The recently introduced Value Added Tax (VAT) on banking services may be a European Union (EU) prescription to Ghana on how it can  make up for expected revenue losses after the country signs the controversial Economic Partnership Agreement (EPA).

This was contained in a 2007 report by Realizing Rights, an international NGO and cited by myjoyonline.com.

The report is titled Economic Partnership Agreements between the EU and African Countries: Potential Development Implications for Ghana.

The report states: "the EU has recognised that African countries are likely to face revenue losses from tariff elimination, but has argued these ought to be considered ‘short-term adjustment costs’ which can be overcome through re-structuring and broadening domestic tax bases".

There was public anxiety after it surfaced two weeks ago, government will be charging banks a 17.5% Value Added Tax on the fees they take for providing financial services. Many thought it meant government was putting a levy on savings and salaries paid through the banks.

But government has clarified, the new VAT Act, Act 870 will affect only non-core financial services such as data processing, legal, accounting, actuarial, notary and consulting services.

The VAT on financial services will not to be charged on salaries, savings, deposits, investments, interests or loans.

It is expected to take effect from June 1,2014 after intensive public education.

But government may just be complying with an EU prescription, says the report by Realizing Rights.

Ghana is widely expected to sign the EPA.

According to the report, Ghana and other African countries are being encouraged by the EU to use VAT to raise revenue.

35% of all Ghana's imports in 2005 for instance were from the EU alone. The EU has asked Ghana to remove as much as 80% of its tariff on these imports -- this is part of the EU-initiated EPAs.

This means Ghana will lose much-needed revenue for development.

The report estimates that the impact of EPA liberalization on Ghana would result in the potential loss of about $90 million in government revenue.

Other reports have also suggested government would lose $1 out of every $5 dollars it spends.

If the government is unable to offset these financial losses, this could lead to possible cuts in public expenditure in 
important areas, such as health and education. 

The Realising Rights report, states that in view of these losses should the EPA be signed,  "the favoured EU prescription is for African countries to switch from trade taxes to levying a VAT".

Ghana begun charging VAT since 1998.