Communications Service Tax on Imported Services

The Ghana Revenue Authority regularly insists on calculating Communications Service Tax (CST) on imported services. The GRA typically does this during tax audits when it discovers that the company or business received services from foreign service providers. The VAT law provides that whenever a foreign service provider provides any service to a person resident in Ghana and that service is not used by the resident person to make taxable supplies, that service should attract VAT. As explained in one of our previous articles, the policy rationale for this imported service system is to ensure foreign services don’t become cheaper in the sense that local services will attract VAT while foreign services won’t.

The Communication Service Tax is a special tax that applies solely to electronic communications. It was imposed by the Communication Service Tax Act, 2008 (Act 754). This law has been amended three times since its introduction. The GRA recently published Administrative Guidelines for the new VAT law. On pages 8 and 9, the GRA provide the illustration below for the determination of the tax due on imported services.

Illustration 2

SEFKA Limited, a resident company, which operates as a microfinance business engaged Toronto PLC, resident in Canada to provide electronic communication services. Per the agreement, SEFKA limited is paying an equivalent of GHS 100,000.00 for the service which will be utilised in the production of exempt supplies.

Required:

Determine the tax payable. 

Solution: 

                                                                                     GHS
Value of the import of service                   100,000.00
CST (100,000 *5%)                                          5,000.00
Taxable Value for (VAT & Levies)           105,000.00
GETF/NHIL(105,000 *5%)                           5,250.00
VAT (105,000*15%)                                      15,750.00
                                                                        126,000.00

From the illustration above, electronic communication services have been provided by a foreign service provided to a resident person. The electronic services were not used to make taxable supplies. This will trigger imported service VAT. In determining the base of the VAT, the GRA included CST of 5%. This is the problem we have with this calculation. We are not sure of the legal basis of the 5% CST on electronic communications provided by foreign service providers.

In the illustration from the GRA, the user of the electronic communications is required to account for the CST on electronic communications services received from a provider resident in a foreign country. We disagree with this position and will demonstrate our reasons below. We will first start with what the current, amended and consolidated text of the law says:

Section 1—Imposition of communications service tax

(1) There is imposed by this Act a tax to be known as Communications Service Tax to be levied on charges payable by a user of an electronic communications service other than private electronic communications services. 

(2) The tax shall be levied on electronic communications service supplied by service providers;

(3) For the purpose of this section, the supply of any form of recharges shall be considered as a charge for usage of electronic communications service. 

Section 2—Persons liable to pay the tax

(1) The tax shall be paid together with the electronic communications service charge payable to the service provider by the user of the service.

(2) The tax is due and payable on any supply of electronic communications service within the time period specified under subsection (5) of section 6 whether or not the person making the supply is permitted or authorised under the Electronic Communications Act 2008, (Act 775) and Electronic Communications Regulations, 2011 (L.I. 1991) to provide electronic communications services.

From section 1(2) of the amended Act 754, the CST is levied solely on the service provider. The law does not at any point provide for the CST to be levied on a user of the electronic service. Section 2, which deals with the person responsible for paying the CST provides that the CST is to be paid by the user to the service provider. There is no provision for payment of the CST to be made by the user directly to the GRA. Indeed, section 6(1) of the amended Act 754 provides that it is the service provider who is responsible for filing the CST return and accounting for the CST. So, where exactly is the legal support for the GRA’s position that the user has to file a CST return and account for CST on foreign electronic communication service received?

Although there is no legal support of the GRA’s position, it is fair to understand why the GRA holds this position. The GRA’s position was a proposal in 2013 as part of the Communications Service Tax (Amendment) Bill, 2013. Unfortunately, this proposal was flatly rejected by the Parliament of Ghana and did not find space in the final Communications Service Tax (Amendment) Act, 2013 (Act 864). The Memorandum of the 2013 Bill said

Clause 1 amends section 1 of the Communications Service Tax Act, 2008 (Act 754) to impose a tax to be known as the Communications Service Tax. The tax is to be levied on electronic communications service supplied by service providers and charges payable on electronic communication service received by users from sources outside this country.

Clause 2 amends section 2 of Act 754 to provide for the tax to be paid together with the electronic communications service charge payable to the service provider by the user of the service. Where the service is received from a source outside this country, the tax is to be paid by the user who received the service.

  The specific clauses of the 2013 Bill said:

Section 1 of Act 754 amended
1. The Communications Service Tax Act, 2008 (Act 754) referred to in this Act as the Principal Enactment is amended by the substitution for section 1 of

Imposition of communications service tax
1. (1) There is imposed by this Act a tax to be known as Communication Service Tax to be levied on charges payable by a user of an electronic communications service other than private electronic communication services.
    (2) The tax shall be levied on
         (a) electronic communications service supplied by service providers; and

(b) charges payable on electronic communication service received by users from sources outside this country. 

 (3) For the purpose of this section, the supply of any form of recharges shall be considered as a charge for usage of electronic communication service.”  

Section 2 of Act 754 amended
2. The Principal Enactment is amended by the substitution for section 2 of

“Persons liable to pay the tax
2. (1) Subject to subsection (2), the tax shall be paid together with the electronic communications service charge payable to the service provider by the user of the service.
    (2) In the case of electronic communications service received from a source outside this country, the tax shall be paid to the Commissioner-General by the user who received the service.
    (3) The tax is due and payable on any supply of electronic communication service within the time period specified under subsection (5) of section 6 whether or not the person making the supply is        permitted or authorised under the Electronic Communications Act 2008, (Act 775) and Electronic Communications Regulation, 2011 (L.I.1991) to provide electronic communications services”. 

From the proposed amendment, clause 1(2)(b) was explicit that users who received electronic communication service from outside Ghana were to be levied with the CST. Consequentially, clause 2(2) identified the user of an internationally-provided electronic communications service as the person liable for the tax.

It is obvious that these two provisions (underlined) above were omitted from Act 864. It was no accident that they were omitted. The Parliament of Ghana discussed these provisions extensively and rejected them.  Some of the reasons for the deletion of these two subclauses in the Bill are:

1. Impracticality of compliance – here the argument was that it is impossible for an individual who receives an international call to be accounting for CST. Further, a recipient of an internal call is not typically charged by the service provider.
2. Violation of International Convention – those opposing the policy argued that based on the Melbourne Convention of the International Telecommunication Union (ITU), fiscal taxes should normally be collected only on international services billed to customers within that country. The proposal violates this international obligation.
3. Clarification of policy intention – during the debate the Government clarified that the actual policy intent was to tax the service providers (specifically on interconnect services/revenues) rather than the individual consumer.
4. Wrong use of taxation to correct market imbalance – it also came out that one of the reasons for this policy was to create an equal playing field among competitors especially those internet service providers receiving services from outside Ghana, whose charges might be lower than those service providers who procured services locally.

At the end of the three-day debate, on 9th July, 2013, Parliament deleted subclauses 1(2)(b) and 2(2). So, this proposal was intended to be part of Act 864. It was wholly rejected by Parliament. Therefore, there is no basis for a user of an electronic communications service provider from outside Ghana to account for CST on it. 

Conclusion

The GRA’s continuous assessment of CST on electronic communications services provided from outside Ghana lacks any legal basis. The amended law does not make any provision for this. This practice not only collects taxes illegally, it increases the base of VAT and the levies. GRA continues to operate as if the proposal introduced in the 2013 amendment Bill was passed. That proposal was roundly rejected by parliament and hence has no legal foundation. Taxpayers who have been assessed with this kind of CST will be right in challenging the GRA to show the legal basis of this type of CST.