This article examines the prevailing taxes affecting the hospitality industry in Ghana. The hospitality industry has the potential to generate employment as a labour intensive sector area. The range of services offered by the hospitality industry include: hotel accommodation, restaurant services, concierge services, transportation (airline operators to vehicle rental agencies) and tourist site visitation. All these services are impacted by taxes.
Whilst taxes like Value Added Tax (“VAT1”) and tourism levy will be seen directly by clientele on their final invoices, others such as corporate income tax and excise duty may not be visible to the clientele but still felt through the prices charged by the industry operators. Other taxes such as airport taxes (applied on embarkation from Ghana to within and outside Ghana) can influence through pricing, the mode of transport used by a tourist in Ghana. Due to airport taxes for example, a tourist may choose to travel to Mole national park by road rather than by air.
Value Added Tax (VAT)
VAT impacts directly the gross amount charged by the hospitality industry. For example, hotels are required to charge VAT on services provided to their clientele. Sales or a service by restaurants is subject to the standard VAT rate of 17.5%. The general registration threshold for VAT is GH¢ 120,000 over a 12-month period. Any entity meeting these criteria is required to register with the Ghana Revenue Authority (GRA) and charge VAT.
Other industry operators such as aircraft operators bringing in tourists or transport tourists across the country are also affected. Although domestic transportation of passengers by road is exempt from VAT, the rental or hiring of passenger vehicles is subject to VAT. In cases where hotels do offer vehicle rentals or hiring of passenger vehicles such services are VAT taxable supplies and subject to VAT of 17.5%. For example, the hotel or restaurant operator as a consumer and purchaser of services is also liable to pay VAT on consumption. As VAT registered entities, the input VAT suffered on purchases is only a cash flow issue, as the input VAT is generally deductible against the output VAT charged on sales or turnover.
Domestic air travellers are subject to a VAT charge on their air fares. However as the services are not VAT exempt, the airline operators should be able to deduct input VAT incurred on goods and services purchased to carry out their business. Hence depending on their procurement structure and tax-cost efficiency, the airline operators should be able to pass on some of the cost savings to their customers through a lowered cost base as a result of VAT input deductibility.
Corporate Income Tax
Companies principally engaged in the hotel industry are to pay a corporate income tax rate of 20%. Per the new Income Tax Bill this rate is expected to change to 22%.
Capital allowance deductions are allowed for fixed assets and other capital intensive projects. As such for a hotel expanding through construction of new buildings, such a hotel should be able to claim a capital allowance deduction against net profits. Currently depending on the type of fixed asset purchased or project carried out, the capital allowance deduction could last for between 2.5 years to 10 years. Buildings, per the tax law are allowed a capital allowance deduction of 10% per annum on a straight line basis. This means that for a newly constructed building, it will take a minimum of 10 years to recoup the total expenditure through capital allowances. This may serve as a disincentive in further investments and expansionary activities. A tax reform may be to allow hotels and other hospitality operators an accelerated capital allowance deduction from 10 to 5 years.
Withholding tax obligations
Hospitality operators like other taxpayers have withholding tax obligations. Payments for goods and services are generally subject to withholding taxes in Ghana.
The current trend with Ghanaian hotels is franchising, where a local hotel uses the brand and other support services of an international hotel chain. This usually means that royalties paid from Ghana to a non-resident person will have withholding tax obligations. The tax rate would also depend on the type of support activities offered to the Ghana hotel as well as the usage of intangible assets or existence of a double tax treaty.
Tourism Levy
Per the Tourism Levy Regulation, a tourism operator is required to register with the Ghana Tourism Authority and charge one percent levy on service offerings.
The levy collected is required to be submitted to the Authority through payment into a bank account within a month of each collection period.
Business/Property Rates
Based on the location of the hotel, restaurant or cafe, business or property rates may be applicable. This will be paid to the municipal authority in which the business or property is located. The amount payable depends on the size of property and the rates charged by the specific municipality or local assembly.
Employee Taxes
The hospitality industry as service providers employers have the obligation to withhold and pay PAYE (Pay as You Earn) taxes on employee remuneration. PAYE taxes range from zero to 25%. Withholding taxes on payments to directors, board members or similar persons is subject to 20% withholding rate. Social security taxes is also applicable on employee remuneration. Under the current regime, there are three tiers with the first two being compulsory and a voluntary third tier.
The rates for the mandatory two tiers sum up to 18.5% for the employer and employee portions. Tax exemptions are available for the mandatory and voluntary contributions within specified limits and conditions.
Conclusion
Empirical evidence supports the fact that reduced VAT rates could possibly lead to a reduction in prices charged by restaurants, hotels etc. Furthermore, a reduced VAT rate could have a ripple down effect on the economy, leading to increased patronage of bars and other hospitality products. This could lead to employment generation which should in the end lead to recouping of the reduced VAT rates through Pay As You Earn (PAYE) taxes deducted from the additional employment created.
Overall, the hospitality industry plays an important part in every society, which affects the way people eat out of home, travel in-country and serves as a multiplying factor in the economy. Due to the sensitivity of the hospitality industry to pricing and consumer demand, taxation should play an important part in setting the tourism or hospitality policy. The Government can utilize taxes (both direct and indirect) to lower prices, affect growth of the industry and facilitate further job creation in Ghana.
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