Ghana’s Ministry of Finance has unveiled a groundbreaking report titled “A Review of Ghana’s Value-Added Tax (VAT) System”. The report, developed in collaboration with researchers from the Institute for Fiscal Studies (UK), provides an in-depth analysis of the structure, administration, and performance of Ghana’s VAT system and associated levies. It examines both short-term and long-term revenue trends, leveraging global VAT policy principles, international best practices, and detailed tax data.
Key Insights from the Report
1. Progressivity of the VAT System
The report finds that Ghana’s VAT system is broadly progressive, with wealthier households contributing a larger proportion of their expenditure to VAT compared to poorer households. This progressivity stems largely from exemptions on basic foodstuffs that benefit low-income households. However, in absolute cash terms, richer households derive greater benefits from these exemptions. This has prompted the government to review existing VAT exemptions as part of its Medium-Term Revenue Strategy (MTRS) to ensure they are effectively targeted and equitable.
2. VAT Registration Challenges
The report highlights discrepancies in VAT registration compliance. While many small businesses below the VAT registration threshold voluntarily register for VAT, a significant number of businesses that exceed the threshold fail to register. Additionally, a considerable proportion of registered taxpayers either do not file tax returns or submit “null” returns with no sales or purchases reported. This underscores the need for enhanced enforcement measures and strategies to boost voluntary compliance, a key focus of the MTRS.
3. VAT Flat Rate Scheme (VFRS) Reforms
Reforms to the VAT Flat Rate Scheme in 2023 have been instrumental in improving revenue collection. Previously available to all wholesalers and retailers, the scheme was restricted to small taxpayers. This shift has streamlined administrative processes, reduced compliance costs for smaller businesses, and contributed to an increase in tax revenues.
4. Economic Growth and VAT Revenue Trends
The report observes that the composition of Ghana’s economic growth in the latter half of the 2010s—dominated by investment and exports—was less conducive to growth in VAT revenues, as VAT primarily targets consumption. This economic structure, combined with rate adjustments, contributed to slower-than-expected growth in VAT revenues despite overall economic expansion.
Implications for Policy and Administration
The findings of this report have already informed significant tax policy decisions and are guiding the government’s MTRS. By addressing the identified gaps in VAT administration and compliance, the government aims to optimize revenue mobilization. Proposed reforms under consideration include revisiting VAT exemptions, enhancing enforcement mechanisms, and refining administrative processes to ensure a fairer and more efficient system.
This report underscores the government’s commitment to evidence-based policymaking and highlights its broader efforts to strengthen Ghana’s tax system as a critical pillar of sustainable economic development.
Story by: Mercy Addai Turkson #ahotoronline.com
