Tax Analyst with Ali Nakyea and Associates, William Demitia has attempted to break down the meaning of the VAT recalibration announced in the Mid-Year Budget Review and its implications on prices of goods and services.
Also, Mr. Demitia has provided an analysis of how government intends to increase revenue through this policy. The Finance Minister, Ken Ofori-Atta presented the Mid-Year Budget review yesterday[19 July, 2018].
Below is William Demitiaâ€™s analysis
â€œIf I purchase an item for GHS100. I will be charged VAT/NHIL of 17.5% on the value of the item which will be GHC17.50. If I sell the item for GHC200, I am expected to charge 17.5% on the value of the item which will be GHC35. Under the normal rules of VAT, I can deduct the GHC17.5 I paid on my purchases from the GHC35 I collected from the customer and pay the difference i.e GHC17.5 to GRA.
Government now says it wants to make 5% of the 17.5% VAT/NHIL a flat rate tax. This means I cannot deduct 5% of the VAT/NHIL I incurred on my purchases from the VAT/NHIL I will collect from my customers. Therefore in the above example, instead of deducting GHC17.5 from GHC35, I can only deduct GHC12.5 from the GHC35 and I will have to give GRA, GHC22.5.
Thus, by restricting the amount of input tax I am allowed to deduct, government has found a nice way of increasing revenue. But since I am a rational businessman, I will pass on this extra GHC5 I am unable to deduct to my customers thereby increasing the cost of the item. So, If I purchase an item for GHC100, and I am charged VAT/NHIL of 17.5% on the value of the item which will be GHC17.50, I know that I will not be able to deduct GHC5 of the VAT/NHIL I paid. I will therefore increase my sale price to GHC 205 instead of the initial GHC200 to cater for the GHC5 I canâ€™t deduct. If I sell the item for GHC205 , and I charge 17.5% on the value of the item it will be GHC35.88. Out of this, GHC35.88 can only deduct GHC12.5 leaving a tax of GHC23.38 payable to government.Â So government revenue increases.
And the cost of the item to the final consumer increases from the initial GHC200 plus VAT/NHIL of Ghc35Â to GHC205 plus VAT/NHIL of GHC35.88.â€�