3 August 2007
analysis
"This feature seeks to highlight some of the special challenges encountered in the imposition of the standard invoice-credit VAT scheme on the retail sector, and explores some of the benefits the introduction of the VAT Flat Rate Scheme (VFRS) would bring to this sector"
INTRODUCTION
GOVERNMENT IN its vision of bringing rapid development to the nation and reducing poverty on a sustainable basis as articulated by the GPRS I & II documents, has over the years consistently pursued tax reform policies geared towards the simplification of the compliance requirements of tax legislation in general. It has encouraged, in particular, tapping into the immense revenue potential of the retail/informal sectors in the nation's collective effort to, in the medium to long term, build a buoyant revenue mobilisation base to wholly support government expenditure budgets thereby reducing support from her development partners.
In consonance with this vision, and recognising:
(i) That in an emerging economy like Ghana with low level of literacy and low record keeping capacities in the retail sector, the desired compliance requirements of the invoice-credit scheme (i.e. the standard VAT system) that has hitherto been used in the administration of VAT to the sector have not sufficiently been met, and,
(ii) That, for this sector, the perceived complexities of the invoice credit method of collecting and accounting for the tax feeds into trader frustration and the difficulties that dog the administration of the tax within the sector, the VAT Service, in its Action Plans dating back to 2005, has consistently proposed a number of initiatives for the sector, the most significant initiative being the proposed introduction of a special scheme to cater for the peculiar needs of the informal/retail sector; a scheme that has the potential of enhancing equity in the tax system by widening the tax net and tapping into the immense revenue potential of the informal sector.
Coincidentally, in 2005, GUTA, one of the leading trade associations in the country, in a ten-point resolution to the VAT Service, copied to the Ministries of Finance and Trade, sought for the cooperation and involvement of the two ministries to address the problems and frustrations that their membership faced at the retail level in their effort to comply with the requirements of the standard VAT system. GUTA, in the resolution, also proposed a special flat scheme for all retailers with the objective of simplifying the tax accounting system and widening the tax net to encompass the entire retail sector.
It was against this background that a VAT Service/GUTA working group was constituted with a mandate to come up with a special scheme for the informal retail sector that was simpler and easier to operate, that would reduce the burden of compliance for operatives in the sector, and would lead to the widening of the tax net. These antecedents culminated in the proposal by the Minister of Finance and Economic Planning in the 2006 Budget Statement and Economic Policy that a special flat rate scheme for the informal/retail distributive trade sector would be evaluated for implementation in the course of the year.
CHALLENGES OF THE INFORMAL/RETAIL DISTRIBUTIVE TRADE SECTOR UNDER THE INVOICE-CREDIT SYSTEM
The present initiative, which has seen GUTA taking a flagship role in the collective effort to develop a special scheme for retailers of goods in the informal/retail sector, has been informed by concerns and a desire to solve the following challenges associated with the regular way of collecting VAT:
(i) Difficulty in claiming back input VAT as traders do not have invoices for purchases from traders that are not VAT - registered.
(ii) Low record keeping capacities of small-scale retailers, which inevitably increases the burden of compliance.
(iii) Unfair competitive advantage in favour of non-VAT registered retail businesses.
(iv) High level of illiteracy among retail traders in general, and the associated computation difficulties, which open the standard VAT system to abuse in that sector.
The VAT Service, in its application of the invoice-credit scheme to the informal/retail sector over the years, has identified the following drawbacks associated with the sector:
(i) High incidence of non-issuance of VAT invoices,
(ii) High non-filing rate,
(iii) Significant non-compliance (both deliberate and inadvertent) resulting from various obstacles within the current system, including the high cost of compliance and the perceived complexity of the invoice-credit system of accounting for VAT; and consequently,
(iv) Low revenue contribution to the national kitty from the sector; and (v) Manipulation of input taxes to understate tax liabilities
In the face of these difficulties, attempts by the VAT Service at enforcing compliance with the VAT law have consistently been perceived as acts of intimidation/harassment.
It was against this background that the GUTA/VAT Service working group, in executing their mandate, recommended the flat rate scheme for implementation.
DEFINITION, SCOPE AND COVERAGE OF THE FLAT RATE SCHEME
The VAT Flat Rate Scheme is a VAT collection/accounting mechanism that applies a marginal tax rate of 3%, representing the net VAT payable, on the value of taxable goods supplied. It is an alternative to the invoice credit method (or standard VAT system) which charges a given percentage on sales (in this case 3%) for each transaction without recourse to input tax deduction.
The scheme is restricted to all retailers of taxable goods, except those authorised by the Commissioner of the VAT Service to operate the invoice credit scheme (an authorisation which will be given in the interest of safeguarding national revenue) and will operate concurrently with the current invoice credit method.
It is also worth noting that, as is the case under the invoice-credit scheme, all exempt items under schedule 1 of the VAT Act as amended (e.g. agricultural inputs, essential drugs as approved by Ministry of Health, mosquito nets, petrol, diesel, kerosene etc) shall remain exempt under the VFRS. Thus, the VFRS is not a separate tax handle or additional impost; it is only an amendment of the VAT Act with the principal aim of simplifying the VAT accounting system and consequently, deepening public faith and confidence in VAT administration in Ghana, The use of a marginal tax rate of 3% for the VFRS, a rate which is the effective VAT rate of the retail sector, makes it inappropriate for the inclusion of other sectors such as the manufacturing and service sectors, where value added could be as high as 100%.
NOTE:
1. Sectoral effective VAT rate is defined as the ratio of VAT revenue received to total taxable output declared by VAT registered businesses in a given sector 2. The manufacturing and service sectors have relatively higher effective VAT rates. e.g. Manufacturing sector-7% and Service sector-9.5%
KEY FEATURES OF THE SCHEME
The following are the main features identified with the VFRS:
(i) VFRS operators apply a marginal tax rate of 3% on the value of taxable supplies for each sale transaction.
(ii) VFRS operators issue a simplified VAT/NHIL invoice for each sale transaction.
(iii) They also submit a simplified monthly VAT/NHIL returns form which does not show input taxes.
(iv) VFRS operators are not required to keep or maintain a separate register on input taxes and do not take credit for input taxes, but recover such input taxes as part of their costs in arriving at selling prices.
(v) VFRS operators are issued with the regular VAT Certificate of Registration upon registration.
(vi) Minimal record keeping, to the extent that records are adequate in determining the correct VAT/NHIL payable to the VAT Service.
BENEFITS OF THE SCHEME
The scheme is simple to operate, with simplified and easy to complete return forms, and will solve the problem at the informal retail level of what input tax one can or cannot claim, and will consequently;.
Curtail the submission of repayment returns (credit returns) by retailers.
The simplicity of the scheme will encourage a lot more retailers who were hitherto not registered with the VAT Service to register. This will consequently broaden the tax base and boost revenue collection.
The scheme holds tremendous promise for the removal of the compliance and enforcement barriers that currently plague the administration of VAT at the informal retail level where value added is least and the incidence of non-compliance highest.
TRANSITIONAL ARRANGEMENTS
RETAILERS OF GOODS CURRENTLY REGISTERED WITH THE VAT SERVICE
Retailers of goods currently registered with the VAT Service who qualify to operate the VFRS have been identified as such and placed under the scheme. Such retailers have subsequently been notified in writing of their status as VFRS operators. Planned visits shall thereafter be made by officers of the VAT Service to such retailers for further education on the VFRS.
STOCKS OF STANDARD VAT INVOICES HELD BY VFRS OPERATORS
Registered retailers whose status will change from being operators of the standard VAT scheme to being operators of the VFRS, and who have in stock quantities of unused or partly-used standard VAT/NHIL invoice booklets, are required to submit such invoice booklets to their Local VAT Offices for replacement at no cost. It must be noted that used invoices must be accounted for appropriately.
OUTSTANDING VAT RETURNS
A retailer currently registered with the VAT Service who qualifies to be registered as a VFRS operator is required to file all outstanding returns for the periods preceding the month in which the retailer's status changes to a VFRS operator. Such returns shall be filed on the standard VAT return form (VAT 20) currently used by operators of the standard scheme.
OUTSTANDING LEDGER BALANCES
1. Outstanding Payments
Outstanding tax liabilities of retailers currently registered with the VAT Service as standard scheme operators and who, on introduction of the VFRS have been registered, as VFRS operators shall be recovered by the VAT Service through its normal debt recovery/management procedures.
2. Outstanding Credits
Outstanding credit balances on the ledgers of retailers migrating from the invoice-credit scheme to the VFRS which are mainly as a result of input taxes on unsold stocks of goods shall be reversed as VFRS operators shall not take credit for input taxes on VFRS returns. Such credits will then have to be recovered as part of the VFRS operator's cost in arriving at the selling prices of the unsold stocks of goods.
UPDATE ON IMPLEMENTATION TRAINING PROGRAMME
Appropriate training modules have been developed for the following identifiable stakeholders:
(i) VAT Service staff and management
(ii) Representatives of media houses
(iii) Leaders of identifiable retail trade associations
(iv) The judiciary
(v) Other stakeholders
Workshops/seminars have so far been conducted for the following stakeholders:
(i) VAT Service management and staff
(ii) The legislature (specifically the Finance Committee of Parliament)
(iii) Representatives of media houses and
(iv) The leadership of GUTA
PUBLICITY PROGRAMME
Publicity messages on the scheme in English, and also in some Ghanaian languages have been identified. Such messages have been developed into flyers, posters, billboards etc. for the target audiences.
A series of seminars/workshops have also been lined-up for the identifiable groups on various aspects of the VFRS, including the following: Record keeping requirements Calculation of VAT on goods sold under the VFRS Returns filing and Issuing invoices under the VFRS Other publicity tools such as public announcements in the print and electronic media would be fully utilized in the Service's effort to educate the general public on the scheme.
CONCLUSION
The retail sector dominated by small-scale operators that have no formal structures presents the greatest challenge to the administration of VAT in an economy such as Ghana. In the production-distribution chain covering importation, manufacturing, provision of services and distribution, record-keeping capacity is weakest in the distribution sector.
With most distribution firms engaged almost exclusively in cash transactions and dealing predominantly with consumers for whom sales invoices hardly serve any purpose, audit trail is rather difficult to follow and opportunities for under declarations and tax evasion tremendous.
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