The Court of Appeal in Kumasi has dismissed an appeal brought by 75 former employees of the Kwame Nkrumah University of Science and Technology (KNUST), affirming that ex-gratia or end-of-service benefits paid to employees upon retirement are taxable under Ghana’s income tax laws.
The case, Daniel K. Bannor & 74 Others v. Kwame Nkrumah University of Science and Technology (KNUST) & Another, concerned deductions made by KNUST from ex-gratia payments paid to the former employees upon their retirement.
The appellants argued that the deductions were unlawful, contending that their ex-gratia payments were part of their retirement benefits and should enjoy the same tax exemption applicable to pensions.
They sought declarations that the deductions were unlawful, an order for the refund of the amounts deducted, interest and costs.
KNUST, however, maintained that the payments were not pensions but one-off end-of-service benefits and were therefore taxable under the applicable tax legislation. The University also contended that it was legally required to make the deductions.
The High Court had earlier dismissed the former employees’ claims, holding that ex-gratia or end-of-service benefits were taxable, unlike pensions.
Dissatisfied with that decision, the former employees appealed to the Court of Appeal on two main grounds: that the High Court erred in holding that their end-of-service benefits were taxable income and that the trial judge wrongly applied a practice note issued by the Commissioner-General of the Ghana Revenue Authority (GRA).
Ex-Gratia Is Not Pension
In its judgment, the Court of Appeal drew a clear distinction between pension payments and ex-gratia or end-of-service benefits.
The Court noted that pensions are mandatory statutory contributions made by employers and employees for retirement payments, while the ex-gratia payments in question were one-off payments made to the appellants upon their retirement.
The conditions for entitlement also differed. While the employees were required to have worked and contributed to the Ghana Universities Staff Superannuation Scheme or SSNIT for at least 15 years to qualify for pension, the applicable conditions of service required at least 10 years of service to qualify for the ex-gratia payment.
The Court further observed that the appellants had not specifically challenged the High Court’s finding that the payments constituted ex-gratia or end-of-service benefits rather than pensions in their stated grounds of appeal.
The Court therefore held that arguments seeking to reopen that issue could not properly be entertained because an appellate court’s consideration of a case is generally circumscribed by the grounds of appeal filed by the appellant.
Court Relies on Income Tax Act
On the question of whether ex-gratia payments are taxable, the Court examined the relevant provisions of the Income Tax Act, 2015 (Act 896).
The Court noted that Article 199(3) of the 1992 Constitution expressly provides that pensions payable to persons are exempt from tax. Section 7(1)(d) of Act 896 similarly exempts pensions from taxation. However, the Court held that the statutory exemption applicable to pensions did not extend to ex-gratia payments.
According to the Court, section 4 of Act 896 broadly brings income and benefits derived from employment within the scope of taxable income. This includes gratuities, retirement payments received in respect of employment and other payments or benefits arising from employment.
The Court concluded that ex-gratia payments fell within these provisions because they constituted benefits arising from past employment.
The Court stated that ex-gratia or end-of-service benefits, other than pensions, were “caught squarely” within the law as taxable employment income. It identified three statutory bases for this conclusion: the payments constituted benefits arising from employment conditions, retirement payments received in respect of employment, and income or gains arising from past employment.
The Court therefore rejected the appellants’ reliance on pension legislation, holding that ex-gratia was not part of the mandatory three-tier pension scheme and was neither administered by SSNIT nor by registered pension trustees.
Ex-Gratia Was an Earned Employment Entitlement
The Court also disagreed with the description of the payments by the trial court as gratuitous payments.
The Court explained that, although the expression “ex-gratia” is commonly associated with a payment made out of goodwill or as a favour, the payments in this case were contractual entitlements arising from the appellants’ conditions of service.
The benefits, according to the Court, had accrued to the former employees through their years of service and were therefore earned employment benefits.
The Court nevertheless held that their contractual character did not make them tax-exempt.
Because the payments arose from the appellants’ employment arrangements and were made upon severance from employment, they fell within the taxable employment income provisions of Act 896.
The Court consequently held that KNUST was entitled to deduct the applicable taxes and had not breached the employees’ conditions of service or any constitutional provision by doing so.
GRA Practice Note Not Binding on Taxpayers
The Court also considered the appellants’ argument that the High Court had wrongly treated a practice note issued by the Commissioner-General of the GRA as binding on them. The Court rejected that argument.
It explained that under the Seventh Schedule to Act 896, the Commissioner-General may issue practice notes to provide guidance and promote consistency in the administration of the tax law.
However, such a practice note is binding on the Commissioner-General until revoked; it is not binding on persons affected by the Act. The Court described the practice note as a guide to tax and customs administration, stressing that it serves as a “servant and not a master of the law.”
It therefore held that the trial judge had not erred in considering the practice note, particularly because the interpretation contained in it was consistent with the provisions of Act 896.
Appeal Dismissed
Having found that the ex-gratia payments were taxable employment benefits and that the trial court had not improperly applied the GRA practice note, the Court of Appeal found no basis to interfere with the High Court’s decision.
The three-member panel, comprising Justice Dr. Poku Adusei, JA, Justice Patrick Kwamina Baiden, JA, and Justice Ali Baba Abature, JA, accordingly dismissed the appeal.
The Court affirmed that KNUST had lawfully deducted taxes from the end-of-service benefits paid to the former employees upon retirement.
There was, however, no order as to costs.
The decision establishes a clear distinction between pension benefits and ex-gratia/end-of-service benefits for tax purposes. While pensions are expressly exempt from tax under the Constitution and applicable pensions legislation, the Court has affirmed that contractual ex-gratia payments made upon retirement constitute taxable income from employment under the Income Tax Act, 2015 (Act 896).
