Question Tag: Tax Collection

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  • 5 Marks

PT – Nov 2021 – L2 – Q5a – Withholding Tax Administration

State the merits and demerits of the withholding tax regime in Ghana

Withholding tax is deducted at source by an authorised agent and accounted later to the Commissioner-General of Ghana Revenue Authority.

Required:
State TWO (2) merits and TWO (2) demerits of the withholding tax regime.

Merits of Withholding Tax

  1. Faster Mobilisation of Revenue: Withholding tax ensures faster mobilisation of revenue to the state, as the tax is collected upfront before returns are made.
  2. Expansion of Tax Net: It helps in expanding the tax net, bringing in taxpayers who may not otherwise be compliant.
  3. Accurate Determination of Taxpayer’s Turnover: By withholding tax at source, the authorities can more easily ascertain the taxpayer’s actual turnover and hence the correct income.
  4. Low Collection Costs: The system involves little to no additional cost for tax collection since the tax is collected directly by authorised agents.
  5. Time-Saving for Revenue Officers: The system saves time for revenue officers, allowing them to focus on other important duties.
    (Any 2 points @ 2.5 marks each = 5 marks)

Demerits of Withholding Tax

  1. Negative Impact on Business Cash Flow: A high rate of withholding tax can adversely affect a business’s cash flow and operating performance.
  2. Potential to Discourage Economic Effort: Withholding tax may discourage additional economic effort, such as part-time teaching or work, due to the perceived burden of high taxation.
  3. Locking up of Capital: Businesses may face liquidity challenges due to the locking up of capital in the form of prepaid taxes.
  • 5 Marks

PSAF – May 2018 – L2 – Q3a – Public sector fiscal planning and budgeting

Explain the difference between direct and indirect taxes and suggest three ways to improve tax collection.

Both direct and indirect taxes are critical components of government revenue as they are intricately linked with the overall economy. Collection of these taxes is important for the government as well as the well-being of the country.

Required:
Distinguish between direct taxes and indirect taxes and suggest THREE ways by which tax collection can improve.

Direct and Indirect Taxes and Ways of Improving Collection by the State:

  • Direct Taxes: A direct tax is one that the taxpayer pays directly to the government. These taxes cannot be shifted to others. A homeowner, for example, pays personal property taxes directly to the government. In a general sense, a direct tax is imposed upon an individual person (juristic or natural) or property (e.g., real and personal property, livestock, crops, wages).
  • Indirect Taxes: An indirect tax is imposed upon a transaction, such as a sales tax or a value-added tax (VAT), which is paid by consumers when they purchase goods or services. The tax is collected by intermediaries (e.g., retailers) from the person who bears the ultimate economic burden of the tax (e.g., consumers).

(2 marks)

Ways to Improve Tax Collection:

  1. Educating taxpayers: Providing education about compliance and the benefits of paying taxes to the nation.
  2. Ensuring regular updates to the taxpayer registry: Keeping an updated registry of taxpayers to improve the accuracy of tax assessments and collections.
  3. Simplifying the tax system: Making the tax system simpler to encourage formalization and compliance, especially among small businesses and individuals.

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