The topic of VAT has dominated the discussion of taxation in recent years, with the most notable conversations occurring in the Gulf. Like the Gulf countries, many territories have their own story of implementing the tax. This analysis outlines the VAT story in Ghana, highlights how the tax has changed over the years and explains the situation surrounding the current VAT regime.
If anyone were to ask what is the applicable VAT rate in Ghana – and more importantly, what are the responsibilities and expectations around VAT – the most accurate answer would be that it depends on several factors.
VAT was first introduced in Ghana in 1995. It was meant to replace both sales and services taxes, which tax policy analysts said created an inflationary pressure on prices. The 1995 implementation failed, however. The short implementation period of around two months after the act was passed and the lack of public education were blamed for the failure. VAT is a more complicated tax than the sales tax it was meant to replace. Political pressure also played a role in the withdrawal of the tax.
VAT was reintroduced in 1998 after a number of public education campaigns to teach citizens about the importance and benefits of the tax. After the first attempt at introducing the tax, legislators prioritised inclusion and public education. Indeed, the law’s section on commencement laid out detailed provisions charging the minister responsible for finance with announcing in the official gazette and to the media when the tax should be paid. In the end, the 1998 implementation was successful.
The VAT law introduced in 1998 was applied until 2013, when it was replaced with a new VAT. During the about 15 years of implementation, the 1998 VAT was amended on an almost annual basis, with the changes aimed at improving the execution of the tax and reaping its full benefits. However, some of the amendments distorted the fundamentals of the VAT.
The Retail Question
Retailers – a category of VAT taxpayers – have been at the centre of some of the most critical amendments. The question surrounding retailers is, “Who are retailers and why are they important?” Through this, the commonly understood meaning of retailers was adopted: retailers are persons who buy and sell items or commodities. If you are familiar with the Ghanaian economy, you will observe that trade and distribution is vibrant. It therefore makes sense why key players in the sector – retailers – would receive substantial attention in amendments to the VAT legislation.
To begin with, the original 1998 VAT law prescribed a turnover registration threshold for retailers only. Other taxpayers were required to register regardless of their turnover. The threshold was reduced in 2001, perhaps to get more retailers to register. In 2007 a 3% flat-rate scheme was introduced for retailers. The scheme reintroduced a sales tax feature and did not allow retailers to claim their VAT inputs.
Legal amendments in 2011 tried to address the confusion created by previous amendments, as retailers now fell into two categories. Further, the registration thresholds were revised upwards 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 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 era of the 1998 Act came to an end in 2013, with Ghana having a clear VAT regime based on an input-output calculation mechanism for companies with turnover of GHS90,000 ($17,400) or more, and a flat-rate regime that did not allow for input deductions like the sales tax for persons with turnover falling between GHS10,000 ($1940) and GHS90,000 ($17,400).
A new VAT Act was passed in 2013 and implemented in 2014. The intention was for the new VAT to seamlessly replace the old one, but it did disturb some existing processes. The new law effectively cancelled the flat-rate scheme, meaning that some taxpayers needed to be reclassified from the flatrate scheme to the VAT regime. Ghana had a complete VAT regime again in 2014. There again were upward revisions to the thresholds.
In April 2015 a special 5% flat-rate scheme was introduced for real estate developers. At this time, real estate was beginning to get some level of attention. However, this was cancelled in April 2017 when the 3% retailer flat-rate scheme similar to what was in the 2007 amendment was reintroduced. Once again, Ghana had a 3% flat rate for retailers and a clear VAT for the taxpayers who met the threshold. The general meaning of retailer was adopted, but broadened to cover wholesalers. 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. Concerns around inflationary pressure were raised.
By the end of 2017 an amendment was passed for implementation in 2018 introducing a VAT withholding feature for a select group of taxpayers, called agents. Under the VAT withholding requirement, an agent must hold on to a portion of the VAT it is due to pay to its suppliers and remit it quickly to the revenue authority. The VAT not paid became input credit to said supplier and required an acknowledgement certificate from the agent. An agent now had increased responsibility when it came to VAT compliance: first, to make sure that the appropriate VAT was charged, i.e. the standard VAT or flat rate; second, to ensure that the VAT was withheld; and third, to make a credit certificate available to the supplier. VAT withholding did not apply to the flat-rate scheme that was introduced in April 2017.
Just before VAT taxpayers could get used to these changes, there were additional amendments in August 2018. An amendment was added that isolated two levies that were embedded in the total effective standard VAT rate of 17.5% and made them straight levies. As straight levies, the associated input taxes were no longer claimable, similar to the flat-rate scheme. Another sales tax feature was introduced and the reporting requirements of VAT taxpayers again increased. These alterations made the VAT more complicated.
A company can handle its own VAT if officers have a general understanding of the tax. However, seeking initial guidance is useful as there are a number of provisions that are specific to Ghana.
Now, to answer the earlier questions.
What is the rate of VAT in Ghana in 2020? It depends: if you are a retailer of tangible goods, it is 3%; and if you are not a retailer, it is 12.5%, but you must charge two other levies totalling 5% and apply the VAT.
What are the obligations associated with paying VAT in Ghana? Again, it depends. If you are a retailer, you have a single return to file, but if you are not a retailer, you have up to four returns to file, depending upon the nature of your business. If you are or have been selected to be a VAT withholding agent, you have an additional responsibility to file a VAT withholding return, regardless of whether you are a retailer or not.
Taxpayers in Ghana should keep a good reconciliation of all VAT transactions, as these prove very useful during audits by the Ghana Revenue Authority.
OBG would like to thank PwC for its contribution to REPORT Ghana 2020.