By Frederick ASIAMAH
The Value-Added Tax (VAT) Flat Rate Scheme is in full gear now and the impact is gradually beginning to be felt.
For the likes of the Association of Ghana Industries (AGI), the VAT Flat Rate Scheme (VFRS) this is so much a big deal.
On the other hand, the rolling out of the VFRS excites the Ghana Union of Traders Association (GUTA).
So far, the debate has been about prices increasing, due to the fact apart from retailers, who are the end of the supply value chain, virtually every stakeholder who will come under the scheme will have to pass on cost.
Tax expert Abdallah Ali-Nakyea puts it more lucidly: “VAT Flat Rate is meant for a threshold or category of retailers who are the last in the value chain, meaning from them the goods get to the final consumer.”
He expatiates that “This is so because in that way there is no cascading effect of tax on the goods. That is no tax upon tax, meaning the retailer does not end up imposing the flat rate on another flat rate already incurred on purchases from the wholesaler.”
Arriving at VFRS
The VFRS came into force on July 1, 2017 after the Ghana Revenue Authority (GRA) had issued a circular, advising all retailers, wholesalers, including importers to start implementing the tax.
The GRA explained that the VFRS collection and accounting mechanism under which, a registered taxpayer who is a retailer, wholesaler or importer of goods shall have a marginal Value Added Tax (VAT)/National Health Insurance Scheme (NHIS) levy rate of 3%, representing the net VAT payable on the value of taxable goods supplied.
The tax collector added that the tax is an alternative to the standard Scheme method of accounting.
This is a follow up to government’s indication in the budget presented to parliament in March that VAT would but reviewed from 17.5% to 3% flat rate for certain category of business operators.
It has been described as a tax that is not alien to the Ghanaian retailer in particular as the erstwhile Kufour administration run the same scheme in the mid-2000s.
The “VAT Flat rate is not a new policy in Ghana. We need to understand why it was withdrawn,” Ali-Nakyea says, point out that it was having a cascading effect.
Cascading effect is the term for double taxation in indirect taxation because double taxation refers to taxing the same person twice on the same income, he explains.
What VFRS means
Considering the type of businesses brought within the VFRS net as defined by the GRA, there is a real risk of prices of goods rising because of the double taxation effect.
Here again, the knowledge of Ali-Nakyea proves invaluable. “The [VAT] threshold used to be GHS20,000 but with changes in the economy it was found too low and thus raised to GHS200,000. This meant any retailer of goods below GHS200,000 was not required to register and charge VAT.
“Thus if we even want to reinstate the flat rate it should be applicable to retailers with a threshold below GHS200,000 and not to be made applicable to distributors, wholesalers and retailers.
“Doing so as of now will lead to the cascading effect of taxes analyzed above and hence leading to price increases, and ceteris paribus (all other things being equal) lead to increase in inflation.
“This is what occurred in 1995 when VAT was introduced and we had to withdraw it, repackage it, engaged in extensive public education before it was successfully re-launched in 1998,” he pointed out but with a quizzing: “Are we learning from history?”
AGI, GUTA in conflicting response
The VFRS had barely taken off when the AGI asked government to immediately suspend the implementation of the scheme.
The manufacturers group want government to return the consultation table with stakeholders to address their concerns before resuming the implementation.
Accra-based Starr FM also reports that the Food and Beverage Producers Association of Ghana has indicated that the levy could force businesses to pass on the cost to consumers and lay off workers.
The group’s General Secretary also told Joybusiness that the scheme could result in prices going up by as much as 9%. ‘This is not because we want to increase our price but it’s because we appreciate the impact on our operations. The rising input cost has forced us to pass it on to wholesalers and the final consumer,’ he reportedly said.
But the GNA reports that GUTA has fully backed VFRS, describing it as a very good policy that would ensure fairness in the business environment.
The group claimed that the vast majority of traders, wholesalers and retailers who are captured under the VFRS are in support of the arrangement.
According to Barima Ofori Ameyaw, President of GUTA, ‘To our understanding, this is just a matter of calculations and if right will not result in any changes in prices… This system has been with us for over a decade and has never resulted in price increases.’
Who is right?
The GUTA position does not surprise Ali-Nakyea. “GUTA members are indeed those for whom VAT Flat Rate is meant for and not AGI members; so, they have achieved nothing by saying VAT Flat Rate is good because yes it is good for them.
“They are the last in the distribution chain so from them the goods go straight to consumers. They thus do not have a problem with the cascading effect of tax as they recover directly on their price. They have little or no high costs of doing business.
“Remember they are the very target of the modified taxation system envisaged in the Income Tax Act, 2015 (Act 896) at the same rate of 3%. Let us not compare apples with oranges. They are two different players on the economic market space with different impact of taxes,” he stressed.
Ali-Nakyea continues: “That is why in my submissions I always state that it is the application and coverage of the VAT Flat Rate which is of concern and not that the system is not workable. When we had it introduced in 2000 it was on these GUTA members so that is the focus. They don’t want to keep proper records to do the input credit system.”
He also said: “The point to add is that the flat rate/presumptive scheme is used to target small and informal sector businesses that do not keep detailed records. Hence the single rate in the Income Tax Act in lieu of both VAT and income tax.
“It is for those mostly in the informal sector and who cannot keep proper records because for those in the formal sector who keep proper records, they are on the credit system. The credit system is where a taxpayer is required to suffer VAT and NHIL at the rate of 17.5% (VAT 16% -+ NHIL 2.5%); and when selling is also to charge VAT and NHIL at 17.5% on his/her/its sales.
“The VAT suffered on purchases is called Input VAT and that on sales is called Output VAT.”
Furthermore, “The trader is then to reimburse himself/herself/itself of the Input VAT from the Output VAT and the difference is then remitted to the GRA. Since the Input VAT is claimable, it is not added to the cost, however with the VAT Flat Rate, since the VAT paid is not claimable, it is added to the price. Hence from
“Each stage of the distribution chain, the distributor charges 3% and it becomes part of the price; transferred to the wholesaler who also imposes 3% on the price from the distributor which already includes a 3%; transferred to the retailer who also imposes 3% on sales to the consumer. This is the cascading effect referred to, that is the 3% tax of the retailer is on a 3% tax from the wholesaler which also had a 3% tax from the distributor imbedded in the price.
“It is thus ridiculous for anyone to think price levels will not rise and thereby lead to inflation, which is a general rise in price levels unaccompanied by increases in production.”
Ali-Nakyea sums up by voting for a withdrawal of the VFRS. “The way forward is rather to roll out the modified taxation system which I am told the GRA is done with its fashioning out. Why are we as a country so inconsistent in policy direction?
“I believe and can state without any fear of contradiction that the tax experts in GRA and Tax Policy of Ministry of Finance have educated and advised government on the above analysis I have put out but without being given a listening ear.
“Well maybe because it was a campaign promise it has to be implemented by hook or crook, but please is that economically expedient… with the current economic gains of reducing inflation?”
The reaction of Deputy Finance Minister Kwaku Kwarteng is that the introduction of the flat rate is to aid government in plugging loopholes in the generation of revenue in the country.
“I am not surprised the Ghana Union of Traders are (sic) comfortable with the implementation of the scheme… For those who are saying they will increase their prices, consumers now have a choice,” Kwarteng said.
