The 2017 Budget tax “reliefs” have been extolled for almost three years and, likely will be likely repeated ad nauseum in 2019 and 2020. However, the 2019 Mid-Year Review may also result in more explicit reversals of some “nuisance” tax measures that have adversely affected the tax structure. Progress in the third successive year shows that the measures have not boosted revenues targets—despite significant revenues from two new petroleum fields.

This 3-part article assesses the status of the policies as well as subtle reversals and additions that have diluted reliefs. As usual, when faced with high expenditures, governments use subtle tax measures (e.g., blocking VAT Input Tax Credit and luxury vehicle tax) to claw back the reliefs but without much fanfare.

VAT policy change and confusion

The measures affecting fiscal performance through the tax structure and base relate to Value Added Tax (VAT)—which is 20 years old (i.e., 1999-2019). Ghana’s VAT saga continues to be a lesson in the initiation and sustainability of tax reforms. Hence, the decision by firms to increase prices is a sad commentary and response to flaws in the 2017 tax measures that also erode the tax base and makes the regime difficult to comply with and administer.

– Measure 1: Removal of VAT on non-core financial services

Ghana’s VAT exempts financial services since, technically, it will put VAT on core interest from savings and investments—not consumption. This is not so for distinct fee-based (non-core) services that the previous administration brought into the VAT net. Since Ghana’s main “new” economy is financial, petroleum, and real estate services, the reversal is myopic in continuing to focus the tax regime on an over-burdened and less-responsive “old” economy.

– Measure 2: Removal of VAT on Real estates

The investment or savings versus consumption VAT debate is also relevant to real estate, notably residential housing—but, as with non-core financial services, less controversial with commercial real estate. Similarly, the expansion of construction and related services brings up the “old” versus “new” economy debate again in pursuing a dynamic tax and fiscal regime.

– Measure 3 Domestic Airline Tickets

The debate on a dynamic tax stance for new economies is equally relevant for domestic airline services. We note that VATA exempts public transportation as social intervention policy since most patrons are low-income persons.

New economy and tax incentives

First, as noted later, the 2017 to 2019 VAT decisions that continue to “exempt” the new sectors from Output VAT are harmful in denying them the inherent VAT Input Tax Credit (ITC), which increases costs and prices. Ghana also uses income tax incentives—such as accelerated depreciation and tax holidays—to extend fiscal benefits to the “new economy” economy.

The VAT exemption is a poor substitute since, as a consumption tax, the patrons of new economy services tend to be relatively affluent. Besides the dynamic tax base argument, the VAT on “new” economy services is a tool to address the general charge that VAT is regressive and not progressive. Finally, the reversal of these taxes misses the vital point that expanding the tax base is not a policy relating to only the informal sector of the economy.

– Measure 4: Abolish VAT on selected imported medicines

This “relief” merely expands the scope of existing reliefs, particularly, for the health and education sectors. Technically, imports of these supplies will be specified in the Customs Tariff as exempt or zero-rated—with affecting the claim for ITC for taxable and non-taxable (“mixed”) medicine while zero-rating increases refund claims.

– Measure 5: VAT Flat Rate Scheme (VFRS) of 3% to replace standard rate (17.5%) for some originally registered businesses

Tax experts and practitioners settle the debate over flat or presumptive tax rates for VAT and income tax in favour of small businesses, usually in large informal economies in developing states. Tax jurisdictions also exempt small businesses from VAT registration while a few impose a single presumptive tax in lieu of both income tax and VAT for these entities. Hence, Ghana’s extension of a flat rate regime to medium and large entities that, nonetheless, must keep proper records under the Income Tax Act (ITA) is emphatically contradictory and retrogressive.

The measure worsens the tax burden, does not provide any relief

In this regard, the ITA requires small entities to pay a relatively high 6 percent flat tax on turnover to replace the 3 percent for income tax and 3 percent for VAT, respectively. Second, since Parliament has not repealed the ITA, the combined VAT and income tax rates results in a high tax burden for small entities. Ordinarily, they fall under the zero (0) and 5 percent profits tax bracket, with possibility of refunds, when they file a tax return.

Thirdly, since the VFRS denies ITC for affected entities, the input VAT increases costs, attracts downstream VAT again, and increases consumer prices. Finally, it not consistent to ask medium and large entities to keep proper records to comply with income tax and waive this key requirement for VAT—therefore, the VFRS measure undermines distorts tax policy, undermines administration and compliance, and results in tax evasion and avoidance.

Blocking the right to VAT Input Tax Credit (ITC)

The pillar of VAT is the right to offset Input VAT on purchases and expenses against Output VAT on sales or turnover. Hence, the worst distortion caused by the 2017 to 2019 tax measures is blocking the right to ITC by registered taxpayers—which increases costs and prices through the “VAT-on-VAT” that “cascades” at the multiple stages for collecting VAT.

– Measure 6: VAT Flat Rate Scheme (VRFS)

As noted, one adverse effect of VFRS is blocking ITC. The inclusion of medium and large retailers and wholesalers under VFRS explains why businesses decided to increase prices. This is cancerous because it encourages tax evasion and avoidance.

– Measure 7: GETFund and NHIL

GETFund and NHIL are NDC (2.5% GETFund) and NPP (2.5% NHIL) tactical moves to increase the VAT rate from 10% to 12.5% and to 15%, respectively—before the recent increase to 17.5%. Hence, they were collected as VAT, which explains the right to ITC. Curiously, the 2019 Budget introduced a Finance Bill, which Parliament passed, to block the right to ITC.

– Measure 8: Retention of VAT rate increase from 15 percent to 17.5 percent

In 2015, the immediate past administration increased the VAT rate from 15 percent (including 5 percent for NHIL and GETFund) to 17.5 percent. It is important to note that, despite its description as a nuisance tax, the current administration decided to maintain the overall level of VAT at 17.5 percent. This retention has a far wider impact on the “old” economy than what has been trumpeted continuously for three years.

Measure 9: Cessation of dedicated VAT funding for GIIF

The Mahama government dedicated all the revenues from increasing VAT from 15 to 17.5 percent to the Ghana Infrastructure Investment Fund (GIIF). This restored the low flows to the capital budget and augment the petroleum flows for infrastructure—through the Annual Budget Funding Amount (ABFA) under the Petroleum Revenue Management Act (PRMA). Hence, the repeal of the VAT law means the funds go into the general budget for consumption. This worsens the development agenda since the ABFA flows to GIIF have also stopped.


Ghana’s attempt to introduce VAT in 1995 failed but this was done successfully in 1999 under the repealed 1998 VAT Act. The irony of the 20th anniversary of VAT is that the recent “Kum Yen Preko” demonstrations is a pun on the “Kumepreko” demonstrations that led to the inability to introduce the VAT in 1995. The main lesson is the illusion that countries can raise revenues from a “cascading” VAT regime—which rather results in cost and prices rises, evasion and avoidance, and loss of vital government revenues.

Another lesson is that if we fail to expand the tax base or act with fanfare to remove the necessary measures to cover the “new” economy, the inefficient methods we use result in missing revenue targets while causing policy distortions, increase in prices, and complex tax administration and compliance.

Finally, against expansionary expenditure programs, we siphon valuable new resources, such as petroleum revenues, from investment to consumption. Finally, as noted in Part II, we struggle to defend the rationale for converting user fees such as vehicle inspection into tax handles that duplicate the policy role of excise taxes in the fiscal regime.

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DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.