Implications of 3% VAT flat rate on your business
The Value Added Tax (“VAT”) is a tax levied and paid on the consumption of VAT able supplies of goods or services. VAT is required to be paid at every stage of the supply chain where value is added. Being a consumption and transferable tax, the incidence of VAT is borne by final consumers.
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The re-introduction of the three per cent VAT flat rate scheme
The VAT Flat Rate Scheme (“VFRS”) has recently become one of the topical issues for most taxpayers in Ghana, particularly large sized wholesalers and retailers.
The government’s 2017 budget statement which was centered on the theme, “Shifting the Focus of Economic Management from Taxation to Production” reintroduced the three per cent VFRS as part of the taxes reviewed in the budget.
Hitherto, all VAT registered taxpayers were required under the VAT Act, 2013 (Act 870) to charge VAT at the standard rate of 17.5 per cent and were allowed input tax deductions on costs incurred.
On April 7, 2017, the government passed the VAT Amendment Act 2017 (Act 948) to give legislative backing to the VAT proposals in the 2017 budget including the reintroduction of the VFRS.
The effective date of implementation of the VFRS was June 1, 2017 but was subsequently postponed to July 1, 2017. The VFRS requires a VAT registered wholesaler or retailer of tangible goods to charge and account for VAT on taxable goods at a flat rate of three per cent. VAT costs incurred in making the supply of tangible goods are not deductible for VAT purposes.
VAT registered wholesalers and retailers will be automatically migrated to the scheme. In accounting for VAT under the VFRS, affected taxpayers will now be required to charge VAT on supplies made and account for the VAT using a simplified VFRS return issued by the Ghana Revenue Authority (“GRA”).
All fully or partly used (after verification) standard rate scheme invoice booklets are to be kept and unused booklets returned to the GRA.
A key observation with the introduction of the VFRS is the various changes in the categories of taxpayers the scheme applies to. The initial definition in the NPP’s manifesto referred to “micro and small enterprises” which shifted to “traders” in the budget statement and then to “retailers” in the Tax Amendment Bill and then “wholesalers” and “retailers” of goods when the law was finally passed.
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Is the three per cent VFRS new?
The VFRS is not a new scheme in the history of Ghana’s tax laws. Historically, the scheme has been applicable to retailers and with a defined revenue threshold which is absent in its current version.
What does the re-introduced three per cent VFRS mean for businesses?
For most businesses, the impact of the VFRS depends on several factors including:
• Price elasticity of demand of their products.
• Risk appetite of the business.
• Whether or not the customers are price takers or price setters.
The VFRS may ultimately affect business profit margins and business leaders may need to re-negotiate contracts and employ other measures to ensure they stay afloat.
The way forward
In light of the above, we recommend that the government should consider the following options for effective implementation of the VFRS:
• Re-implementing the VFRS provision in the VAT Act, 2010 (Act 810) repealed, with slight modifications. Act 810 provided for thresholds which made it easier to administer. As such, the threshold should be reintroduced and this could be based on the presumptive tax threshold provided for in the Income Tax Act, 2015 (Act 896).
• Limiting the VFRS to only micro and small enterprises as it has proven to be a useful way of expanding the tax net.
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• For manufacturers whose businesses span more than one sector (i.e. wholesaling and retailing), for whom both 17.5 per cent and three per cent will apply,the government should put in place methods that allow such manufacturers to apportion supplies made and account for VAT separately under both VFRS and standard rate scheme. The dominant business line could also be considered in determining the VAT scheme such manufacturers should operate. To this end, the definition provided for a “wholesaler” and “retailer” should be updated to consider the status of such manufacturers who operate multiple business lines and the general deductible input tax in respect of the apportionment should be made public in a practice note.
• Businesses should be given the opportunity to choose whether to exclusively operate the standard rate scheme or the flat rate scheme to make accounting easier.
• If the expansion has been made because of abuses in the system as a result of business claiming undeserved credits,the government should identify those entities through tax audits and enforce the law strictly.— GB
Email: ayesha.a. [email protected] or [email protected]
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