A newly released report by the Ministry of Finance has uncovered significant non-compliance with the Value Added Tax (VAT) system, particularly among businesses exceeding the registration threshold. The findings indicate that a considerable number of eligible businesses are not registering for VAT, despite being legally required to do so.
Interestingly, the report also highlights a contrasting trend: businesses below the VAT registration threshold are voluntarily registering for the tax. This raises questions about the incentives and compliance behaviours driving these decisions.
Additionally, the report reveals a troubling pattern of registered taxpayers failing to fulfill their filing obligations. Many either neglect to file their tax returns or submit ‘null’ returns with zero sales and purchases. This widespread non-compliance underscores the urgent need for improved voluntary compliance and stricter enforcement mechanisms as part of Ghana’s Medium-Term Revenue Strategy (MTRS).
Titled “A Review of Ghana’s VAT System,” the report is the result of a collaborative effort between researchers from the Institute for Fiscal Studies (UK) and Ghana’s Ministry of Finance. It provides a comprehensive analysis of the design, administration, and revenue trends related to VAT and associated levies.
According to the Ministry of Finance, the report draws on well-established VAT policy principles, international best practices, detailed tax data, and qualitative insights into the functioning of the VAT system in Ghana.
The report scrutinises the design and administration of Ghana’s VAT and associated levies, as well as short and longer-run revenue trends.
“It draws on well-established VAT policy principles, practice in other countries, and both detailed tax data and qualitative intelligence on the operation of the VAT and levies in Ghana”, The Ministry of Finance noted.
Key Findings of the Report
Progressive VAT Structure:
Ghana’s VAT system is designed to be progressive, with wealthier households bearing a larger share of expenditure on VAT compared to poorer households, largely due to exemptions on basic foodstuffs. However, in absolute cash terms, wealthier households benefit more from these exemptions. This has prompted the Government of Ghana to review the effectiveness of exemptions under the MTRS.
Non-Compliance Among Eligible Businesses:
Despite surpassing the VAT registration threshold, many businesses are not registering. Conversely, some businesses below the threshold are voluntarily opting to register. This counterintuitive trend suggests complexities in the tax system’s perceived benefits and obligations.
Filing Irregularities Among Registered Taxpayers:
A significant proportion of registered taxpayers are either not filing tax returns or submitting ‘null’ returns, reporting no sales or purchases. This gap in compliance signals a need for enhanced enforcement and voluntary compliance strategies under the MTRS.
Impact of VAT Flat Rate Scheme (VFRS) Adjustment:
The 2023 restriction of the VAT Flat Rate Scheme (VFRS) to small taxpayers is believed to have boosted tax revenues while also streamlining administrative and compliance costs for smaller entities.
Economic Growth Patterns and VAT Revenue:
The composition of Ghana’s economic growth in the latter half of the 2010s, driven by investment and exports rather than consumption, hindered VAT revenue growth despite overall economic expansion and increased tax rates.
Policy Implications and Future Outlook
The findings from the report are already influencing tax policymaking in Ghana, guiding strategic initiatives outlined in the MTRS. The government is also considering additional policy and administrative reforms to enhance VAT compliance and revenue generation.
The report sheds light on critical compliance gaps within Ghana’s VAT system, emphasizing the need for robust enforcement measures and strategic policy reforms. As the government continues to refine its MTRS, addressing these issues will be pivotal in optimizing VAT revenues and enhancing fiscal sustainability.
This report serves as a call to action for stakeholders, including policymakers, businesses, and tax administrators, to collaborate in building a more effective and equitable tax system in Ghana.
