The Minister of Finance, Mr Seth Terkper has said allowances and pensions are being taxed under the new income tax law, Act 896, 2015, because they are all forms of income no matter how they are earned.
According to him, the new tax law had become necessary because some tax payers were either avoiding or evading tax by hiding their income in areas which were previously not taxed.
Under the new act, taxes on employee allowances such as clothing, as well as on retiring benefits will attract a 20 per cent tax.
Speaking at the Graphic Business/Stanbic Bank Business Breakfast Series on the topic, “The New Tax Law: Its Implications for the Economy and Businesses”, Mr Terkper said, “Yes allowances must be taxed. Allowances are income… The issue I know is a very difficult one, it’s about taxing income and if you do not define income broadly, you will have tax payers either through avoidance or … hiding the income in areas which are not taxed.”
“What is the difference between two chief Executives? One with a salary of a 1000 and allowances of 5000, totalling 6000 and the second executive with allowances of a 1000 and salary of 5000, if we were to exclude allowances one would go away with 5000 even though the total remuneration is 6000 for all of them,” he explained.
On pensions, Mr Terkper noted that it was a thorny one.
“It’s a thorny one because you are exiting. But remember that as you make your social security contributions, they are exempt from tax even though it is part of your income,” he explained.
He noted that there were two approaches to addressing the issue; either it is taxed when it goes in or it is taxed when it is taken it out.
“These are the principles. A middle ground is to exempt a certain level of income on the pension so that those who are fortunate enough to make fat pensions they may pay a little tax,” Mr Terkper said.