THE ROLE OF VALUE ADDED TAX IN THE ECONOMIC DEVELOPMENT OF GHANA – A CASE STUDY OF VAT SERVICE, HO MUNICIPALITY
ABSTRACT
One of the most difficult things to understand is the concept of Taxation. But understand we must, because it is a critical part of how government affects lives of Ghanaians.
Unfortunately, though, when tax return enters the political domain, the subtleties of the key issues are usually lost in the mist of self-serving arguments and misleading implications.
Taxation is not just a means of transferring money to the government, to spend as it thinks fit, but also has a tendency to reflect prevailing social values and priorities. In this respect, it would be argued that a system of taxation is a socioeconomic model, representing society’s social, Political and economic need, at any one times; changes in these needs often being reflected by changes to the system of taxation.
The main objective of this study is to know whether the imposition of VAT has had any effect on the Ghanaian economy. The study examined the previous sales tax regimes as against the new VAT regime. This was done through collection of data from various stakeholders including Retailers, Wholesalers, Manufacturers, Service Providers, and Consumers.
Analysis of data collected revealed that, there has been a consistent increase in tax revenue in the VAT regime as compared to the previous sales tax regime. Also Corporate Institutions improved their liquidity as a result of VAT refunds.
Similarly, there has been a tremendous improvement in the Utilization of VAT revenue in Education and the Health sector such as Ghana Educational Trust Fund (GETFund) and National Health Insurance Scheme (NHIS) which affect every Ghanaian life.
In contrast, consumers also believe that the introduction of VAT was rather a curse than blessing since it increase consumer price index.
However, the outcome of the study revealed to the researcher that, the VAT regime has positively affected the Ghanaian economy.
CHAPTER ONE
INTRODUCTION
1.1 Background Statement
It has become increasingly demanding for governments all over the globe to devise appropriate means of generating adequate revenue to finance government expenditure which continue to soar as a result of growth in population with its attendance demand for infrastructure and other social and economic investment. It is against this reason that taxation has become legally accepted all over the world as one of the most suitable means of generating revenue. There are different kinds of taxes available for governments to raise revenue.
Again, Taxation is said to date back to biblical times where subjects or citizens were made to pay tax in time and wealth towards the building of Babel tower and Jerusalem Temple. Even Jesus was asked to pay tax.
Modern Government forms a unique part of every nation. They have the responsibility to protect the nation against internal disorder and external aggression. They engage a large number of people (judges, civil and public servant, law and order enforcers, health officials, etc) in order to keep the nation running. Despite the general trend especially in the twentieth century towards privatization, the maintenance of the state machinery, production capacity, infrastructure of health, education, housing, roads and railways, to a large extent depend on governments.
Governments however, do not earn any income on their own. They must therefore devise the means to generate revenue to undertake their responsibilities. Historically, this has been done through the levying of various forms of taxes. In pre-modern times, taxation was viewed as a direct exchange of bargain in which the taxing authorities on one hand, and the taxpayer on the other hand, each expected to receive equal benefit in relation to what it gave out. Taxes were looked upon as the wages paid to government for its services, the chief among them being security. This concept became known as the “bargain theory”. The common view was that each one was to provide all his needs otherwise he paid the government authorities to do that for him. It is interesting to note that during the pre-Revolutionary times in France, the wealthy and privileged classes were largely exempted from taxation simply because they could hire and pay for the services they needed. With these ideas about taxation during those times, it is not surprising that it was defined as follows:
“The imposition on the people by sovereign powers is nothing else but the wages due to them that hold the sword to defend private men in the exercise of their several trades and calling” (Kaldor, 1955)
Kaldor (1963) again pointed out that, “The revenues of the state are a part of his property which the citizen gives in order to be sure of other part or
to enjoy comfort”
“The subject, when properly taxed, contributes only some of his property in order to enjoy the rest” (Otiek, 1992).
The modern view of taxation stems from the common premises that no one can be an island for himself. The fight against poverty, crime, economic stagnation, etc., requires the concerted effort of all and thus all must pay for it. Thus in modern times taxation is defined as follows:
“Taxation is the process whereby a state or government exacts contributions from its citizens or from the residents of its territory for the maintenance of the state machinery (Goldsmith, 1951).
According to Hicks 1965, “A tax is a compulsory contribution from the person to government to defray the expenses incurred in the common interest of all without reference to special benefit conferred.” Quickly he added that “A tax is a compulsory contribution of the wealth of a person or body of persons for the service of the public powers”
By the definitions of the various authors, it is now clear that taxes are now seen as compulsory extractions that involve personal obligations for common public purposes. Harley Lutz however, highlighted on this point when he noted that: “The modern viewpoint in taxation is a product of the growing social solidarity and sense of common social obligation that have characterized human progress during the last hundred years. The contributory factor in the modern concept emphasizes the greater social unity and the stronger sense of common burden and responsibilities, which are features of modern life. All should therefore contribute to its effective support”.
In the time of Julius Caesar, Roman citizens did not pay tax. All the revenue required by the empire, including the cost of the military operations, was requisitioned from the people who lived in territories which had been occupied by the Romans. Only indirect taxes were raised in Rome itself because direct taxes were seen to be humiliating and undignified.
Indirect taxes, such as customs duties, are paid by an individual through purchasing goods and services, and are not directly related to the personal circumstances of the taxpayer. On the other hand, direct taxes, such as income tax, can directly reduce the taxpayer’s income and can be directly related to the taxpayer’s personal circumstances. Romans resisted direct taxes, not so much because of an unwillingness to pay them, but because of the loss of privacy which taxes necessitated.
Requisitioning required every citizen to assist the Roman state with his labour and property. The system has a number of serious disadvantages, principally it lack certainty. This led to tax demands being levied in an unpredictable and arbitrary way.
Thinking about the system of tax which operates in the UK today, Employers are required to collect the taxes due from their employers. If they don’t comply they are potentially liable with fines and interest on tax unpaid.
Some commentators have also argued that there is a lack of certainty about the tax liability, which a transaction may attract because, until recently, the Inland Revenue refuses to advise taxpayers of their attitude towards activities in advance of submitting accounts or computations.
According to Terkper, (1998), the introduction of Value Added Tax in
Ghana was in-line with the policy of the Economic Recovery Programm (ERP) which was launched in 1983 and which sought among other things to rationalize the tax system. Following the decline in revenue from exports as a result of dividing world market price for primary goods including Cocoa and gold. Tax revenue from various sources started declining and this has put severe strains on the capacity of government to increase revenue to meet expansion in recurrent and development expenditure. For example, the share of sales tax, total revenue dropped from 8.5% in 1990 to 7.7% in 1991. And 1992, Cocoa export duty also dropped from approximately 16% to 5.3% over the same period. These poor performance have the government to increase the petroleum taxes considerably especially over the year 1992 and 1993.
The low performance of these revenue sources explain why Ghana tax ratio continues to fall below the average of 17% of total revenue in SubSaharan Africa. The need therefore, to improve the tax system led to the commissioning of feasibility study in 1991, conducted jointly by the Harvard Institute of International Development (USA) and the Crown Agent of the U.K.
Among their term of reference was to study into the present tax system and suggest ways of improving it. Their recommendation therefore led to the introduction of VAT in March 1995. Unfortunately, the tax burden on the majority of Ghanaians was increased by the introduction of the Value Added Tax (VAT), in 1995 and later in 1998. In 1995, the government proposed a VAT of 17.5% on goods and services, irrespective of public dissatisfaction and anxieties about inflationary impact, ignorance about how to calculate and handle the new tax, the government still impose it partly to satisfy a trigger condition of the International Monitory Fund {IMF} and the World Bank.
This sparked off public riots in the major cities leading to the shooting to death of some civilians. The anti-VAT demonstration dubbed “kumipreko” (meaning kill me completely) stands in Ghana’s calendar as a major citizen protest action against imposed policies. Whilst the government announced publicly that the tax was being withdrawn, the sales and services taxes it sought to replace were reinstated. Other goods and services that were not covered by these taxes were brought into the tax net. Following a much wider public consultation, the government proposed and received parliamentary approval for a lower VAT rate of 10% in 1998.
The Value Added Tax levied at the rate of 10% on the cost or price of imports, locally manufactured goods and services. It is levied at each stage that there is value added tax.
Thus the importer, manufacturer, wholesaler and retailer all pay VAT. All these are absorbed by the final consumer in the form of high price on the item. The importer, manufacturer and the retailer do not incorporate the VAT paid into their pricing because they get credit for what they pay at VAT. However, the final consumer picks the VAT at each stage of the production and distribution process in addition to the profit and so the price becomes unbearable. The majority of citizens are worse off than before the introduction of VAT. (Boadu-Ayeboafoh, 1997)
1.2 Statement of the Problem
The introduction of VAT in 1995 was not well received by the Ghanaian population, as a result, it led to demonstrations by various groups of people; this was known as ‘kumi preko” [meaning kill me completely] demonstration in which some civilians lost their lives. VAT therefore was suspended, but in 1998, it was re-introduced and has been operating since then.
The research work therefore seeks to find out whether Ghanaians have come to believe or accept the fact that VAT really came in to help and improve the collection of taxes and also develop the country.
1.3 Research Objectives
The main objective of the study is to know whether the imposition of VAT has had a positive impact on the Ghanaian economy.
Specifically, the study attempt to:
- Determine the extent to which the payment of VAT has improved the prospective businesses, firms, organizations and industries as a whole.
- Evaluating the positive extent to which the imposition of VAT has helped the Country to improve its economic fortune as a whole.
- Assessing the mechanism used in the collection of VAT in Ghana.
- Establish a clear distinction between the VAT methodology and what was actually used previously in collection of government revenue.
1.4 Research Questions
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.
Hence, the following are the research questions of the study,
- To what extent does the VAT impacted on the Ghanaian economy?
- What method if any improves the collection of VAT in Ghana?
- To what extent do companies, firms, consumers accepts the VAT in Ghana?
1.5 Significance of the Study
This project work is intended to provide immense benefit to VAT administration in Ghana and also seeks among other things to establish the extent to which the payment of VAT has improved the prospective business, firms and organization.
Again, knowing the positive extent to which the imposition of VAT has helped and the purpose of which VAT has been introduced help in planning the country’s economy. Mechanism used in the collection of VAT in Ghana gives a clear distinction of VAT methodology and other taxes that are of great important to the researcher.
1.6 Limitations
The researcher encounters the following problems.
- Financial Constraint:
Due to the scattered nature of businesses in the municipality , the researcher spend a lot of money on travelling, thus move from one place to another to gather more information.
- Unwillingness to give adequate information:
Most tax payers were reluctant in giving information about the study since most believed that tax payment was something very confidential and therefore did not open up to the researcher.
- Inadequate record keeping (Book-Keeping):
Some respondents were not keeping proper records of their business activities and as such could not give adequate and correct information on the effect of VAT on their businesses rippling on the economy of Ghana.
1.7 Delimitation
The collection of data was restricted to the VAT office, businesses and consumers in the Ho municipality, hence the findings of the study was generalized to cover VAT activities in the Ho municipality and the VAT office.
The generalization of the result of this study to other categories of revenue collectors in the country with similar characteristics should be done with caution and extensive analysis and comparison.
THE ROLE OF VALUE ADDED TAX IN THE ECONOMIC DEVELOPMENT OF GHANA – A CASE STUDY OF VAT SERVICE, HO MUNICIPALITY