Adnan Adams Mohammed
The government, through the finance ministry, is taking a consultative approach towards plausible tax reforms, especially with regards to the Value Added Tax (VAT).
The Ministry, in its quest to improve the framework underpinning the current VAT system, has approached the International Monetary Fund, tax experts and the business community for technical input towards reducing the VAT rate which is effectively 22%..
With the help of a VAT Reform Taskforce, yet to be inaugurated by the Minister of Finance, to coordinate the consultation process, the President John Mahama administration has reiterated its commitment towards ensuring the protection of businesses to create job opportunities while saving individual consumers from the cascading effect of rigid tax systems.
“Mr. Speaker, we commit to the people of Ghana and the business community that we will undertake comprehensive Value Added Tax (VAT) reforms this year with the aim to review the current distortions and cascading structure of the VAT regime”, Dr Cassiel Ato Forson, Finance Minister told Parliament last week when presenting the government’s 2025 budget statement and economic policies.
Currently, Ghana’s effective VAT rate is about 22 percent with is 700 basis ponts above the stated rate of 15%. This is because GET Fund Levy of 2.5 percent, National Health Insurance Levy (NHIL) of 2.5 percent and COVID-19 Levy of 1 percent are all added to the base for the final determination of the VAT stated rate of 15%.
Aside from the high VAT rate, businesses are not permitted by law to claim their input for the NHIL, GETFund Levy and COVID-19 Levy, compounding the burden on households.
Prior to the budget reading, the President of the Ghana Union of Traders Association (GUTA), Dr. Joseph Obeng, called for a restructuring of the Value Added Tax (VAT) system. It is instructive that, the current inordinately high effective rate and complex structure is not encouraging compliance and is therefore negatively impacting the state’s tax revenue collection as well as the finances of compliant businesses.
He stressed the need for tax cuts and a streamlined tax system, with special emphasis on VAT, explaining that the current VAT system is complex and burdensome.
“The way VAT is structured is not ensuring compliance. It’s not helping businesses. We want VAT to be made simpler, more affordable, and uniform. It should be restructured,” Dr Obeng had said in a radio interview on Monday, March 10, the day before the 2025 budget was presented.
Also, some tax experts had also highlighted the need for urgent reforms to Ghana’s Value Added Tax (VAT) system, which has become overly complex and hinders business operations, before the budget was presented.
A tax lecturer at University of Ghana and consultant, Prof Abdallah Ali-Nakyea, in a recent interview, noted the positive implications of decoupling strict levies from the VAT system, which has significantly impacted business operations and compliance.
He urged the government on the need for stricter enforcement and clearer guidelines to ensure that VAT invoices are consistently issued, thereby reducing discrepancies and increasing overall tax compliance.
“We still have businesses and traders asking whether you want a VAT invoice or not. This practice poses a significant challenge and contributes to what is known as the tax gap,” he said.
Subsequently, Tax Partner at Price Waterhouse Coopers (PwC), Abeku Gyan-Quansah, has also noted that the current VAT system in Ghana has multiple different rates and categories, ranging from 0 to 15 percent. He believes the complexity is a major cause for businesses not being tax compliant, ultimately costing the government revenue.
“The VAT system is troubling. Why should we have a law that at a minimum, excluding levies, should have about six different rates, which I guess probably a number of you have not paid particular attention to? The law has 0%, 3%, 5%, 12.5%, 15%, and 7% percent withholding VAT rates.
“Of course, I am not saying they all apply at the same time on all transactions but it creates complexities, which are very difficult to do business with,” he said.
Consequently, the Finance Minister has acknowledged that, “our VAT regime has been distorted and rendered inefficient. It combines both VAT and sales tax principles with a flat rate, standard rate and levies.”
He declared the government’s commitment to reform the VAT system.
“Mr. Speaker, we have currently requested Technical Assistance from the Fiscal Affairs Department of IMF on VAT reforms. It is expected that the IMF Mission will commence in April 2025. The recommendations from the Technical Assistance Mission are expected to inform our VAT reforms.
“.Ahead of the IMF Technical Assistance Mission, I will inaugurate a VAT Reform Task Force to hold broad consultations with key stakeholders for their inputs.
“Mr. Speaker, the parameters for the VAT reforms will include: abolishing the COVID-19 Levy; reversing the decoupling of GETFund and NHIL from the VAT; reducing the effective VAT rate for households and busineses; reversing the VAT flat rate regime; upwardly adjusting the VAT registration threshold to exempt micro and small businesses from the collection of VAT; and improving compliance through public education and awareness.”
