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Reintroduced 3% VAT Flat Rate to raise prices, threaten jobs - worried manufacturers

Prices of some goods and services manufactured locally and imported have been increased from July 1 following the introduction of a 3% VAT Flat Rate Scheme (VFRS).

But the industries, manufacturers, importers have argued that the tax would result in them paying 3% more in every stage of value addition in production and possibly result in them paying a little over 20 percent at VAT to the state.

General Secretary of the Food and Beverage Association, Samuel Aggrey tells JOYBUSINESS the development could also result in prices going up by as much as 9%.

“This is not because we want to increase our price but it's because we appreciate the impact on our operations. The rising input cost has forced us to pass it on to wholesalers and the final consumer,” he said.

GRA’s public notice on the tax

A circular issued by the Ghana Revenue Authority (GRA) has advised all retailers, wholesalers, including importers to start implementing the tax.

According to the Authority, the VFRS collection and accounting mechanism under which, a registered taxpayer who is a retailer, wholesaler or importer of goods shall have a marginal Value Added Tax(VAT)/National Health Insurance Scheme (NHIS) levy rate of 3%, representing the net VAT payable on the value of taxable goods supplied.

The Ghana Revenue Authority in the public notice to the public added that, the tax is an alternative to the standard Scheme method of accounting.

“The marginal rate of 3% represents the net VAT payable and is the difference between the output tax and the input tax of a wholesaler/retailer if the taxpayer were operating the Standard Rate Scheme,” it said.

It has a marginal tax rate of 3% applied to the value of taxable supply of goods. It does not allow input tax credit i.e. VFRS operators shall not be entitled to input tax claims.

It is restricted to only wholesalers and retailers of taxable goods. Taxpayers operating the VFRS shall issue a simplified VAT/NHIL invoice.

Scenarios on how the tax would be implemented

XYZ Motors sells (retails or wholesales) automobiles and also operates a motor vehicle servicing and repair shop on the same premises. The operations of the part of the business which sells vehicle parts are separate and distinct from the servicing and repairs section.

In other words, no part of the supply (sale of motor vehicle or servicing and repairs of automobiles is incidental to the other.

In that case, the retail and wholesale part of the business will be accounted for at the flat rate of 3% whereas the servicing and repairs portion will be accounted for under the SRS (at 17.5%).

XYZ Motors will then have to file separate returns in respect of the two schemes; SRS and VFRS.

Computing the VAT payable under the VFRS              GH ¢

(a) Cost price of item    -                                                100.00

(b) Input Tax (17.5%*100)    -                                           17.50

(c) Value Added (10% *117.50)  (i.e. margin and other overheads)   -       11.75  

(d) Taxable Value  (a+b+c)   -                               129.25

(e) Output tax @ 3% Flat Rate   -                                    3.88

(f) VAT/NHIL payable (i.e. 3% Flat Rate) -                     3.88

(g) Cost to Consumer (tax inclusive) (d+f) -                    133.13

Cascading effect of this tax on businesses and economy

According to the various businesses Business Associations comprising the Association of Ghana Industries (AGI), Importers and Exporters Association, Food and Beverage Association of Ghana and the Ghana Automobile Distributors Association the increase could have a serious impact on the economy and business.

They argue that “because of the compounding impact of the 3% VFRS, simulations of various value chains show a price inflation to the consumer of 6% to 15 percent ”.

This will significantly impact the purchasing power of consumers/general public as costs of goods are estimated to go up by 6% to 15%.

The have also maintained that “decreased purchasing power will affect the survival of small retail shops as they will no longer be competitive as their products will be too expensive.

"Big retail shops will go into direct import and sell at cheaper prices, thereby taking the small retail shops out of business.”

Large Scale unemployment

The have also anticipated some job cuts as a result of this development. This is because “the expected increase in the cost of business will adversely affect businesses ability to expand and employ more.

Also, manufacturers and retailers will resort to direct imports and direct distribution, thereby bypassing the distribution value chain which will lead to unemployment”.

Impact on competitiveness of local businesses

Ghana, like most countries, has wide distribution channels which typically run from; manufacturer/importer - key distributor - wholesaler - retailer. All correspondence should be addressed to the Chief Executive Director.

The cascading effect of the 3% flat rate scheme means that at every level of the value chain, 3% VAT will be applied thereby increasing working capital pressure on the value chain.

Where a manufacturer buys from an importer of non-exempt raw materials, then the importer will transfer all the 17.5% VAT paid to Customs to the manufacturer driving up cost and negatively impacting VAT remittance to Government from the manufacturer.

The manufacturer will, therefore, take a decision of importing directly, thereby increasing inventory holding costs and reducing businesses to importers with it ripple effects.

How did we get here?

The New Patriotic Party (NPP) administration in 2000 introduced the 3% VAT Flat Rate Scheme which was aimed at improving tax collections among the informal sector.

This was because they had a difficulty in establishing how much they were making in terms of profits, so they had to settle on a threshold that if a trader falls within that tax bracket he/she would pay that tax.

However, the NPP administration during last year’s campaign promised traders to reintroduce the 3% flat rate scheme and do away with the practice where most of them were now paying 17.5 percent tax as VAT.

However, sources close to government have told JOYBUSINESS it might be difficult to review this tax in its current form.

JOYBUSINESS is also learning that it wants to go ahead with the implementation of the tax in its current form and address the concerns later.