- 8 Marks
Question
The Government intends to drastically discourage the importation of television sets and rather create local demands for Osafo Electronics as part of efforts to “Grow Made in Ghana products.”
The following data is relevant:
4,000 pieces of television sets at a cost of GHS2,200.00 per one were imported in March 2015 from USA by Kamus Enterprise. The cost of freight was GHS100 per television set via KLM Airline.
Additional information:
- Rate of duty: 20%
- Specific rate of duty: GHS80 per television set
Required:
i. Using the above, compute the taxes payable under both the ad valorem and specific methods.
(6 marks)
ii. Advise the government on which method would help achieve its intended action and why.
(2 marks)
Answer
i. Computation of Taxes Payable
Ad Valorem Method
| Description | Amount (GHS) |
|---|---|
| Cost of Television Sets (4,000 x 2,200) | 8,800,000 |
| Freight Charges (4,000 x 100) | 400,000 |
| Cost and Freight | 9,200,000 |
| Notional Insurance (1% of Cost and Freight) | 92,000 |
| Total Cost (CIF) | 9,292,000 |
| Duty (20% of CIF) | 1,858,400 |
| VAT (15% of CIF + Duty) | 1,672,560 |
| National Health Insurance Levy (2.5% of CIF + Duty) | 278,760 |
| Total Taxes Payable | 3,809,720 |
Specific Rate Method
| Description | Amount (GHS) |
|---|---|
| Cost of Television Sets (4,000 x 2,200) | 8,800,000 |
| Freight Charges (4,000 x 100) | 400,000 |
| Cost and Freight | 9,200,000 |
| Notional Insurance (1% of Cost and Freight) | 92,000 |
| Total Cost (CIF) | 9,292,000 |
| Duty (4,000 x 80) | 320,000 |
| VAT (15% of CIF + Specific Duty) | 1,441,800 |
| National Health Insurance Levy (2.5% of CIF + Specific Duty) | 240,300 |
| Total Taxes Payable | 2,562,400 |
(6 marks)
ii. Recommendation:
The Ad Valorem Method would help achieve the government’s objective as it results in higher taxes (GHS3,809,720) compared to the Specific Rate Method (GHS2,562,400). This higher tax would serve as a disincentive to importers and support the local demand for Osafo Electronics.
(2 marks)
- Tags: Ad Valorem tax, Government tax policy, Import duty, Specific tax rate, VAT
- Level: Level 3
- Topic: Business income - Corporate income tax
- Series: NOV 2015
- Uploader: Kwame Aikins