Everything You Need To Know about Withholding Tax in Ghana

As a small business owner in Ghana, it’s really important for you to understand the different types of taxes that you are required to pay. One of these taxes is withholding tax — a tax that the government takes from payments for things like services or goods. It’s a bit like when you take a slice out of a cake – the government takes a small part of the payment before you get the rest. This helps the government collect taxes regularly, and you need to know how it works to keep your business running smoothly.

Withholding tax is a helpful tool, not just a duty. When you know how it works, you can manage your business’s money better. You’ll learn how to figure out the tax on different kinds of payments and what to do to follow the rules. This isn’t just about following the law; it’s about making smart choices for your business.

In this article, we will guide you through everything about withholding tax in a simple way. You’ll learn how to handle it in your everyday business activities. By the end of this, you should be more confident in dealing with this part of your business.

What is withholding tax?

Withholding tax is a type of tax that is paid at the source of income. This means that unlike regular taxes that are paid by the receiver of the income, the withholding tax is deducted from the payment and made by the income payer. 

For example, if your business rendered a service to another business, you will be required to pay withholding tax on the money you earn from rendering that service. However, instead of you paying the tax, your client will withhold the required percentage of your payment and send it to the government as withholding tax on that transaction. It is also known as pay-as-you-earn tax (P.A.Y.E) because it is dependent on how much you earn. 

This most popular example of withholding tax in Ghana is employee income tax which employers typically withhold at the point of payment and send to the government. 

What types of transactions are subject to withholding tax?

In Ghana, withholding tax is applied to a variety of transactions where there’s a value exchange. As a rule of thumb, if you’re providing a service to a business or individual, you’re likely required to pay withholding tax on it. There are, however, some exemptions to withholding tax. For instance, income earned from government bonds, some agricultural activities and non-profit organizations are not usually subject to withholding tax.

How much is withholding tax in Ghana?

Withholding tax in Ghana can vary significantly depending on the source of income. Rates can vary between as little as 3% and as much as 20%. Here’s a list of income types that may be relevant to small businesses:

Income type	Tax rate
Supply of services by an entity exceeding GHS 2,000/yr	7.5%
Supply of general services by an individual	7.5%
Supply of goods exceeding GHS 2,000/yr	3%
Supply of works exceeding GHS 2,000/yr	5%
Rent on non-residential properties	15%

For the full list of all types of income and their tax rate, visit the Ghana Revenue Authority (GRA) website.

How is withholding tax paid in Ghana

Withholding tax is usually paid monthly in Ghana. The income payer who is usually described as a withholding agent is expected to file and pay withholding tax within fifteen (15) days after the end of the month in which the transaction is carried out. This means that if a transaction that carries withholding tax is carried out in October, the withholding agent is required to pay the tax between November 1 and 15. 

How to deal with withholding tax during invoicing

Familiarizing yourself with withholding tax rates is only the first part of learning how to use it.

When invoicing a client for goods or services supplied, it is important to take your withholding tax into account.

When sending an invoice to your client, make sure to clearly list the items you are supplying and the total cost. Then separately itemize the withholding tax amount that the client is supposed to deduct based on whatever tax rate is applicable to the payment. Then, you will list the net amount that the client is actually supposed to pay you. This ensures that the client understands the total value of the transaction and tax obligations. 

Some clients may need you to include relevant tax information like your business’ tax ID or VAT number in the invoice. Make sure to keep a copy of the invoice for future tax reconciliation. 

Conclusion

Understanding withholding tax in Ghana is a critical aspect of running a successful business. Remember, withholding tax is not just a regulatory requirement; it’s a proactive step in managing your business’s tax liabilities. This knowledge enables you to anticipate and plan for tax deductions on various transactions, ensuring there are no surprises when it comes to your business’s cash flow. Also, make sure to stay up to date on the Ghana Revenue Authority (GRA) and consult with tax professionals who can provide additional insights and help you navigate the complexities of tax compliance.