The Treatment of Communications Service Tax (CST): It’s all about Finance &

Accounting NOT Politics

- By Ato Sarpong

The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them
already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he
knows already, without a shadow of a doubt, what is laid before him’

Leo Tolstoy, 1897

On 28th March, 2008, His Excellency President John Agyekum Kufour assented to Act 754, an
enactment of the Parliament of the Republic of Ghana entitled Communications Service Tax
(CST) Act, 2008.

Section 1 of the Act states as follows:

I. There is imposed by this Act a tax to be known as the communications service tax to be
levied on CHARGES payable by consumers for the use of the Communication service

II. The tax shall be levied on all communications service usage charged by Communications
Service Providers with Class 1 licenses as provided for in the National Communications
Regulations 2003 (L.I. 1719)

It is pertinent that I clearly state these facts, right from the beginning of this piece, which
constitutes my humble contribution to the debate on the Communications Service Tax (CST)
from an informed position, having availed myself of the copious details relating to this particular
tax.

Let me state a few facts:

Fact: Section 1 of Act 754 [captured above] has not been amended.

Fact: Section 3 of Act 754, which deals with the rate of the tax is what has been amended with
the tax rate increased by 50% of the previous rate to 9%.

Fact: It is also instructive to note that the effective tax rate for telecommunications services has
gone up from 18% (prior to January 2017) to 22% following the amendments to Act 581, 852
and 870 to include the Ghana Education Trust Fund Levy (GETFL) and the National Health
Insurance Levy (NHIL) as part of the taxable base for Value Added Tax (VAT).

Section 6 of the CST Act is on the submission of tax returns and time for payment of the CST
collected by the government agent (in this case the Mobile Network Operator (MNO).

Section 6 sub section 5 states of Act 754 as follows:

“The return and the tax due for the accounting period to which the tax return relates shall be
submitted and paid to the commissioner not later than the last working day of the month

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immediately after the month to which the tax return and payment relate”. By law, therefore, the
MNO, has 30 days from the end of the month in which the consumer consumed the service to
remit the CST component charged on the service to the GRA.

CST is not remitted and or directly accessed from the bank accounts of MNO by government on
a daily basis as and when the service is consumed. The position of the law, and, indeed, the
actual practice, is that the accounting and payment for it is done by the MNO and remitted to
Ghana Revenue Authority (GRA) within 30 days following the month in which it relates.

Pricing of Services by the MNO

Every MNO has its airtime/data pricing policy. This pricing policy is usually influenced by a
number of factors including the following:

- Amortized cost of licensing

- Direct network operating cost
- Interconnect charges and roaming cost
- Salaries, wages, allowances, pensions and other cost of remuneration
- Selling, distribution, marketing and promotions
- Depreciation
- Finance charges and other cost of capital
- Profit margins to reflect expectations of economic value added

To these cost/pricing elements, CST, NHIL, GETFL and VAT are charged/added to arrive at
what you and I pay for use of the MNO service. Remember the MNO is only a tax agent (a
vehicle being used by the GRA) to collect taxes on behalf of the Republic. This means that when
taxes go up (and with factors affecting operators cost remaining the same), you and I pay more
for the service and when taxes go down we benefit, as consumers, by paying less than we used to
pay. In the case of the 50% jump in CST, you and I are to pay more for the service (voice, SMS,
data, VAS etc).

I have been a postpaid customer of one of the MNO’s for close to two decades. All taxes are
charged me on my service and same paid to the MNO by the 8th of the subsequent month. My
bills are itemized and all components of the taxes (CST, NHIL, GETFL, and VAT) clearly
stated. I pay my charges with all taxes and at no point did the MNO absorb the CST on my bills.

I have also reviewed the audited financial statements of some MNO’s over the last four years
and there is no evidence of the absorption of CST as put out in the public domain recently. I will
revisit this issue sometime later but for now let us focus on CST as related to prepaid services. I
will also discuss treatment of NHIL, GETFL and VAT in a future article.

It is however important to note that the point of crystallization of NHIL, GETFL and VAT is
completely different from the point of crystallization of CST.

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Accounting for the CST on Purchase of airtime

Recharge cards/airtime that we buy from retailers (on streets/online and or in shops) get to that
point of sale through a distributor of the service. For the purpose of this write up, I will describe
the process with an assumption that the consumer of the service buying the airtime at the retail
point is buying it directly from the MNO.

When you stop in traffic or walk into a shop and buy Ghc10 airtime, you have, at that point,
consumed no service from the MNO. Remember however from the earlier paragraph on pricing
of service, the Ghc10 airtime you have purchased has 5 components of cost to you, made up of
one component of revenue for the MNO and four components of tax for State.

Revenue Elements Amount Remarks

MNO Services (voice or data purchased) 7.797 Revenue to the MNO

GOG CST @ 9% 0.702 Due on consumption

NHIL @ 2.5% 0.195

GETFL @ 2.5% 0.195

Sub Total – Taxable base 8.889

VAT @ 12.5% 1.111

Cost of Recharge paid by consumer 10 What the consumer actually paid

Of the Ghc10 paid by the consumer the MNO will deliver service equivalent to Ghc7.797 in line
with its pricing policy based on per second or per minute of voice calls or per Mbps of data
consumed in line with its unit price regime either at peak or off peak rates. NHIL plus GETFL
totaling Ghc0.39 is not subject to any deduction and is payable in full to the GRA: Output VAT
of Ghc1.111 (subject to input vat deductions) will all be credited GRA and paid by the end of
the month following which the amount was charged/collected.

At the point the consumer exchanged Ghc10 for a recharge card, no service has been delivered
by the MNO; neither has the airtime been consumed by the consumer: But money has
exchanged hands and therefore the MNO will record this money of GHC10 in its books as a
liability owed the consumer with mutual intent to deliver/consume service at a point in future.
The MNO captures this as follows:

DR Bank/Cash accounts CR Unearned Income (reflecting need to make service

available for the consumer at any time in future) –Ghc8.499

CR GRA (for NHIL & GETFL) Ghc0.39

CR Output Vat Ghc1.111

(NHIL, GETFL, VAT not subject of this article and therefore deposited in the two liability accounts for now)
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No consumption of service has taken place and therefore Government cannot, at the point of
exchange of cash for a future service, stake a claim to CST. Similarly, no service has been
delivered at that point by the MNO to warrant any charge/deduction for CST. Note, however,
that NHIL, GETFL and VAT are treated differently. As it is not the subject of this article we
will not go into it. We will discuss the three in a future article. However it is important to note
that CST is not the same as NHIL, GETFL and VAT chargeable on goods and services.

The MNO’s must be transparent in their billing and provide consumers of their service a
breakdown of airtime purchased. Schedule 1 is an example of details consumers should be
provided anytime they recharge or load their phones with airtime. The consumer loading the
Ghc10 with the intent to use the service must be given a break down on the Ghc10 immediately
it is loaded showing the elements of the purchase. Information enhances transparency and
customer experience.

Accounting for the CST on use of airtime

Assume that upon loading your phone with the Ghc10 recharge you decide to make a call that
lasted 35minutes and per the rate regime, you were billed a service charge of ghc5.00. The service
charge of ghc5 at that point is subject to the CST as service has been consumed and a charge
upon which CST is levied billed. Upon usage of the credit the MNO per its billing system will
move into action and account for ghc5.30 from the unearned income and reflect this in the
MNO financial records as follows:

Dr Unearned Income ghc5.45 Cr MNO Revenue – Ghc5

Cr CST - Ghc0.45

Assuming the Ghc10 credit airtime was bought by Uncle Atta on 16th October, 2018 and
thereafter Uncle Atta did not make any call and or used any data service, the MNO will, by 30th
November, 2019, be required to submit returns and make payments for the CST it has collected
on services consumed by its customers. Uncle Atta will appear in the CST schedule with an
amount of Ghc0.45 recorded against his name and not Ghc0.702.

The difference between what he paid (Ghc8.499) and what he has consumed (totaling ghs5.45)
will appear on the statement of Financial Position of the MNO for the accounting period as a
liability owed to Uncle Kojo in the form of unearned income reflecting the un-used part of the
airtime purchased.

The MNO reflects this treatment in its policies on revenue recognition in its financial statements.
In the audited financial statement of the only listed MNO, you will see one of its policies stated
on revenue recognition as follows:

“Revenue received from prepaid voucher is deferred as a contract liability, and recognized when
services are utilized by the customer or on termination of the customer relationship”

I am of the strong opinion that for our beloved country to move forward, we need to
depoliticize a lot of the issues and engage in constructive and healthy debate that advances our
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collective well-being. People must learn from our debate and those studying must be educated by
listening to our debates. It is only when we elevate our debates beyond NDC and NPP that we
will be advancing our collective interest.

In Conclusion

1. The MNO are wrong to deduct the CST (at source) when a consumer buys airtime. As
the law says, it is a tax to be levied on charges payable by consumers for the use of
communication service. At the time a consumer makes prepayment for a telecom service,
what service and or charge has the MNO levied upon the consumer on which the CST is
based? The MNO has at that point not delivered any service and a charge and cannot at
that point make a deduction upfront for CST.

2. On the back of the information put out in the public domain by the Minister for
Communications, to the extent that the MNO have been quoted by the Minister as
having stated that since 2009, they have been absorbing the CST of consumers, GRA
must carry out a special audit on the financial records of the MNO to establish the truth
or otherwise in the information strongly articulated by the Minister on behalf of the
MNO’s. The GRA must establish how this was being done (expensed, capitalized,
deducted off revenues etc), how it was being reflected in the books of the MNO and the
possible impact of this practice (if confirmed) on their corporate tax obligations to the
state.

3. Government, through regulatory directive and in line with license conditions and
regulations, must enforce a policy of transparency in pricing, with a demand on MNO to
provide consumers with detailed breakdown of cost of airtime purchased and loaded as
well as details of airtime usage.

It is clear, from the points made above, that the debate on the point of crystallization and
treatment of CST is more of a Finance and Accounting Debate than a political one.

Abbreviations used:
CST – Communications Service Tax
NHIL – National Health Insurance Levy
GETFL – Ghana Education Trust Fund Levy
MNO – Mobile network Operator
GRA – Ghana Revenue Authority