The Government of Ghana has, in its mid-year review of the budget, proposed changes to VAT. The changes will convert portions of the existing VAT into levies. The proposed changes are as follows:

Pre-budget

Budget proposal

VAT 15% VAT 12.5%
NHIL 2.5% GET Levy 2.5%
    NHIL Levy 2.5%

This blog analyses the effects based on assumptions that are stated below. The effect of the proposal is not tax neutral. The effect is to reduce business profits and cash flow. It will significantly increase the money collected through VAT and the levies. On the assumptions below, the monies collected by government will increase by 143%.

Profit and Loss

PRE BUDGET POST BUDGET
Sales 1200 1200
Cost of sales 1000 1000
Gross margin 200 200
Other costs 0 0
Levies 0 50
Profit before tax 200 150

 

Cash Flow

PRE BUDGET POST BUDGET
Cash paid for good -1175 -1175
Cash from sales 1410 1410
VAT paid -25 -25
GET paid -5 -30
NHIL paid -5 -30
Cash flow from operations 200 150
Beginning balance 1175 1175
Cash at end 1375 1325

 

Taxes Paid

PRE BUDGET POST BUDGET
VAT 25 25
GET 5 30
NHIL 5 30
Total 35 85

Assumptions underlying the model

You are a trader and you have cash on hand of GHC1175. Your mark up on cost is 20%. You have no other operating cost. You are VAT registered and the products you deal in are vat taxable. You are exempt from income tax.

Assuming you buy goods for GHC 1000. You sell all the goods and are fully paid. What is the effect of the proposal on your profit, cash and taxes paid?

Tax Assumptions

VAT, NHIL & GET

VAT 15.00%
NHIL 2.50%
Total 17.50%

Pre-budget – input taxes offset against output taxes

Post Budget

VAT 12.50%
GET Levy 2.50%
NHIL Levy 2.50%

Only input VAT offset against output VAT.

Effects of the proposed changes

1. The proposals will severely hurt the profits and cash flows of businesses.
2. It will push marginal businesses overboard. Business will need to cut cost significantly. In the service sector, the cost cut will hit labor badly.
3. New investment proposals will be reconsidered and put on hold because of the significant uncertainties created by the proposal.
4. It damages Ghana’s reputation as an investment destination.
5. Because of the negative effect on business and spending, Government is unlikely to raise the revenue it projects. It may end up with a bigger hole in budget than projected.

Recommendation

My recommendation is that parliament should not hasten to approve the proposal. They should ask for economic impact assessment and allow business and labor to present their view. Deep cuts to government spending should be a part of the consideration.

Written by George Katako

George is a partner of SCG Chartered Accountants.