The Hindu Business Line : The VAT drama in Ghana

The sharp decline in aid since the early 1990s compelled Ghana to explore alternative sources of revenue and the search culminated in the adoption of VAT in March 1995.

THE recent announcement in Parliament that value-added tax (VAT) has been put on hold was greeted with enthusiasm. What the industry has been pressing for long is something which the trade abhors, a classic case of `one man's meat being another man's poison'.

The introduction of VAT in its true spirit has posed difficulties in federations, in general, and developing countries, in particular. Even in a developed country such as Canada, VAT implementation was not a smooth sailing. In India, the problem is even more complicated, as the Centre's monopoly over excise duty is something peculiar to the concept of commodity taxation — a legacy left behind by the British and not based on any economic rationale.

While Indian industry has never missed an opportunity to express its anguish over the delay in VAT implementation, trading houses, particularly small traders, have been vehement in their objection. Their reaction should be seen against the need to maintain proper accounts to claim the credits, which would amount to disclosure of real income, thereby making them liable to income-tax.

It would be of interest to look at VAT implementation, especially in other developing countries. In Ghana, for instance, which introduced the tax a few years back, the political fallout has been deep. The sharp decline in aid since the early 1990s compelled Ghana to explore alternative sources of revenue and the search culminated in the adoption of the VAT in March 1995.

The member countries of the Economic Community of West African States (ECOWAS) had committed themselves to introducing VAT by 1999.

Though the tax has already been introduced in a number of African countries, including Benin, Cote d'Ivoire, Kenya, Madagascar, Mali, Niger, Nigeria and Uganda, it was in Ghana that VAT policy was envisaged as part of a wider vision of good governance and self-reliance, as outlined in `Ghana Vision 2020'.

This document sought to achieve a growth rate of 8 per cent by 2020 and transform Ghana into a middle-income country, from where it had fallen since independence. It had been projected that in the first year of its implementation, the domestic VAT would yield 74.3 billion cedi (the Ghanaian currency), while the VAT on imports was projected to generate cedi 137.6 billion or 60 per cent over import sales tax collected in 1994.

In October 1994, Mr Odoi Stykes, a leading member of the New Patriotic Party (NPP), observed that the Ghanaian economy was not buoyant enough to cushion the burden of the new tax on the average citizen owing to the high level of poverty and hardship which the average Ghanaian was already enduring.

In the debate on the VAT Bill in November 1994, a critic preferred to interpret VAT as "Very Augmented Trouble", while a protagonist maintained that the VAT would reduce the craze for foreign goods and facilitate capital formation in sectors such as education, housing and health.

Notwithstanding protests from various quarters, the majority National Democratic Congress (NDC) passed the Bill in December 1994 for introduction of the tax with effect from March 1, 1995.

A newspaper article spoke of the Ghanaians being fooled into believing that they were going to pay only one tax, the VAT, which was meant to replace the sales tax of 35 per cent.

Attention was drawn to an announcement by the Commissioner of Income Tax to the effect that under the sales tax, a single rate of 17.5 was to be charged, the remaining 17.5 per cent would be imposed as special tax and that both sales tax and special tax would be calculated on duty inclusive value.

The implementation of the VAT was also quite tardy. Though items such as petrol, diesel, crude oil, kerosene, liquefied petroleum gas and residual fuel oil as well as transport, including the movement of goods by any means, were exempted, it was difficult for ordinary citizens to appreciate all this; drivers, for instance, were agitating for hikes in fares because of increases in the cost of spare-parts and some retailers even raised the proce of foodstuff which were actually VAT-exempt.

When the VAT system came into force in March 1995, there was a public outcry, particularly in the urban areas because of gross misapplication of the scheme by several traders.

According to a survey by the Daily Graphic, the prices of beer, soft drinks and liquor as also non-alcoholic beverages and foodstuff, including eggs, increased cedi 50-100. Upward price movements coupled with the imposition of 17.5 per cent as standard VAT actually jeopardised the fiscal management and fuelled inflation, which was around 59.5 per cent in 1995. The Bank of Ghana's decision to adjust the discount rate from 39 per cent to 45 per cent with effect from September 19, 1995, was indeed a desperate attempt to contain inflation and correct the fiscal imbalance.

While as many as 400 personnel, including control verification officers, were trained and posted throughout the country to ensure effective implementation of the VAT system, not only was there an abundance of illegal operators but several retailers were profiteering by their failure to submit VAT returns.

By February 23, 1995, the VAT office had dealt with 4,000 applications and is still working on 1,650 others.

The Government of the Progressive Alliance was left with no alternative but to withdraw VAT, as it failed to muster the consensus needed to carry through the tax law. The NDC party preferred to hold that the withdrawal of the VAT was purely a temporary setback to its economic policy objectives.

The timing for VAT introduction had been rather inopportune. In Ghana, price fluctuations occur only during Christmas and the immediate pre-Budget period. The introduction of VAT on March 1, 1995, brought the third wave.

To cushion the workers against falling real incomes, the Trade Union Congress (TUC) started demanding wage increases. These developments compelled the government to withdraw VAT on May 11, 1995, pending a review of the system.

The causes for the failure of VAT have been attributed to the non-compromising attitude of the Opposition and the squabbling even among those at the political helm over the policy.

The shortlived VAT was replaced by the Customs, Excise and Preventive Service (Management) No. 2 (Amendment) Act, 1995. The Act reinstated sales tax, and introduced a new Service Act 1995, which replaced the VAT with respect to a restricted number of services.

This time round an intensive education programme was organised to familiarise the citizens about VAT. Further, the view that a widening tax base through the VAT should be accompanied by a lower tax rate was endorsed by Mr Joseph Abbey, an eminent Ghanaian economist with the Centre for Economic Policy and Analysis (CEPA) in Accra, who held that the revenue target could be achieved with a much lower rate, perhaps between 10 per cent and 12.5 per cent.

Finally, the VAT rate was pegged at 10 per cent. The new law also provided that previous laws which had been repealed by the VAT Act 546 would remain intact until the new one came into effect and was seen to be working. According to an analyst, "The first attempt at instituting the VAT in Ghana represents a classic case of inadequate capacity of government and the failure of policy analysis in the fourth republic.

The top-down approach adopted by the government explains the failure to realise and factor into the analysis, the level of power and organisational capabilities of the groups opposed to the VAT and those who had interest in making political capital out of government under performance."

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