Value Added Tax & Revenue Generation
A recent PwC study identified 5 global megatrends keeping CEOs and World Leaders up at night namely:
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• Demographic and Social change;
• Shift in global economic power;
• Rapid Urbanisation;
• Climate change and resource scarcity; and
• Technological breakthroughs.
These megatrends are likely to result in the need for improved infrastructure and resources such as power, transportation, new cities, healthcare and educational facilities. It goes without saying that Governments the world over will be under a lot of pressure to accommodate these changes, and fund the subsequent projects they may result in.
These projects, usually long term in nature, will be funded by a mixture of private investment and Government sources, the latter often being the significant contributor. I’m sure we can all guess where the majority of the money will be coming from? Taxes!
Taxes have always been a major source of revenue for Governments globally. However the focus has historically been on direct taxation (Corporate Income Taxes, Withholding Taxes, and Personal Taxes). With increasing pressure on Governments to support their fast growing economies, the focus of revenue generation seems to be shifting towards indirect taxes, with Value Added Tax (“VAT’) being the popular choice.
VAT has proven to be an effective way of increasing tax revenues since it is a consumption tax borne by the final consumer; effectively expanding the tax net. The system of VAT collection is also advantageous in terms of the timing of cash flows; VAT, is collected at each stage of the supply chain and paid over to the tax authorities.
Recent country trends show that VAT has become a preferred means of tax revenue generation and this is supported by the fact that over the last 20 years, a number of countries, including Bosnia Herzegovina, Jersey, Burundi, Malawi, Mozambique, Sudan and Guyana, have introduced it into their economies. Also, recent VAT changes in Lithuania, Switzerland and Puerto Rico see the implementation of a reverse VAT charge, a proposal to lower the VAT registration threshold, the application of VAT to e-newspapers and the introduction of a new VAT regime respectively.
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VAT in Ghana
VAT was first introduced in Ghana in 1995 amid public agitation. The tax which was withdrawn almost immediately, was reintroduced in 1998 and has been in operation since.
The introduction of VAT in Ghana has captured a large part of the informal sector into the tax net; i.e. once you consume a taxable good, you pay VAT. People who may not have historically paid direct taxes find themselves contributing to the national revenue pot through the consumption of taxable goods, whether they like it or not.