Policy distortions to VAT impeding high revenue generation – Seth Terkper

Former Minister for Finance, Seth Terkper, has said, policy distortions to the country’s second-biggest tax handle – the Value Added Tax (VAT) – is impeding its ability to generate the needed revenue for government.

Making the assertion at the second edition of the PFM Tax Africa Network Dialogue Series, the former Minister for Finance noted policy distortions hindering the ability of VAT to generate high levels of revenue include the decoupling of the GETFund and NHIL, from the VAT and the subsequent conversion into straight levies.

According to him, the exclusion of GETFund and NHIL from VAT and imposition on goods and services as straight levies and the subsequent charge of VAT, denies businesses the needed input tax credit and refunds and also adds to the high costs of goods and services which makes businesses uncompetitive.

The denial of input tax credit and refunds for businesses, he noted, results in tax evasion and avoidance leading to low levels of revenue generation from the tax handle.

“The law now says businesses can no longer get input credit and refunds on taxes paid on inputs as allowed previously, so what happens now is that businesses add what they were supposed to get in the form of input tax credit and refunds to the cost of goods and services and that will definitely result in higher prices than when GETFund and NHIL were part of VAT and input tax credit and refunds were claimed by businesses,” Mr Terkper stated.

“And you see, when prices are that high, it makes businesses uncompetitive, especially for those exporting, this then gives rise to tendency for tax evasion and avoidance and you may not realise the revenue you expect,” he added.

Speaking further at the event, Mr Terkper noted the inability of the VAT to generate the needed revenue as a result of the revenue-restrictive nature of the aforementioned policy distortions is evidenced by the declining revenue share of VAT in the country’s total taxation.

“The numbers show that we are not reaping as much as we should from the VAT, because in our last presentation at the first edition of the PFM Dialogue Series we showed that the share of VAT in total taxation is declining.”

“And so you see that its not achieving the desired effect which was to increase revenue because our tax to GDP ratio even after rebasing is still low,” averred the former Finance Minister.

 His assertion was corroborated by the Deputy Commissioner in charge of Strategy, Research, Policy and Programmes at the Ghana Revenue Authority (GRA), Dr Charles Addae who noted that VAT contribution to GDP was 6.2 percent in 2004, rising by 41 percent in 2008 but then declined to 27.2 percent in 2020.

Adding that, VAT has now been overtaken by Corporate Income Tax (CIT) as the largest tax handle.

The PFM Tax Africa Dialogue Series has been put together to encourage apolitical discussions on fiscal policies, revenue mobilisation, resource exploitation and management, national expenditure among others

The dialogue series is held each quarter with each dialogue focusing on a pertinent issue of relevance to the management of the Ghanaian economy and its natural resources especially within the fiscal space.

Source: norvanreports.com