On July 1, the Ghana Revenue Authority commenced implementation of the 3% VAT flat rate Scheme (VFRS) for wholesalers and retailers as prescribed by Law. The Law to back the replacement of the 17.5% Output-Input approach (or the Standard Rate Scheme) with the 3% VFRS had earlier been passed by Parliament unanimously and had been assented to by President Akufo-Addo as part of the 2017 economic policies of government.
The commencement was initially met with disquiet from some industry players notably manufacturers and wholesalers. They have expressed a fear that the new approach if not restricted to retailers alone, has the potential of causing price hike of about 20% between the wholesaler and retailer. The main opposition party the NDC through its minority in Parliament quickly sought to jump unto the legitimate concerns and make political capital out of it – Claiming the Policy is ill conceived.
On the other hand, retailers are very comfortable with the approach. Some wholesalers and even importers within the Ghana Union Traders Associations have embraced the new approach.
A third arm of groups that were not included (small restaurant operators) have also come forward advocating to be included since they viewed the VFRS as more beneficial to both government and business.
In the Midst of the confusion, questions have been asked about what the real facts about the VFRS are. Here are a few answers.
What is the VFRS?
It is a simplified way of calculating VAT. It is designed for all VAT registered and registrable wholesalers (including importers) and retailers of taxable goods. It does not apply to manufacturers of goods and service providers. This is not the first time it is being introduced. As a less cumbersome way of calculating VAT, it is an approach that ensures that there is greater voluntary compliance, lower incentive to evade and ultimately it assures a broadening of the base of VAT payers on account of its simplicity and ease of operation.
Why has it been Introduced?
The difficulties with the Standard Rate Scheme (SRS) created lots of inefficiencies in VAT computation and compliance by large number of potential VAT payers, particularly, for those in the distributive trade sector. Notable among those difficulties was the challenge in obtaining VAT invoices to support input claims. Consequently, the VFRS was introduced to replace and simplify the hitherto complex approach of a taxpayer charging a tax of 17.5% Standard Rate on his/her sales (output tax) and paying a tax of 17.5% on his/her purchases (input tax). (i.e. the OUTPUT VAT and subtracting the INPUT VAT computation) to determine the net tax payable or credit to be filed through monthly VAT returns. ‘OUTPUT VAT minus INPUT VAT’.
With the new VFRS, a wholesaler or retailer simply computes 3% on their sales and pay same to government as VAT, without burdening themselves with requirement (hitherto) to obtain VAT invoices on their purchases to enable them to make input VAT claim. This is transparent and very easy to follow through by both tax officials and taxpayers.
Will it lead to increase in Prices?
The VFRS is not expected to result in an increase in prices of goods. This is because the 3% Flat rate is equal to the VAT that was effectively being charged under the old ‘OUTPUT VAT minus INPUT VAT’ approach. Stated differently, therefore, taxpayers will sell with the 17.5% VAT inclusive price and account for only 3%. The tax payable at a Flat Rate of 3% is equivalent in value to the effective tax payable by VAT Registered wholesalers and/or Retailers on the current Invoice-Credit Scheme of 17.5% which employs the input-output mechanism. In effect government has done the calculation on your behalf already and thus is only taking away the compliance difficulties.
When applied properly, and if players in the distributive trade sector do not take advantage of the scheme to overly increase their margins, we do not expect prices to change on retail counters.
What about the fear of a cascading effect?
The ‘cascading effect’ simply refers to the risk of an increase in prices along the distributive chain as every player adds a 3% VAT to his/her cost in their price build up. The claim that a change over to the VFRS will occasion cascading in the distributive chain cannot be sustained, since the 3% VAT at each stage merely represents the effective VAT which would have been charged if the OUTPUT – INPUT approach had been used. Besides, this effect has been present even under the old approach as margins are added at every stage. Particularly, when the VAT registered taxpayer buys from a non-VAT Registered person or when an invoice is not issued. The impact of cascading is at the high Rate of 17.5%. For example a 1,000 cedi product sold for 1,500 at one stage of the distributive chain will cascade the impact of the VAT on the selling price as it continues through various steps in the distributive chain. If this cascading effect was bearable under 17.5% OUTPUT – INPUT, then the claim that it will be realized under 3% cannot be sustained.
Does it mean wholesalers and retailers are estopped from keeping proper records?
One claim by the Minority in their criticism of the Policy approach is that by introducing it government is “telling wholesalers and retailers not to keep records”. The argument is then made that this will make it difficult for income tax calculations at year end.
This argument cannot be sustained because the 3% VFRS is based on records. Indeed for wholesalers, the records are the basis for claiming an allowable deduction of their input VAT when income taxes are filed. So the Policy is not an edict to industry players not to keep records. There is still a requirement to keep the necessary documentation and records as outlined in the VAT Act to support business transactions. The type of records to be kept will depend on the nature and size of the business.
What happens to wholesalers & Importers who pay input VAT but do not have recourse to claim same from GRA under the new model?
First of all, such operators ought not to add the 17.5% input VAT to the base for computing the 3% VAT; it is added as an independent line item in determining the price at which a retailer will purchase a product from a wholesaler.
For operators who were on the Standard Scheme or Invoice-Credit have the prices of their goods being inclusive of the 17.5% output tax. The Flat Rate of 3% is to be taken from the 17.5% output tax. The difference between the 17.5% and the 3% which is part of the price the consumer pays is kept by the taxpayer.
Additionally, the 17.5% output tax is still claimable but this time as an allowable deduction during the filing of income tax returns. This time it is a more efficient deduction because it is the exact amount which is deductible. What will remain is only the 3% on final sales which is chargeable as flat rate VAT payable.
So What is the way Forward?
– Continuous education
As a new approach it will be foolhardy on the part of government to expect immediate and full adoption of the VFRS without issues. Indeed some teething problems are expected. The focus is to continuously educate and assist industry players who have genuine concerns with the new computation.
– Strict enforcement after initial phase
When education has been thorough, the Ghana Revenue Authority will have to pursue full compliance by all players to ensure a level playing field for all operators on the market. Strict enforcement is what is needed to ensure that the projected revenues are attained.
The Important Thing
The important thing is that with a simplified and strictly enforced VAT flat rate, doing business is set to get easier, as it is easier to comply with regulation. At the same time, a massive loophole in government revenue mobilization will be closed leading to a reduction of fiscal risk for the country. We are making progress in achieving our targets. Let’s keep working.
