Introduction
The Value Added Tax (VAT) was introduced (or rather re-introduced) to replace the sales tax regime in December 1998, after the first attempt failed in 1995. Since the VAT in Ghana will be 20 years in 2018, we must transcend the current public debate on very basic principles of VAT regimes and, rather, bring the tax in line with global best practice. We will review some of these basic principles before commenting on issues arising out of the current debate.
Who charges or pays VAT
VAT is an indirect or consumption tax that falls in the same category as import duties and excises. It is charged by registered businesses or taxpayers but paid by consumers as higher prices for taxable supplies (goods and services). It is collected at multiple stages along the production/import-distribution chain, as “value [is] added” to final products.
Eligible taxpayers pay VAT charged and collected from businesses and consumers to GRA offices. Since VAT is imposed at multiple stages, it can “cascade” along the value chain, as raw materials, semi-finished or finished products are converted to final supplies. “Cascading” is a defect in sales tax systems and the reason for replacing them with VAT. Hence, the issue is not whether VAT cascades at 3 percent or 17.5 percent: both are anti-VAT.
Strengths of VAT Credit Method
To avoid cascading, registered taxpayers who pay input VAT on purchases can offset this amount (take credit) against output VAT charged on sales. This credit method is self-policing because taxpayers must show evidence of purchases and sales invoices to take the credit. Since a sales invoice becomes a purchase invoice, until supplies reach final consumers and unregistered taxpayers, these documents leave an audit trail for tax inspectors. As with income tax presumptive tax methods, “flat rate” schemes weaken the VAT mechanism because it relaxes the need to keep VAT invoices and other accounting records. Hence, presumptive taxes are restricted to informal sector SMEs at the final distribution stage.
VAT rate exceptions
Countries apply two VAT rates—standard (domestic supplies) and zero (0) (exports). Ghana’s standard rate of 17.5 percent represents: general VAT (12.5 percent) and NHIL and GETFund (2.5 percent each). Zero-rates (and drawbacks for import duty/excises) apply to exports to prevent foreigners paying domestic taxes. They make exports competitive because taxpayers get “VAT refunds” by offsetting zero (0) against 17.5 percent. Hence, we do not do exporters a favour with a 3 percent flat rate: we are exporting a zero (0) to 3 percent increase!!
There are three exceptions to VAT standard regimes. VAT registration thresholds, based on annual sales or turnover (200,000 cedis in Ghana), exclude SMEs from registering and charging VAT, even if they make “taxable supplies”. VAT laws also exempt some supplies (e.g., unprocessed food, education, and health services) from the tax base on grounds of income redistribution. Finally, privileged persons such as Diplomats are deemed foreigner and do not pay VAT.
The VAT flat rate scheme, a variant of thresholds, does not conform to best practice. Presumptive tax rates are designed to replace corporate and “progressive” personal income tax rates. SMEs apply the low rates to annual sales, in lieu of profit, to avoid complex calculations and records. Yet, Ghana’s Income Tax Act (ITA) already has a 3 percent presumptive rate meant to replace the original flat VAT rate. This has not been repealed and adds to the current confusion.
Other major Flat Rate Deficiencies
Ghana’s flat rate VAT scheme was repealed because it is uncommon and discouraged in other jurisdictions. The enhancements before Parliament make it worse and offends the principles of simplicity, efficiency, and fairness. In fact, the scheme is against GRA’s own Strategic Plan and Modernization Programme.
Vague multiple VAT thresholds: The amendments to the VAT Act did not repeal the VAT threshold and, as noted, the ITA has a presumptive rate meant to replace the original flat rate. The proposal adds a third layer, includes large businesses, and gives a lot of discretion to the Commissioner-General (CG) without legal backing.
Large retailers and wholesalers: The inclusion of wholesalers and non-SME retailers is not best practice since it discriminates against service providers and manufacturers—who often conduct wholesale/retail activities. Secondly, those under flat rate schemes are not required to keep invoices and other accounting records. Without amendment to the ITA, they have to keep these records for income tax purposes. We seem to dangerously encourage a dichotomy in recordkeeping for the same taxpayers.
Inclusion of importers: VAT is “collected as though it were an import duty”. By adding importers, the flat rate is encouraging some importers not to keep records that come naturally with shipping activities. Further, they must keep these same records for import duty, excise and income tax purposes. Also, we have not amended the Customs Tariff to select the importers who qualify to continue with the 17.5 percent standard rate.
Complexity in compliance: Besides being unfair, the proposal will make it complex and expensive for taxpayers. Taxpayers with multiple activities must apply 17.5 (e.g., manufacturing), zero [0] (exports) and flat 3 (retail/ wholesale) percent rates.
Rule of “averages” is dubious: We hear strenuous defence of a so-called rule of averages but it remains dangerous from a tax compliance viewpoint. ALL our tax laws demand “complete (or full) and accurate” records, the exception being presumptive regimes. Do we expect regulations to define “average” records, notably for large and medium entities? Regarding VAT, the true meaning of “average” is (a) exporters are denied VAT “refunds”; and (b) consumers pay less for high margin supplies and vice versa.
Flat rate regime defeats GRA reforms: Under GRA’s segmentation programme, taxpayers come under large, medium and small taxpayer offices (i.e., LTO, MTO and STO). Needless to say, those under LTO/MTOs must keep “complete and accurate” records for ALL taxes. They are also typically above the VAT Threshold. Hence, the “flat rate” proposal defeats this vital goal of the Authority’s Strategic Plan and Revenue Modernization Programme.
Likewise integration: This argument also applies to the the Domestic Tax Division (DTO), which “integrated” the Internal Revenue Service (IRS) and Value Added Tax Services (VATS). The goal is to merge many VAT and income tax functions, encourage taxpayers to keep uniform records for this purpose, and facilitate compliance and administration. Hence, it seems odd to hear DTO staff strenuously and openly defending the dichotomy of operations and recordkeeping—especially for large and medium entities.
Need to bring taxpayers in the informal sector into the tax base. This long-standing goal of revenue administration cannot be achieved without proper records. The flat rate has the opposite effect by allowing even elite medium and large (MTO/LTO) taxpayers to come under a presumptive regime!!
Not a superior revenue earner: It is argued that the flat rate proposal will increase revenues by preventing malpractices. The flat rate scheme is not new and it did not show any such dramatic revenue increase between the mid-to-late 2000s. Our tax-to-GDP ratio has hovered around 15 to 17 percent for over two decades. The scheme will likely lead to revenue loss through tax rate arbitrage (zero, 3 and 17.5 percent), evasion and avoidance.
Need to amend the statutory fund laws: We must point out that the NHIL and GETFund are collected as though they were VAT but under different legislation that imposes 2.5 percent rates of levy. We may have to amend these laws to bring them in line with the VAT 3 percent VAT rate.
Conclusion
Clearly, there is only one major recommendation, as way forward: let’s implement the existing ITA provisions on presumptive taxes. It has a deemed VAT flat rate (a past political compromise) and, under regulations, allow multiple flat rates for different sectors (with different “margins”). Ghana is not a “tax island” and, therefore, as we quibble over basic coverage and rate structure issues, countries are moving their VAT regimes into the “apps age” to help taxpayers meet their voluntary compliance obligations.
