Why Gov’t may Review implementing the 3% VAT Flat Rate

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Government is likely to review its policy on the implementation of the 3% Vat Flat Rate barely two months of its implementation, BusinessWeek has gathered.

Our sources within both the Ministry of Finance (MoF) and the Ghana Revenue Authority (GRA) have related that government is likely to amend the implementation policy slightly in order to satisfy concerns of stakeholders who have expressed dissatisfaction with current application.

The decision to amend the policy follows government’s consultation with some industry players and tax experts who have advised against non-compliance and tax evasion and other counterproductive tendencies of disgruntled tax payers.

The anxiety that accompanied the re-introduction of the 3% Vat Flat Rate still lingers in the minds of taxpayers who are either in favor, or against its implementation.

Though its implementation took effect from July 1, 2017, it has left many questions unanswered.

It is frost with some controversies that have set industry players against each other. While some business associations have openly endorsed the Tax as very business friendly, others have also openly expressed their opposition, threatening to cut down cost of doing business by laying-off workers.

The General Secretary of the Food and Beverages Association, Samuel Aggrey, who openly expressed concern with the implementation, told BusinessWeek that their position has not changed on the adverse effect of the tax on their businesses after a month’s implementation.

According to him, the one month experiment has confirmed their fears and has indicated that, if government does not do anything about it, his members would have no choice but to pass on the cost of his imported raw materials on a wholesale scale to consumers.

Mr. Aggrey further intimated that members and other likeminded importers and wholesalers have adopted the wait and see attitude to the first month of implementation before taking a stand.

He said, the current situation makes it impossible for importers to recover their 14.5% Vat input incurred during the course of importation. “We are made to maintain the 17.5% Vat on the Standard Rate Scheme, only for us to charge a nonrefundable Flate Rate of 3%. Who pays the difference of the 14.5%?” he quizzed.

Business Week has gathered further that some tax payers including large supermarkets are holding on to their old stocks waiting to see what action would be taken by government in the coming days in order to determine whether to pass on the cost of importation down the value chain or not.

Prices of some goods and services manufactured locally and imported were increased from July 1 following the introduction of the 3% VAT Flat Rate Scheme (VFRS). But industries, manufacturers and importers have argued that the tax would result in them paying three per cent more in every stage of value addition in production and possibly result in them paying a little over 20 percent as VAT to the state.

GRA’s public notice on the tax

The Ghana Revenue Authority (GRA) issued a circular to 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 three per cent, representing the net VAT payable on the value of taxable goods supplied.

It said the tax is an alternative to the standard scheme 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.

Example of 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 between six per cent and 15 per cent.

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

They have also raised the concern 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.

Job cuts

The expected increase in the cost of business is anticipated to adversely affect businesses’ ability to expand and employ more people staff and lead to job cuts.

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


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.

The Minority in Parliament also joined its voice to calls for government to suspend the implementation of the 3% Vat Flat Rate in the interest of Ghanaian tax payers since the Flat Rate has a cascading effect that may end up imposing a further tax of between 6 to 15 percent on the final consumer from importer, wholesaler and retailer.

Source: Clement Akoloh || Businessweek Africa

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