Ghana began a new taxing regime under the late Flt. Lt. Jerry John Rawlings, the first President of the Fourth Republic, with the introduction of Value Added Tax (VAT) after a failed attempt in 1995 and later reintroduced in 1998.

The country established a new revenue collection agency, the VAT Service, recruited and trained staff, and developed computer systems to administer the tax in preparation for its implementation. The VAT legislation was written and passed, and a public education campaign was launched. This legislation has been amended several times over the years to its current Value Added Tax Act 2013 (Act 870).

Value Added Tax (VAT) is a consumption tax that is levied on goods and services at each stage of production and distribution. Pursuant to Section 1 (1) of the Value Added Tax Act 2013 (Act 870), there shall be a value-added tax that is to be charged on the supply of goods or services made in the country other than exempt goods or services and on the import of goods or services other than exempt import.

VAT is an important source of revenue for many governments around the world, and changes to the VAT rate can have significant effects on the economy and individual consumers. In this article, I will discuss the increment of the VAT (Standard rate) from 12.5% to 15.0%.

The government in the 2023 budget announced an increment in the VAT rate from 12.5% to 15.0% which subsequently took effect on January 1, 2023. This move, which according to government is to raise more revenue, has generated mixed reactions among Ghanaians, with most expressing concerns about the impact it may have on their pockets.

One of the major reasons cited for the increase in the VAT rate is the need to address the revenue shortfall in the country. Ghana, like many other countries, has been hit hard by the global Covid-19 pandemic, which has led to a decline in sources of income. The increase in VAT is seen as a way to generate more revenue to fund the country's budget and finance infrastructure projects.

Impact on individuals

One of the most direct impacts of the increment in VAT will be the increase in the cost of goods and services. This is because businesses will have to pass on the additional cost of the VAT to consumers. For example, a product that costs GHS1,000.00 with the previous VAT rate (12.5%), will cost GHS1,192.50 (inclusive of NHIL, GETFL, COVID-19 Levy and VAT) and with the introduction of the 15.0% VAT rate, the product will now cost GHS 1,219.00.

This increase may not seem like much for a single product, but it can add up over time, especially for individuals or families with limited disposable income.

The impact of the VAT increase will be felt more by low-income earners who spend a larger proportion of their income on consumption. Example, a person who earns GHS 7,000.00 per month and spends GHS 4,000.00 on taxable goods and services would now pay GHS 4,876.00 inclusive (inclusive NHIL, GETFL, COVID-19 Levy and 15% VAT).

This means that the person will spend more money on the same items, reducing their purchasing power for other necessities such as fees and bills, and leaving very little for savings. Furthermore, with inflation now standing at 53.6% as of January 2023, the real value of a person's income is decreasing, implying that the same amount of money can now buy fewer goods and services, lowering an individual's standard of living.

However, the impact of the VAT increase may be less severe for high-income earners who have a larger disposable income. They may not feel the impact of the increase as much as low-income earners, as their spending habits and purchasing power may not be as constrained.

Impact on businesses and the economy

The increase in VAT would have an impact on businesses and the economy because prices of goods and services would surely increase in order to maintain profit margins. This, in turn, can reduce consumer demand, as people may cut back on spending to adjust to the increased cost of living.

On the other hand, an increase in VAT can generate additional revenue for the government, which can be used to fund social services such as healthcare, education, and infrastructure development. This, in turn, can have a positive impact on the economy and the standard of living of citizens in the long term.

In addition to the above, the compliant taxpayer/trader/service provider will bear the brunt of the VAT increase, especially if they compete with other service providers who do not follow Section 41 of the VAT Act 2013 (Act 870).

For example, if Firms A and B are both air-conditioning repairers with adjacent premises, but Firm A is VAT-registered and charges the same but Firm B is not, the increase in VAT from 12.5% to 15% would only increase Firm A's charges, forcing customers to choose Firm B, which charges no VAT.

It’s important to note that the Value Added Tax (Amendment) Act, 2021 (Act 1072) was enacted to revise the application of the VAT flat rate scheme (VFRS) which provided that retailers and wholesalers with annual taxable supplies exceeding GHS 500,000.00 will now account for VAT under the Standard VAT rate regime.

Such retailers and wholesalers will be required to charge VAT at the standard rate of 12.5% on the value of taxable supplies plus the National Health Insurance Levy (NHIL) of 2.5%, the Ghana Education Trust Fund Levy (GETFL) of 2.5%, and the COVID-19 Levy of 1%. With the increment in VAT from 12.5% to 15.0%, the net effect is that taxpayers and consumers would have to pay more despite already suffering under this taxing regime.

The increase in VAT from 12.5% to 15.0% may have a significant impact on the pockets of consumers, especially low-income earners. While it can generate additional revenue for the government, it can also increase the cost of living and reduce the purchasing power of lower-income households.

It is important for the government to consider the potential impact of the VAT increase on the most vulnerable in society and explore other options for revenue generation to reduce the burden on citizens, and even more, the Ghana Revenue Authority must work efficiently to target traders who are not tax compliant to help rake in more revenue for the state.