What exactly is the Value Added Tax (VAT) standard rate in Ghana after the 2018 Mid-Year budget amended the VAT rate from 15% to 12.5% and delinked the National Health Insurance Levy (NHIL), the Ghana Education Trust Fund (GETFund) and the recent COVID-19 Health Recovery Levy from the VAT? This was done by removing their input tax deductibility.
Does the change in the VAT computation comply with the VAT laws in Ghana? Is the taxpayer paying more VAT than required as a result of the Commissioner-General’s directives on the computations? Is the current standard rate accurate but full disclosure is not made to the ordinary Ghanaian? Tax students and taxpayers in Ghana continue to seek answers to these questions.
In order to edge-up government revenue to address various developmental gaps in Ghana, VAT was introduced by the VAT Act, 1994 (Act 486) to keep up with the policy of the Economic Recovery Program (ERP) and Tax Reform Program (TRP) to streamline the tax structure and accelerate economic growth, among others (Agalega, 2017; Ali-Nakyea, 2008, 2014; Antwi et al., 2012).
As a result, VAT was implemented in March 1995 amid widespread unhappiness and concerns about inflationary impact and misunderstanding on computations. The anti-VAT march, called “kumipreko” (literally translated as “kill me fully”) forced the government of the day to repeal the initial VAT Act, which was successfully reintroduced in 1998 with the passage of a new VAT Act, 1998 [Act 546] (Agalega, 2017; Ali-Nakyea, 2008).
The rate of VAT began at 10% in 2000 with additions of 2.5% each of GETFund levy and NHIL levy in 2000 and 2003 respectively (Agalega, 2017; Ali-Nakyea, 2008, 2014). The rate, according to the authors, moved to 17.5% in 2013 after additional 2.5% was introduced. The rate further increased to 18.5% after the introduction of the 1% COVID-19 Health Recovery Levy Act, 2021 (Act 1068). These rates are shown on Ghana Revenue Authority’s (GRA) VAT invoices.
VAT is a general tax levied on goods or services. It could be termed a consumption tax as it is a general tax on consumer spending. VAT is a tax levied on the final consumer because of the non-cascading system of tax under VAT. It is added to the price of taxable goods or services at all levels of the production-distribution chain. The name “Value Added Tax” comes from the way the tax is collected. VAT is paid on the “value-added” made at various stages of the production and distribution of the taxable goods and services. Significant value added is created at each of these points in the chain of distribution (Okoli & Afolayan, 2015).
Production activity often entails obtaining inputs from other businesses, processing the inputs, and producing an output sold for a higher price than the inputs. A firm’s “value-added” is the value added by the firm’s activity to the value of inputs obtained from other firms to produce the output. It is the difference between the output’s sales value and the cost of the output’s inputs.
Rendering of service also involves the generation of value-added in so far as inputs may be used and the output (supply of service) is sold at a price. Indeed, production is merely the generation of value-added; the price paid by the consumer for any product is accumulation of value-added created at the various stages through which the product passes in the production-distribution chain (Tsang et al., 2008; Zee, 2005).
VAT, under the 2013 Act [Act 870] (as amended) is, therefore, chargeable on every supply of goods or services in Ghana, importation of goods as well as on the provision of services, except those specifically exempt by law (GRA, 2021) at the rate of fifteen percent, [including GETFund and NHIL levies] (section 3, Act 870, as amended), calculated on the value of the taxable supply of the goods or services or the value of the import. The rate provision was amended in 2018 to 12.5% (excluding GETFund and NHIL levies). Despite the various amendments to the rate, the basis of computation remains unchanged.
Value of taxable supply connotes the value of a supply of goods or services made by a taxable person for consideration, other than an exempt supply, in the course of, or as part of taxable activity carried on by that taxable person [Section 33, Act 870] ( as amended).
The Challenge
Raising money through taxes to meet fiscal policy objectives is one of the herculean tasks of governments, which Ghana is not an exception. Whiles some citizens do their best to support governments in developmental plans by honouring their tax obligations; others try to either evade or avoid tax payments and care less about any developmental goals. Reasons for the later are not farfetched in our communities.
It, however, seems that good citizens who try to support tax payments through the VAT system end up paying more than required by the VAT Acts. A taxpayer, who knowingly agrees to pay 18.5% VAT on taxable goods or services, which comprise of the Standard Rate (SR) of 12.5%, National Health Insurance Levy (NHIL) rate of 2.5%, Ghana Education Trust Fund levy (GETFund) rate of 2.5% and COVID-19 Health Recovery Levy (COVID-19 HRL) rate of 1%; ends up paying a higher percentage. Is the taxpayer being cheated? Where does the extra percentage come from?
Our study, therefore, sought to examine the current computation of VAT in Ghana to ascertain the actual VAT standard rate payable by the citizenry on taxable supply. Scenario-based analyses (adapted from GRA) were used to examine and test the actual standard rate of VAT applicable in Ghana.
Computation of VAT in Ghana
The Commissioner-General of the GRA, responsible for the day-to-day administration of the authority’s affairs, has the sole mandate to issue practice notes in accordance with sections 100 and 101 of the Revenue Administration Act, 2016, Act 915 (Ernst &Young, 2021). These notes include interpretation of certain provisions in that VAT Acts (as amended) and computation of the VAT payable by taxpayers.
A quick review of the practice note on taxable value for charging VAT (GRA, 2021) shows that the 12.5% standard rate of VAT is computed on the NHIL, GETFund, and COVID-19 HRL charged inclusive value of the taxable supply. That is, the 12.5% VAT is computed on the value of the taxable supply inclusive of NHI, GETFund and COVID-19 levies.
This implies that VAT is charged on NHI, GETFund and COVID-19 levies. This looks different as compared to the provisions of the VAT Act, 2013 (as amended), which provides for the computation of the standard VAT rate on the value of the taxable supply of the goods or services or the value of the import. The former implies that the VAT standard rate is higher than normal as it is chargeable on the charged NHI levy, GETFund levy and the COVID-19 HR levy, in addition to the standard rate charge on the taxable supply.
A quick analysis, based on the given scenario (appendix), produces different VAT amounts computed and transferable to the final consumer. Application of the provisions in the VAT Act, 2013 (as amended) produces a tax liability of GHS11,250.00 as compared to the outcome produced in accordance with the practice notes of GHS 11,925.00 sanctioned by the Commissioner-General (GRA, 2021).
The results of the computations imply that the standard VAT rate is not applied to the value of the taxable supply but rather the aggregate of the values of the taxable supply, and the components of the GETFund, NHIL and COVID-19 levy. The computations reveal that the taxpayer (final consumer) actually bears a standard VAT rate of 13.25% of the value of the taxable supply, which is different from the 12.5% in accordance with the VAT Act, 2013 (as amended).
Conclusion
Based on the outcome of the computations, the study concludes that a VAT standard rate of 0.75% has been added to the rate approved by the VAT law in Ghana and borne by the taxpayer. This addition is not fully disclosed on GRA VAT invoices to the taxpayer. The current mode of computation and the lack of its awareness among taxpayers appear to suggest that taxpayers pay more than known and required in VAT liabilities.
Recommendations
An experimental cross-sectional survey conducted among taxpayers in the La Nkwantanang, Sunyani, Asante Akim Central, Nkawie, Atwima Nwabiagya and Kpone-Katamanso Municipal Assemblies indicated that taxpayers are not aware of the excess VAT liability incorporated in the standard rate.
The study, therefore, recommends that GRA either backs the current VAT computation with an Act of Parliament or compute VAT liability in accordance with the provisions in the VAT Act, 2013 [Act 870] (as amended). None of the amendments to the VAT Acts bases the computation on taxable value. The study further recommends that there should be full disclosure of the actual rate of VAT on GRA’s VAT invoices, if the law accepts taxable value as taxable supply to enhance transparency and remove any tax hiding perceptions among taxpayers and tax students.
References
Agalega, E. (2017). Ghana Taxation: A comprehensive guide on new tax laws. (2nd ed). Koforidua, Ghana: SMK Graphix.
Ali-Nakyea, A. (2014). Taxation in Ghana (3rd ed.). Accra, Ghana: Black Mask Limited.
Ali-Nakyea, A. (2008). Taxation in Ghana: Principles, practice and planning (2nd ed.). Accra, Ghana: Black Mask Limited.
Antwi, S., Atta, M. F.E.E., & Zhao, X. (2012). Impact of VAT rate changes on VAT revenue in Ghana. International Journal of Social Science Tomorrow, 1(10), pp. 1-11. https:// www.researchgate.net/publication/272171254_Impact_of_VAT_Rate_Changes_on_VAT_Revenue_in_Ghana
Ernst and Young (2021, October 28). Ghana revenue authority issues practice notes on certain provisions of the VAT Act. https://taxnews.ey.com/news/2021-1964-ghana-revenue-authority-issues-practice-notes-on-certain-provisions-of-the-vat-act?uAlertID=Sd%2FG8 rua1oj6%2Fl58EZ2AiA%3D%3D
Okoli, M. N., & Afolayan, S. M. (2015). Correlation between value added tax (vat) and national revenue in Nigeria: An ECM model Research Journal of Finance and Accounting, 6(6), pp. 230-238. https://www.iiste.org/Journals/index.php/RJFA/article/ view/21179
Tsang, E. W., Yip, P. S., & Toh, M. H. (2008). The impact of R&D on value added for domestic and foreign firms in a newly industrialized economy. International Business Review, 17(4), pp.423-441. https://doi.org/10.1016/j.ibusrev.2008.02.005
Zee, H. H. (2005). A new approach to taxing financial intermediation services under a value added Tax. National Tax Journal, 58(1), pp. 77-92. https://www.journals.uchicago.edu/ doi/abs/10.17310/ntj.2005.1.04
GRA (2021). VAT Standard. https://gra.gov.gh/domestic-tax/tax-types/vat-standard/
Value Added Tax Act, 1998 (Act 546)
Value Added Tax (Amendment) Act, 2013 (Act 870)
Value Added Tax (Amendment) Act, 2015 (Act 890)
Value Added Tax (Amendment) Act, 2018 (Act 970)
Value Added Tax (Amendment) Act, 2019 (Act 1005)
Appendix
ABC Limited is a VAT registered textile manufacturing company. The following sales were made during the month of May, 2021.
- Domestic sales Ghc90,000.00
- Sales to diplomatic community Ghc10,000.00
- Export to Togo with relevant customs documentations Ghc150,000.00
Comparable VAT liability computations
| Computation per GRA practice notes (GHS) | Computation per VAT Act [as amended] (GHS) | |
| Taxable supply(TS) | 90,000.00 | 90,000.00 |
| GETFund Levy (2.5% on TS) | 2,250.00 | 2,250.00 |
| NHI Levy (2.5% on TS) | 2,250.00 | 2,250.00 |
| COVID-19 Levy (1% on TS) | 900.00 | 900.00 |
| Taxable Value (TV) | 95,400.00 | – |
| VAT (12.5% on TV) | 11,925.00 | – |
| VAT (12.5% on TS) | – | 11,250.00 |
| Excess VAT charged | 675.00 |
Actual standard rate of VAT Computation
C = Cost
GETFund Levy (2.5%) = 0.025
NHIL (2.5%) = 0.025
COVID-19 Levy (1%) = 0.01
VAT (12.5%) = 0.125
If C represents the value of the goods or service without taxes and the levies,
Then:
Total Inclusive Value (per GRA’s Practice Note):
= C+0.025C+0.025C+ 0.01 + [(1.06C) *(0.125)]
= 1.1925C
Therefore 1.1925 minus 0.06 (Levies) = 1.1325
Current standard rate of VAT = 13.25%
ABOUT THE ATHOURS
Francis is with School of Graduate Studies, Valley View University and Job, Philip, Boachie and Kofi are PhD Students, Valley View University
e-mail :[email protected], [email protected], [email protected], [email protected] and [email protected]
