Simplification of tax compliance in Ghana

The value-added tax (VAT) regime in Ghana can be complicated, as it blends both the features of a traditional sales tax, which lacks the ability to claim credit for some aspects of the tax incurred by a business – and a pure VAT, where claims are permitted for input taxes incurred. The tax was first introduced in 1995, and meant to replace both sales and services taxes – which policy analysts said created inflationary pressure on prices. While the initial implementation was short-lived, it was reintroduced in several iterations in subsequent decades.

Ghana’s VAT system features withholding and the immediate payment of VAT from select (appointed) taxpayers. An input credit is then given to the individual charging the VAT (the supplier), as the supplier will not be paid the full value of the tax. The scheme was finalised in 2017-18, when a series of legislative amendments made associated input taxes no longer claimable, while also tightening the reporting requirements of VAT taxpayers.

Retail Question

A source of confusion surrounds who can be categorised as a retailer. If an entity is a retailer of tangible goods, the VAT is 3%; if not, it is 12.5%, and the company must charge two other taxes totalling 5% in addition to the VAT. In the 2022 government budget, the authorities appear to have reconsidered their earlier position on who can be classified as a retailer. The spending package not only changed the definition of a retailer for the purposes of VAT, it introduced a new threshold to make the definition of a retailer more clear.

When the 3% VAT flat-rate scheme was introduced for retailers in April 2017, one of the challenges with the reintroduction of VAT was the absence of a legal definition of who a retailer was. The law also lacked a turnover limit or threshold that would differentiate between large or corporate traders and smaller shops. The general meaning of retailer – persons who buy and sell items or commodities – was commonly understood, if not spelled out, and broadened to cover wholesalers. The 3% flat rate therefore had a wide reach, and it disproportionately affected large distributors as there were no turnover restrictions that narrowed it to smaller businesses. Moreover, concerns around inflationary pressure were raised as the flat rate had a sales tax effect.

Legislative Changes

The changes laid out in the 2022 budget included a turnover threshold range of GHS200,000 ($34,200) to GHS500,000 ($85,500) for retailers to fall under the flat-rate scheme. The threshold appears to be an effort to tamp down on companies taking advantage of the broader meaning of retailer for their financial gain.

If a retailer falls below the lower threshold, it is too small and should not consider registering for VAT. The upper threshold, meanwhile, clearly sets the large traders apart and puts them in the general VAT regime. These larger traders – whether they are retailers, wholesalers or importers – are considered capable of appropriately accounting for VAT because of the scale of their operations.

The changes to the tax law have been well received. They came at a time where there was a substantial level of confusion surrounding compliance, as well as concerns about inflation. Looking to the future, many retailers will have to make changes. Many large-scale trading corporations had operated under the flatrate scheme under previous retailer rules. However, under the new regulations, they will have to reconfigure their accounting systems to accommodate the general VAT regime, which allows businesses to claim portions of VAT and associated taxes paid. It is expected that there will be some challenges associated with adjusting to the nuances of the general regime, but it will prove to be a necessary change.