Assessing the impact of audit interest on taxpayers and revenue mobilization

By Francis Yaw DAAH & Nathan DANQUAH

Non-compliance of the tax laws has been one of the major challenges the Ghana Revenue Authority (GRA) has been grappling with over the years.

While the authority is making all efforts and putting in place measures to ensure that taxpayers comply with the country’s tax laws, some  taxpayers with all their might try  to thwarts the gains chalked by the revenue institution.

The GRA has thus employed variety of tools to enforce the compliance of tax laws. Among these tools are Educational Visits, Snap Checks, Operation Dragnet, Invoice Invigilation, Invoice Reconciliation, Test Purchases, Swoops, Issuance of Tax Clearance Certificates (TCC) and Events & Entertainment Monitoring. Other important technical compliance tools include tax audit, application of penalty and interest as well as other enforcement tools.

One of the core mandates of the Authority is to ensure maximum compliance with all the relevant tax and customs related laws in order to ensure sustainable revenue mobilization for Government and the controlled and safe flow of goods across the country’s borders. One critical mechanism used to enforce compliance is the computation of interest on delayed tax payments. This write-up explores how interest computation affects taxpayer behavior and its implications for revenue mobilization.

WHY INTEREST

Interest is said to be a fee paid by a borrower to a lender for the use of borrowed money or assets. It can also be the amount earned by depositors on their savings accounts in a financial institution. The purposes of this write up is to  focus on tax interest or intereston Tax.

Tax interest refers to the additional amount charged by a tax authorities on unpaid or late-paid taxes. It can be said to be a financial penalty designed to encourage timely compliance with tax obligations and to compensate the government for the time value of money lost due to delayed payments.

In other words, interest can be charged on overdue tax payments or refunds. For instance: Interest on tax debts: When taxpayers fail to pay their taxes on time, they may be charged interest on the outstanding amount. In some cases, taxpayers may be entitled to interest on their tax refunds if the refund is delayed beyond a certain period (Sec 68 of RAA Act 915).

TAX AUDIT AND ITS OBJECTIVES

Section 36 (1) of the Revenue Administration Act 2016, Act 915 states that “The Commissioner-General may, in the exercise of powers under this Act, including sections 33 and 35, audit the tax affairs of a person”. Tax Audit is an examination of an entity’s or individual’s tax return to verify that financial information is being reported correctly. That, it is an official examination of the information that a person or business provides to the tax authority to check that it is accurate and in conformity with the tax laws.

Notwithstanding  the definition above, tax audit could have wide range of objectives. These may include  assessing unpaid taxes, tax education and compliance. It must be noted however, that, tax audit programme would be considered successful even if audits do not contribute directly to revenue provided the way they are selected and conducted encourages voluntary compliance. It is also to ensure compliance as modern tax systems are based on self-assessment and voluntary compliance. Tax audit could help to study the habit of taxpayers and to determine how they file returns.

TAX DEBT

Tax as a debt is any tax, penalty and interest, etc due to the government on the date it becomes payable –( section 51 of Act 915 (RAA). A tax debt may arise as a result of returns filed with liabilities but without payments or remittances, part payment made in lieu of debt owed (short payments), dishonoured/returned or dud cheques, provisional and/or audit assessments, estimates and projections (self-assessment), penalties / interests, taxes not in dispute and other adhoc taxes.

Tax laws requires that, interest must be charged on a tax debt as long as it remains unpaid for the period. This could be on daily, weekly, monthly or yearly basis depending upon the type of the tax debt. For instance, a tax debt that arises as a result of payment returns without remittances may have the interest computed every month that the debt remains unpaid.

LEGAL REGIME OF CHARGING INTEREST

Any tax law enacted for the collection of taxes can be considered incomplete and inadequate if it lacks clearly defined sanctions for non-compliance. In Ghana, tax laws incorporate provisions for interest and penalties to ensure accountability among taxpayers in the event of infractions.

The Revenue Administration Act, 2016 (Act 915), which governs tax administration and collection of tax revenue by the Ghana Revenue Authority, stipulates the imposition of interest on unpaid taxes. It outlines how interests should be calculated for taxes that remained unpaid by companies and individuals liable to pay taxes.

Sections 70 and 71 of the Act 915 deals with interest charges for taxpayers who under-estimate their income tax payable or fail to pay their taxes on time. These measures are essential for promoting compliance and safeguarding the integrity of Ghana’s tax system.

INTERESTS AS PER THE LAW

The Revenue Administration Act, 2016 (Act 915) outlines the computation methods for interest in ensuring that they are stringent enough to compel taxpayers to meet their tax obligations on time. These compelling measures base on the provisions in the law are discussed herewith.

1. a) Interest for Underestimation of Income Tax Payable – Section 70

When a taxpayer underestimates their income tax liability, interest is charged at 125% of the Bank of Ghana’s statutory rate, compounded monthly. This interest is applied to the difference between:

• 90% of the total amount that should have been paid through instalments during the year of assessment (assuming the taxpayer had estimated correctly), and
• The actual amount paid by instalments during that same period.

The interest accrues from the due date of the first instalment for the year of assessment until the date the taxpayer files their income returns for that year

1. b) Interest for Failure to Pay Tax by the Due Date – Section 71

If a taxpayer fails to pay taxes by the statutory due date, interest is similarly charged at 125% of the Bank of Ghana’s base rate, compounded monthly. This is applied to the outstanding tax amount at the beginning of the default period

INTEREST COMPUTATION

In calculating interest on outstanding taxes payable, the rate used is linked to the Bank of Ghana’s (BoG) policy rate plus a margin. The current BoG Policy Rate is 25% and 125% of it amounts to 31.25%. As per the Revenue Administration Act, 2016, Act 915, the interest is computed on the amount which is compounded monthly for the period that it remains unpaid.

The formular for calculating the interest is = A (1 r )ⁿ – A, Where

“A” is the unpaid tax, “r” is 125% of the Bank of Ghana monetary policy rate (statutory rate) per annum (p. a.) and “n” is the number of months.

ILLUSTRATION

If the tax due as at 1^st January 2021 is GHS5,000.00. Using the Bank of Ghana monetary policy rate of 25% p.a. The interest payable as at October, 2025 is calculated as follows:

Solution: The compounded rate = 125% of 25% p.a. = 31.25% p.a. = 0.3125/12 = 0.0260 The number of months = January 2021 to October 2025 = (12*4) 10 = 58months           .The amount involved is GHS5,000.00.

Therefore Interest = 5,000 (1 0.02604) ^58 – 5,000 = 17,207.46

From the above, the interest amounts payable for a debt of GHS5,000.00 that remains outstanding for more than four and half (4.5) years would be GHS17,207.46.    

From the illustration, the factors that determines the interest payable includes the amount involved (A), the rate (r) and the number of months that tax remains unpaid (n). The most variable among these factors is the number of months (n). Given the same amount of GHS5,000.00 when remained unpaid for eight (8) months, the interest payable would be GHS1,141.63. This means that TIME is of essence in the computation of interest.

INTEREST ON TAX LIABILITIES

Every business entity would always want to reduce its expenditure and increase profit. In much the same way, every taxpayer’s aim is to reduce its tax liability to the barest minimum while conforming to the tax laws (Tax Planning).

One of such tax planning strategies is for taxpayers to pay their tax liabilities promptly. Remember that any unpaid tax liabilities attract interest as per section 71 of Act 915. It is therefore in the interest of taxpayers to pay their tax liabilities within the shortest possible time to avoid accumulated interest charge. Also, when a tax audit is conducted on a taxpayer’s business and there is a liability, interest is charge on the liability as required by the tax laws.

Some taxpayers as well as Tax consultants are of the view that interest imposed on audit assessments should commenced after the expiration of the grace period given in the audit letter from GRA. However, in the case of Pil Ghana Limited and Commissioner-General GRA, the learned Judge, His lordship Kwesi Boakye. JA, Appeal Court Judge sitting as Additional High Court Judge, affirmed section 71 (3) (a) (i) of Act 915 and ruled that “For the purposes of calculating interest under sub-section 1 thereof, in the case of adjusted assessment, tax is payable under the original assessment and not when the adjusted assessment is made”.  

The Elephant in the Room

As already indicated, the interest amount computed is very much depended on the number of months or years that the liability remains unpaid. A taxpayer who owes, may want to pay early enough to avoid interest charges. In a situation where a taxpayer is not aware of the extent of the indebtedness, then the onus lies on the tax authority to audit such a taxpayer to confirm or otherwise of the liability status. This is where tax audit comes to the scene.

At the moment, the  time a taxpayer is to be audited is determined by the revenue authority. And so, it may take a number of years before a taxpayer could be audited. Questions that agigitates the mind of the business community  may include: should inerest be charged on audit assessments when the taxpayers do not have control about time to be audited? Can a taxpayer request to be audited at regular and short intervals to avoid huge interest? Though a taxpayer can exercise the right to ask for timely audit, what happens if the Authority fails to accede to the request? These are revenant questions that should engage the thoughts of Tax professionals.

IMPACT ON TAXPAYERS AND REVENUE GENERATION

The interest regime as stipulated by law with all intent and purpose is punitive. It has the potential of derailing finances of business entities and thus affects their operations. For enterprises to thrive and ensure employment, they must be in continuous business. This is essential for economic growth of the nation. Creation of wealth is paramount to the country’s GDP.

It is crucial however, for businesses to pay taxes accurately and on time so as to save their entities from interest charged. As defined in section 9 of Act 915 of RAA, interest is deemed as tax. Thus, the potential for increasing tax revenue through the imposition of interest is great.

It is therefore incumbent on the authority to apply the interest regime stringently in all aspect. It must be noted that the GRA’s Management System being used by the (GITMIS 3) has been designed to compute interest automatically when taxes remain unpaid. Thus, payment returns without Remittances, short payments etc attracts interest in the system.

CONCLUSION AND THE WAY FORWARD

The rationale behind the imposition of interest goes beyond revenue generation. The interest component is avoidable if taxpayers diligently compute and pay taxes accurately and timely. Tax practitioners and professionals are well equipped to assist in reducing the incidence of interest payments.

It is also paramount for tax laws enacted to have safe nets when it comes to the imposition of interest. Interest Waiver Acts should be structured and passed intermittently to give defaulters a measureof reprieve. Tax Revenue is a life blood of any nation hence the need to engender prompt payments of tax due. The taxpaying portal makes payments easier and accessible which serves as surest way of avoiding interest thereon. Let’s always  remember that “our taxes our future”.

Refences: Revenue Administration Act, 2016 (Act 915), GRA CEDM Manual – 2018, GRA Audit Manual – 2018 The Scope and Coverage of Income Taxation in Ghana – L. Hotsonyame, 2024, Penalty Regime, a Necessary Tool for Voluntary Tax Compliance, F. Daah & N. Danquah, 2020.

 The writers are officers of the Ghana Revenue Authority at the Accra Central & Accra East Area Enforcement and Debt Management (EDM) Units respectively. They are members of the Chartered Institute of Taxation, Ghana (CITG).

Contacts: 0244542671, 0242205435, [email protected], [email protected]

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