VAT constitutes one of the great sources of tax revenues, yet it’s the most abused or evaded by taxpayers. An analysis by the Africa Tax Administration Forum (ATAF) on VAT Fraud Manifestation and Typologies in Africa established, among others, how the African VAT system is under threat as a result of continental trade and economic cooperation between countries.
This is further engraved with the flagship project of the Africa Union (AU) – The African Continental Free Trade Area (AfCFTA) entered into force on May 30, 2019 and aims to create a free trade area in Africa through relaxed border controls, continental integration, and facilitation of liberalised trade in goods and services across the continent.
Ghana’s VAT system not only focuses on a ‘brick and mortar’ system of assessment and collection but also includes the ‘cloud’ system as well (section 16 of Act 870). This makes Ghana’s VAT system robust as it encompasses the broad spectrum of modern globalisation. Despite the gains made compared to our sub-Saharan peers, the VAT revenue generated compared to other tax types leaves much to be desired.
According to the ATAF report, available revenue statistics show that the unweighted VAT Revenue Ratio (VRR) in Africa stood at about 0.37 as of 2018. This suggests that, on average, around 63 percent of potential VAT revenue remains uncollected.
Tax revenue from VAT has not improved in recent years, looking at the trend of economic growth. The service and manufacturing sectors which account for most of the VAT base have been on an upward trajectory compared to the agriculture sector. This was supposed to have been translated into VAT revenues. A lot of experts attribute varying reasons for this inertia of VAT revenue growth – but of great essence in this article is the VAT audit risk based on Act 870.
The major risk areas include the following:
- Taxable and exempt supply:
Taxable persons who retail both taxable and exempt supplies and have been given permission to issue their own invoices are to keep two separate records of the supplies (section 23; Act 870). A taxable person who lumps both supplies shall calculate the output tax for the period using the formula (Regulation 24; L.I. 2243)
Likewise, in apportioning input tax, the taxpayer should be able to separate taxable purchases and taxable imports which can be directly attributed only to the taxable supplies made.
However, section 49 of Act 870 provides that where a taxable person cannot directly attribute input tax to the taxable and exempt supplies, that person may deduct as input tax on the taxable purchases and taxable imports an amount that bears the same ratio as the taxable supplies bear to the total supplies applying this formula
A is the total amount of input tax for the period that is not directly attributable to taxable or exempt supplies;
B is the total amount of taxable supplies made during the period; and
C is the total amount of all supplies made during the period.
It should be noted that if the ratio of B to C is less than 5 percent, the taxable person is not entitled to deduct input tax for the period; but if the ratio of B to C is more than 95 percent, the taxable person may deduct the entire input tax allowable on the taxable purchase and taxable imports.
- Exporter of goods and services:
Generally, taxable goods and services that are consumed elsewhere other than in the country are zero rated (section 36 and 2nd schedule of Act 870). A taxable person who engages in such activities is required to obtain and retain documentary proof that is acceptable to the Commissioner-General and substantiate the person’s entitlement to apply the zero rate to the supply.
Tax officers will disregard any verbal evidence and surcharge the taxable person who does not comply with this provision (section 56; Act 870). In addition to re-characterisation of the arrangement, interest and penalty shall be computed in accordance with section 71, 74 of Act 915 and the person shall be prosecuted for tax evasion (section 59 of Act 870; section 81 of Act 915).
A taxable person who exports taxable goods and services may apply for refund of input tax or use it as credit for next accounting period. For refund of excess credit, at least 25 percent of the total supplies exported should have been repatriated to the taxable person’s authorised dealer bank(s) in the country. This provision shall be in consonance with any enshrined enactment in force which allows the taxable person to retain part of the export proceeds outside the country (regulation 42; L.I. 2242).
- Free zone enterprise or developer:
Persons registered under the Free Zone Act, 1995 (Act 504) are to provide documentary proof including renewal certificate when demanded by tax officials. This is very important due to the special treatment entities under this Act enjoy. Imports and exports of taxable goods or services by such entities outside the territorial boundary of Ghana are zero rated. Similarly, when a resident entity supplies taxable goods or services to a free zone entity, the taxable supply is zero rated. A free zone entity is to keep documentary evidence of all those transactions to avoid imposition of penalties as stated in section 72 of Act 915.
However, when free zone entities supply taxable goods or services to persons in the territorial boundary of the country, such supplies are considered as imports and therefore the applicable VAT and levies are applied together with other taxes administered by the Custom division.
- Relief supplies
Persons who have been granted relief as specified in section 38 & the third schedule (Act 870) are to comply with the provision in the strictest form. Tax officers will disallow persons who go contrary to such provisions and surcharge those persons for tax evasion (section 59 of Act 870). It must be noted that reliefs granted by a Ministry, Department or Agency (MDA) without approval from the Minister of Finance and Parliament shall not be accepted, and those arrangements shall be re-characterised as taxable supplies (section 63 & 99 of Act 915, section 38, 54, 56 & 59 of Act 870).
In conclusion, the potentials associated with the VAT act are enormous and a good avenue for government to shore-up revenue for national development. There is therefore a need for GRA to ensure strict compliance through education, regular compliance audit and enforcement actions.
- ATAF (2022). Value Added Tax (VAT) Fraud Manifestation and Typologies in Africa: Considerations in Designing a Fit for Purpose Response. Africa Tax Administration Forum (ATAF): Pretoria.
>>>the writer holds MSc in Economic Policy and is a member of CITG. He can be reached on 0242033009 and or [email protected]