The Finance Act 2023 was signed into law by President Julius Maada Bio on April 24, 2023. As we had highlighted, there are several alarming provisions in the Act. This article will focus on one of the main provisions – an amendment of the Income Tax Act 2000 which imposes a 3% tax levy on the turnover of all companies as the minimum corporate tax payable. Proponents argue that the tax would provide a source of revenue for the government and reduce budget deficits, while opponents argue that it would harm businesses and consumers.
One of the benefits of a turnover tax is that it may provide a new source of revenue for the government. This revenue could fund public services such as free quality education and infrastructure and reduce budget deficits in Sierra Leone.
Another benefit of a turnover tax is that it would be easier to administer than other forms of taxation. A turnover tax (ToT) would be simpler to calculate and collect than a corporate income tax, reducing the administrative burden on businesses and government agencies.
However, the 3% tax on turnover could have significant consequences for individuals, businesses, and the economy as a whole. One concern is that it could harm businesses, especially small businesses. This tax would be levied on all revenue, whether or not the business is profitable, which could strain the finances of businesses already struggling to make a profit. Even with large businesses, those with huge turnovers but small profits of 2-3% may be unable to survive this tax burden.
Another primary consequence of the 3% tax on turnover is likely to be reduced employment opportunities. Businesses struggling to meet their tax obligations may cut costs in other areas, including labor, resulting in layoffs and a higher unemployment rate, leading to decreased economic growth and increased social issues.
A decrease in employment opportunities could also lead to a decline in the amount of PAYE income the government receives, leading to a shortfall in government funding. This could have a knock-on effect on public services and infrastructure, such as education and health, which could suffer as a result of reduced funding.
A turnover tax could also lead to higher prices for consumers, as businesses may be forced to pass the cost of the tax onto their customers in the form of higher prices, particularly in highly competitive industries where profit margins are already tight.
A turnover tax could also lead to a decrease in investment, as businesses may be less willing to invest in new projects if they are already facing a significant tax burden, which could have a negative impact on economic growth, particularly in developing countries.
The 3% tax on turnover could also significantly impact purchasing power, leading to a decrease in demand and a reduction in overall economic activity. It could also exacerbate existing inequalities, with low-income households disproportionately affected by price increases, leading to increased food insecurity and rising poverty levels.
The 3% tax on turnover in Sierra Leone could have profound consequences for the country, including increased unemployment, reduced income, and rising poverty levels. Other African countries, such as Nigeria, Ghana, and Uganda, have implemented similar turnover taxes, but with much lower rates and thresholds. For example, in Nigeria, the Turnover Tax (TOT) rate is 1% for businesses with an annual turnover of N10 million or less. It is not too late for the government to reconsider the tax and its potential consequences for businesses and individuals in Sierra Leone or at the very least reconsider the tax threshold and rate.