As a good citizen of Ghana and a practicing tax professional, I am duty bound to make my expertise available to our motherland in diverse ways. After passage of the Value Added Tax (Amendment) Act, 2021 (Act 1072), my phone has been buzzing with queries concerning Act 1072 on questions like: has VAT flat rate scheme been abolished; why is my supplier now issuing a standard rate invoice to me instead of the flat rate invoice; who is required to implement Act 1072?
In as much as I did my best to provide answers to all those who enquired from me on the implementation of Act 1072, I see myself obligated to reach my wider audience with my opinion on Act 1072 and its associated issues.
It’s because of this that I chose to pen an article to explain the concept of VAT Flat Rate Scheme and educate the public on the Value Added Tax Act 2013 (Act 870) and its Amendment Acts, 2017 (Act 948), 2021(Act 1072) and their applicability.
- Value Added Tax (VAT)
Value Added Tax (VAT), known in some countries as goods and services tax (GST), is a type of tax that is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer. VAT is a consumption tax, and as the name suggests value-added tax is designed to tax only the value added by a business on top of the services and goods it can purchase from the market.
The history of the tax suggest that Germany and France were the first countries to implement VAT, doing so in the form of a general consumption tax during World War I. The tax was designed separately and unknown to each other by two people: namely Wilhelm Von Siemens, a German businessman; and Thomas S. Adams, an American. The modern variation of VAT was first implemented by France in 1954 in Ivory Coast (Côte d’Ivoire) colony. Recognising the experiment as successful, the French introduced it in 1958; and other European countries and the rest of the world followed suit.
- History and changes in VAT implementation in Ghana
Introduction of VAT in Ghana first surfaced in 1995, but it suffered a setback in its implementation and was reintroduced in 1998 with a successful implementation to date. The VAT regime has seen several changes over the years – from revision in some thresholds to introduction of flat rate schemes, introduction of associated levies and the introduction of withholding tax on VAT by some specified taxpayers.
The implementation of all the various measures were meant to strengthen the VAT regime by ensuring simplicity in the VAT application, increase in tax revenue, and revenue assurance.
In 2007, the flat rate scheme was first introduced with a rate of three percent (3%) on the value of taxable supplies of retailers.
The scheme reintroduced a sales tax feature that did not allow retailers to claim their input VAT as deductions. The various amendments over the period created some form of confusion, as retailers fell into two categories due to revision in revenue thresholds.
Further, the registration thresholds were revised upward and expanded to apply to all taxpayers, whereas they had previously applied only to retailers. Retailers were no longer singled-out for purposes of determining threshold. The three percent (3%) flat-rate scheme also saw an expansion to cover all taxpayers with lower turnover, and as such it was no longer solely applicable to retailers.
The promulgation of VAT Act 2013, (Act 870) sought to harmonise the various amendments, seamlessly replace the old Act, and address new ideas in the VAT regime. The new law effectively cancelled the flat-rate scheme; meaning that some taxpayers needed to be reclassified from the flat rate scheme to the VAT regime. Ghana had a complete VAT regime again in 2014, with upward revisions to the thresholds.
In April 2015 a special 5% flat-rate scheme was introduced for real estate developers, but it was later abolished by the passage of VAT (Amendment) Act 2017, (Act 948). The passage of Act 948 saw a reintroduction of the flat rate scheme for retailers again, like what was introduced in 2007. Once again, Ghana had a 3% flat rate for retailers and a standard rate for any other taxable persons.
The general meaning of ‘retailer’ was adopted but broadened to cover wholesalers and distributors. The flat rate had a wide reach, and it disproportionately affected large distributors as there were no turnover restrictions to narrow it to smaller businesses.
2. The VAT Flat Rate Scheme (VFRS)
The VAT Flat Rate Scheme (VFRS) is a special scheme that allows a category of vatable persons who meet certain criteria to apply a fixed VAT rate on their revenue to arrive at the VAT payable, and they are not permitted to deduct the VAT they incur on their inputs. The VFRS is mostly implemented by revenue authorities to target small businesses who may find it challenging to apply the input-output mechanism required in administration of the standard rate scheme.
As explained above, since one cannot claim input VAT under the VFRS, the input tax becomes an expense to the business. In order to recover the input VAT, one has to treat the VAT they incurred on their purchases as part of the purchase cost of goods and set a margin on that to fix their sales price.
The VFRS does not change the tax status of goods and services supplied. The provisions in VAT Act 2013 (Act 870) on exempt supplies, zero-rated and relief supplies remain unchanged under the VFRS. VFRS businesses and operators are required by the VAT law to issue the VAT flat rate invoice for all transactions. However, businesses authorised by the Commissioner-General (CG) to operate the Special Retail Scheme can use electronic means to record their sales and issue till-receipts for their sales. The till-receipt will show the rate and amount charged for the VAT and any applicable levies.
3. Benefits of the VAT Flat Rate Scheme
The VFRS has several benefits, including:
- The VFRS is simple to operate and makes record-keeping simple because taxpayers don’t have to work out the VAT they can claim on their purchases.
- The VFRS can also save you money, though it’s not designed with this in mind. This tends to depend on what sector you’re in, and how much VAT you pay out on your costs.
- The VFRS eliminates the difficulty of obtaining invoices to support input tax claims, since input tax deductions are not allowed.
- The VFRS makes VAT collection easier and more successful than other types of taxes.
4. Demerits of the VAT Flat Rate Scheme
The VFRS has the following demerits:
- VAT flat rate, like most taxes, distorts what would have happened without it. Because as the price rises for someone, the quantity of goods traded decreases.
- Because flat rate taxable sales include VAT-exempt sales, persons who make a lot of exempt or zero-rated sales under the VFRS might end up paying more in VAT.
- VFRS increases tax passed to the consumer, which increases the ultimate price paid by the consumer.
- The incidence of VAT may not fall entirely on consumers, as traders tend to absorb VAT to maintain volumes of sales.
- Passage of the VAT (Amendment) Acts, 2017 (Act 948), 2021 (Act 1072), and COVID-19 Health Recovery Act, 2021 (Act 1068)
The purpose of Act 948 was to reintroduce the VFRS, and three percent (3%) is to be charged on the supply of goods in the distribution chain and to provide for related matters. The advent of the COVID-19 pandemic led to the introduction of Act 1068, which introduced a one percent (1%) levy on taxable supplies under both the VFRS and the VSRS. The purpose of Act 1072 is to limit application of the VFRS to Retailers with an annual turnover more than Two Hundred Thousand Cedis but not exceeding Five Hundred Thousand Cedis.
- Interpretation and Application of the VAT (Amendment) Acts, 2017 (Act 948), 2021 (Act 1072), and COVID-19 Health Recovery Act, 2021 (Act 1068)
The VAT registration requirement in Act 870 as amended by Act 904 requires a person who is engaged in a taxable activity and is not registered for tax purposes to register – if at the end of any period of twelve or less months the person made, during that period, taxable supplies exceeding Two Hundred Thousand Cedis, or at the end of any month there are reasonable grounds to expect that person will make taxable supplies in the next twelve or less months exceeding Two Hundred Thousand Cedis.
As mentioned above, one of the reasons for introduction of the VFRS is to make accounting for the tax easier for small businesses, which are predominantly in the retail, wholesale and distribution chain. That notwithstanding, some businesses in those sectors are not small enterprises and can employ professionals to handle their tax reporting.
This among other reasons required an amendment in the registration requirement: to make it possible for only taxable persons who are retailers of goods and make at the end of any period of twelve or less months a taxable supply in excess of Two Hundred Thousand Cedis but not exceeding Five Hundred Thousand Cedis to account for the VAT payable at a flat rate of three percent (3%) and one percent (1%) for the COVID-19 Health Recovery Levy calculated on the value of the taxable supplies.
- Conclusion
My review of Act 1072 and associated enactments provides answers to the three questions stated above in my introduction as follows.
The VAT flat rate scheme has not been abolished, but it has been reviewed for only taxable persons who are retailers, wholesalers and distributors of goods and makes at the end of any period of twelve months or less a taxable supply not less than Two Hundred Thousand Cedis but not exceeding Five Hundred Thousand Cedis to account for the VAT payable at a flat rate of three percent (3%) plus one percent (1%) for COVID-19 levy calculated on value of the taxable supplies.
Suppliers who were on the VFRS but make annual revenue of more than Five Hundred Thousand Cedis are expected to migrate from the VFRS to the VSRS and issue a standard rate invoice effective from 1st January 2022.
- Recommendations
I recommend the following for possible consideration:
- Businesses which are currently on the VFRS are to migrate to the VSRS if their annual revenue exceeds or is expected to exceed Five Hundred Thousand Cedis.
- Businesses which have migrated from the VFRS to the VSRS because of the implementation of Act 1072 should advise their customers on reasons for the change in their billing.
- Businesses which qualify to migrate from the VFRS to the VSRS because of the implementation of Act 1072 should do so to avoid audit queries.
This article is to advise the public and businesses that Act 1072 has not abolished the VFRS; but persons who are currently registered for the VFRS need to seek professional advice on how Act 1072 impacts their business, and to advise the public why some retailers and wholesalers will issue to them the VAT standard rate invoice instead of the VAT flat rate invoice they used to receive from them.
The author is a Tax Practitioner – a Member of ICAG and an Associate Member of the Chartered Institute of Taxation Ghana)
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