Former Finance Minister Wades In

– Ofori-Atta’s ‘Logoligi’ 3% VAT Rate

…Says it is discriminatory and defeats VAT principles

Finance Minister, Ken Ofori-Atta’s immediate predecessor, Seth Terkper, has weighed in on the raging debate over the controversial introduction of a 3% flat rate Value Added Tax (VAT) regime shooting down the move as primitive and anticlockwise.

In a very erudite, albeit very technical appraisal of the new regime, Mr. Terkper points out that the new regime stampedes every commonsensical fruit that the old regime yielded for the national revenue and, dangerously, encourages tax evasion.

A long list of counterproductive effects that Mr. Terkper envisages about the new regime include making Ghana’s export sector uncompetitive, complicating NHIL and GETFund sources, adding more burdens on the income deduction of Ghanaian workers and throwing spanners into the modernization of the operations of the Ghana Revenue Authority (GRA).

As a matter of global best practice, Mr. Terkper makes the point that Ghana is shooting itself in the foot with the new VAT regime.

“Ghana’s flat rate VAT scheme was repealed because it is uncommon and discouraged in other jurisdictions. The enhancements before Parliament (now) make it worse and offends the principles of simplicity, efficiency, and fairness,” Mr. Terkper said in an interview with The Republic yesterday

He adds that it is an unfortunate lag behind that Ghana is debating a reintroduction of the flat rate VAT regime after it was shunned some two decades ago, at a time that other countries are upgrading their tax regimes to fit into the ‘apps age.’

Ken Ofori-Atta led the ruling New Patriotic Party government to replace a 17.5% VAT rate with a 3% flat rate, announcing it in the 2017 Budget, in fulfillment of a 2016 campaign promise to do so.

Government consequently directed that businesses affected by this tax should start the application of the 3% VAT Flat Rate to replace the Previous 17.5% Input – Output VAT computation approach from 1st July.

The old approach, according to the NPP government, suffered low compliance due to the extensive paperwork in filing VAT returns and, thus replacing it with the 3% Flat Rate will make it easier for taxpayers to comply.

According to the government, the new approach is not anticipated to increase prices or the cost to businesses. It is rather aimed at simplifying the process for VAT compliance and reduce Tax avoidance and that while the old 17.5% Input-Output Tax was charged on Value Added, the new 3% Flat Rate is charged on Turnover.

However, Mr. Terkper sees the arguments as rather simplistic and deems the new tax regime as replete with counter-productivity in so many ways.

He makes the point in an interview that the new regime discourages the use of invoices and, therefore, dangerously, initiates a culture of wiping out auditing trails that auditors can use to check tax evasion.

“To avoid cascading, registered taxpayers who pay input VAT on purchases can offset this amount (take credit) against output VAT charged on sales. This credit method is self-policing because taxpayers must show evidence of purchases and sales invoices to take the credit. Since a sales invoice becomes a purchase invoice, until supplies reach final consumers and unregistered taxpayers, these documents leave an audit trail for tax inspectors. As with income tax presumptive tax methods, “flat rate” schemes weaken the VAT mechanism because it relaxes the need to keep VAT invoices and other accounting records. Hence, presumptive taxes are restricted to informal sector SMEs at the final distribution stage.”

He also makes the point that because the old regime charged zero percent tax on exports, as part of careful, tailor made provision in that regime to make export tax free in order to make exports from Ghana competitive, the new rate kills the good purpose to make Ghanaian exports competitive.

This is along with the fact that the new flat rate lumps a whole lot of people together under domestic tax demands, including diplomats and dealers in specific sectors that were exempted from paying VAT.

“Countries apply two VAT rates—standard (domestic supplies) and zero (0) (exports). Ghana’s standard rate of 17.5 percent represents: general VAT (12.5 percent) and NHIL and GETFund (2.5 percent each). Zero-rates (and drawbacks for import duty/excises) apply to exports to prevent foreigners paying domestic taxes. They make exports competitive because taxpayers get “VAT refunds” by offsetting zero (0) against 17.5 percent. Hence, we do not do exporters a favour with a 3 percent flat rate: we are exporting a zero (0) to 3 percent increase!!

“There are three exceptions to VAT standard regimes. VAT registration thresholds, based on annual sales or turnover (200,000 cedis in Ghana), exclude SMEs from registering and charging VAT, even if they make “taxable supplies”. VAT laws also exempt some supplies (e.g., unprocessed food, education, and health services) from the tax base on grounds of income redistribution. Finally, privileged persons such as diplomats are deemed foreigner and do not pay VAT.”

Mr. Terkper also makes the point that flat rate tax regimes are presumptive and do not specifically cater to the unique and peculiar needs of specific operators who need specific interventions, especially Small and Medium Enterprises.

He points out that even though the NPP government has claimed that the new rate is aimed at simplifying things for SME operators, it rather complicates things for them. For instance, the new regime ends up being confusing, as it pads up an already existing Income Tax Act rate of 3%.

“The VAT flat rate scheme, a variant of thresholds, does not conform to best practice. Presumptive tax rates are designed to replace corporate and “progressive” personal income tax rates. SMEs apply the low rates to annual sales, in lieu of profit, to avoid complex calculations and records. Yet, Ghana’s Income Tax Act (ITA) already has a 3 percent presumptive rate meant to replace the original flat VAT rate. This has not been repealed and adds to the current confusion.”

He said the reintroduced flat rate VAT scheme had earlier been repealed because it is uncommon and discouraged in other jurisdictions of the world. The new enhancements before Parliament, he said, make it worse and more offensive to the principles of simplicity, efficiency, and fairness.

According to him, the scheme is against the GRA’s own attempt to fine-tune its operations through its Strategic Plan and Modernization Program.

“The amendments to the VAT Act did not repeal the VAT threshold and, as noted, the ITA has a presumptive rate meant to replace the original flat rate. The proposal adds a third layer, includes large businesses, and gives a lot of discretion to the Commissioner-General (CG) without legal backing,” he said.

He adds that, “Under GRA’s segmentation program, taxpayers come under large, medium and small taxpayer offices (i.e., LTO, MTO and STO). Even so, he said, those under LTO/MTOs must keep “complete and accurate” records for ALL taxes. They are also typically above the VAT Threshold. Hence, the “flat rate” proposal defeats this vital goal of the Authority’s Strategic Plan and Revenue Modernization Program.”

Mr. Terkper points out that the new regime is also counterclockwise to efforts to simplify tax administration from the end of the GRA itself.

“This argument also applies to the Domestic Tax Division (DTO), which “integrated” the Internal Revenue Service (IRS) and Value Added Tax Services (VATS). The goal is to merge many VAT and income tax functions, encourage taxpayers to keep uniform records for this purpose, and facilitate compliance and administration. Hence, it seems odd to hear DTO staff strenuously and openly defending the dichotomy of operations and recordkeeping—especially for large and medium entities.”

He pointed out that the new regime calls for the need to go through a laborious process of repealing the Statutory fund laws that the National Health Insurance Levy (NHIL) and the Ghana Education Trust Funds (GETFUND) monies are sourced from.

Originally, of the 17.5% VAT rate, 2.5% each were deducted for NHIL and GETFUND. With the replacement of the 17.5% with the 3% flat rate, Mr. Terkper points out the effect on the GETFund and NHIL levies.

“We must point out that the NHIL and GETFund are collected as though they were VAT but under different legislation that imposes 2.5 percent rates of levy. We may have to amend these laws to bring them in line with the VAT 3 percent VAT rate.”

He also said the escalation of the 3% flat rate to cover wholesalers and non SME retailers is discriminatory to service providers and manufacturers who often conduct both retail and wholesale activities.

Again, he said, those under flat rate schemes are not required to keep invoices and other accounting records. Without amendment to the ITA, they have to keep these records for income tax purposes. “We seem to dangerously encourage a dichotomy in recordkeeping for the same taxpayers.”

Besides it being unfair, Mr. Terkper said the proposal will make it complex, confusing and expensive for taxpayers. “Taxpayers with multiple activities must apply 17.5 (e.g., manufacturing), zero [0] (exports) and flat 3 (retail/ wholesale) percent rates.”

He said the new regime also defeats longstanding efforts to attract players in the informal sector into the tax base of the country because, “the flat rate has the opposite effect by allowing even elite medium and large (MTO/LTO) taxpayers to come under a presumptive regime!!”

The former Finance Minister dismissed arguments that the new flat rate regime will increase revenues by preventing malpractices. According to him, the flat rate scheme is not new and it did not show any such dramatic revenue increase between the mid-to-late 2000s.

“Our tax-to-GDP ratio has hovered around 15 to 17 percent for over two decades. The scheme will likely lead to revenue loss through tax rate arbitrage (zero, 3 and 17.5 percent), evasion and avoidance.”

He said defense from the government on the basis of what the government calls “rules of averages” is also poisonous to efforts to open up tax administration and make it above board.

“We hear strenuous defense of a so-called rule of averages but it remains dangerous from a tax compliance viewpoint. All our tax laws demand “complete (or full) and accurate” records, the exception being presumptive regimes. Do we expect regulations to define “average” records, notably for large and medium entities? Regarding VAT, the true meaning of “average” is (a) exporters are denied VAT “refunds”; and (b) consumers pay less for high margin supplies and vice versa.”

In view of the many flaws that come with the new regime, which coagulate into a definition of an archaic system, he recommends that the NPP government returns to multiple-rate system that existed before the new introduction by the Akufo-Addo government.

According to him, the new flat rate is a system that most countries the world over have long abandoned.

“Let’s implement the existing ITA provisions on presumptive taxes. It has a deemed VAT flat rate (a past political compromise) and, under regulations, allow multiple flat rates for different sectors (with different “margins”).

“Ghana is not a “tax island” and, therefore, as we quibble over basic coverage and rate structure issues, countries are moving their VAT regimes into the “apps age” to help taxpayers meet their voluntary compliance obligations.”


Source: Fiifi Samuels

The Republic News Online

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