Implement E-VAT - IMF recommends

The International Monetary Fund (IMF) has recommended the implementation of the electronic invoicing system, also known as E-VAT, as part of measures to improve the Value Added Tax (VAT) regime. 

The IMF, as part of key reform measures, also suggested the removal of the COVID-19 levy, re-crediting the National Health Insurance Levy (NHIL) and the Ghana Education Trust Fund (GETFund) to allow input claims, and lowering the VAT effective rate.

Others are raising the VAT threshold from the current GH¢200,000; removing the flat rate VAT scheme for retailers, and expanding the tax base to include under-taxed services, such as short-term insurance and water.

The IMF technical teams, which have been holding discussions with key state authorities, also want the government to enhance the turnover tax under the Income Tax Act, curtail the revenue leakage risks from free zone enterprises and consolidate VAT legislation for clarity and legal certainty.

The recommendations are among the IMF's notes to the Ministry of Finance (MoF) for short-term reforms to enhance the country's VAT regime.

The proposals were made by the IMF following meetings with representatives from Ghanaian businesses, large and medium taxpayers, and tax intermediaries during its recent mission. 

Engagement

The Commissioner of the Domestic Tax Revenue Division of GRA, Edward Apenteng Gyamerah, made this known at an engagement with professional bodies on VAT reforms in Accra last Wednesday.

The engagement with the professionals was to solicit inputs to improve the VAT regime.

Participants included representatives from the Ghana Hotels Association, the Pharmaceutical Importers Association, the Ghana Institute of Architecture, the Ghana Real Estate and the Ghana Chamber of Telecommunications.

Others are the Shipowners Association, the Ghana National Chamber of Commerce and Industry, the Ghana Chamber of Mines and the Association of Ghana Industries.

The participants took turns to make their inputs and also expressed an opinion on the recommendation of the IMF.

Not binding

Mr Gyamerah made it clear that the IMF's recommendations were not binding and, therefore, the government, through its agencies, was also gathering input to inform the drafting of the new tax law.

“You are not the only people we are consulting because we will be going to the importers, industry and other taxpayers to get their inputs for the drafting of the new law,” he said.

Medium-term recommendation

In the medium term, Mr Gyamerah said, the IMF recommended that the government implement tax reforms to broaden the tax base, reduce the VAT rate in a revenue-neutral manner and index the VAT registration threshold annually.

The IMF also suggested that mining and petroleum licence holders should be allowed to register for VAT at the start of the development phase, with timely refunds and an import VAT deferral scheme for low-risk businesses.

The IMF also recommended the removal of VAT exemptions on machinery and raw materials, applying the standard VAT rate with full input tax crediting and efficient refunds, and phasing out zero-rating for specific industries in favour of regular VAT treatment.

Inefficiencies

The Head of  Tax Policy, Research and Monitoring at the Ministry of Finance, Dr Phillip Banahene Thompson, stated that the government was in the process of reviewing the country's VAT regime due to its complexity and inefficiencies.

To support the effort, he said, the government invited and hosted a mission from the Fiscal Affairs Department of the IMF to conduct a diagnostic review of the VAT regime.

Dr Thompson explained that the IMF team had since completed its review and presented a report outlining challenges in the current design, as well as policy options that could improve the effectiveness, efficiency and equity of the VAT regime, while minimising the adverse impact on businesses and households.

“Your insights and recommendations are essential to ensure that any reforms are not only sound in theory, but workable and sustainable in practice.

“We believe that reforming the VAT system — when carefully designed and collaboratively implemented — can support economic growth by improving the business environment, encouraging formalisation and ensuring a fairer distribution of the tax burden,” Dr Thompson added. 

Bold steps

The Chief Executive Officer of Ghana Chamber of Mines, Dr Kenneth Ashigbey, who was a participant, said the government needed to take bold steps to attract exploration funding and take a second look at imposing VAT on financial services, given the country's significant financial exclusion challenges.

He explained that a well-designed tax regime should promote inclusivity, leverage technology to expand the tax net and bring the informal sector into the formal economy.

Dr Ashigbey also wants the government to make taxation seamless and inclusive, bridging the gap between the formal and informal sectors by providing incentives for technology adoption and using digital solutions.