The Need for a Simplified VAT System in Ghana
A Tax Partner at Price Waterhouse Coopers (PWC), Abeku Guan Quansah, has emphasized the importance of eliminating the cascading effect of levies associated with the Value Added Tax (VAT) in Ghana. He argues that taxes significantly influence business behavior, investment decisions, and overall economic competitiveness. According to him, the current cascading effect of these levies discourages investors and negatively impacts business operations, often leading companies to pass on increased costs to consumers.
Mr. Guan Quansah is advocating for a simplified VAT tax code as a way to attract more investments and improve compliance among businesses. This call comes after the government announced its intention to introduce a unified VAT flat rate, which would replace the existing 3% and 5% flat VAT rates. His comments were made during an exclusive interview with Business and Financial Times (B&FT).
He highlighted that the current VAT system’s cascading effect is detrimental to the country’s economic growth, as investors are likely to choose other African nations with more favorable and less complex tax regimes. Mr. Guan Quansah pointed out that no country in Africa charges a VAT rate exceeding 20%, while Ghana currently imposes a combined rate of almost 22%. This, he believes, plays a crucial role in the decision-making process of potential investors.
The Value Added Tax (VAT) is a consumption tax applied to products and services in the country. Ghana’s VAT system includes a standard rate, several levies, and various flat rates. These include:
- A VAT Standard Rate of 15 percent
- National Health Insurance Levy (NHIL) of 2.5 percent
- Ghana Education Trust Fund (GETFund) Levy of 2.5 percent
- COVID-19 Health Recovery Levy (COVID-19 HRL) of 1 percent
All of these together make a total VAT of 21 percent. Additionally, there is a separate 3% flat VAT rate for small businesses and a 5% flat VAT rate for the real estate sector. These are charged alongside the COVID-19 Levy. The VAT system also includes zero, 7, and 12.5% withholding VAT rates.
This complexity makes it challenging for businesses to comply with the tax system, ultimately affecting government revenue. While Mr. Guan Quansah commended the government’s efforts to simplify the tax system, he expressed concerns about whether the standard VAT rate and its associated levies would also be reviewed.
He questioned whether the government intends to decouple these levies from the entire VAT system or add them to the standard rate for a single charge. “Removing the cascading effect means we want the levies to function like VAT, which is a proper tax that does not affect production,” he noted.
Mr. Guan Quansah acknowledged the government’s decision to repeal the COVID-19 Levy, stating, “If the government wants to reduce the VAT by repealing its COVID-19 Levy, I think it is a good thing to do.” However, he emphasized that if the cascading effect remains, unifying the flat rate and scrapping the COVID-19 Levy will not truly simplify the tax system or improve compliance, as it will still remain among the highest in the region.
“If the cascading effect is present, businesses will factor VAT into their agreements and costs. But if they know that the cascading effect will not exist, they are not bothered because they can always remit the net to the [Ghana Revenue Authority] GRA.”
The government announced its decision to scrap the COVID-19 Levy following public debates over the relevance of the tax, which continued to be collected long after the pandemic had subsided.