CHAPTER ONE

INTRODUCTION

1.1 Background of the study

In government, money is blood. Currency courses through the body politic, carrying with it civic
health or public pestilence, depending upon how government derive and disburse funds.

Promotion and development resulting in creation and proliferation of young, small dynamic
enterprise have been an important strategy for creating jobs and hastening an economic recovery
and growth of Ghana. The various sectors of the state including government, private businesses,
and civic associations even church based groups have a substantial part to play for the country’s
development. There are different kinds of taxes available for government to raise revenue.

Taxation can be traced in the very early days of civilization. During the various reigns of the
Egyptian Pharaohs, tax collectors (scribes) insure that citizens were not avoiding the payment of
tax. Athenians imposed a tax referred to as eisphora and no citizen was exempted from the tax
which was used to pay for special war- time expenditures.

Historically the earliest taxes in Rome were custom duties on imports and exports called
Portoria. In Great Britain, the first tax assessed was during occupation by the Roman Empire.
Under the earliest taxing schemes, an income tax was imposed on the wealthy office holders and
the clergy.

A tax on movable property was imposed on merchants. The poor paid little or no taxes. That is
why some governments use proportional method of taxing. In colonial America, colonists were
paying taxes under the Molasses Act which was modified to include import duties of foreign
molasses, sugar, wine and other commodities.

Governments in recent times play an important role in the economy. Every country gets money
and spends it. A government is run through the ministries, regional administrations,
metropolitan, municipal, district assemblies and other agencies. Each of these is allocated money
by the government it’s operations.

Government has many means of making money, some are taxes collected by revenue agencies.
Government is responsible in paying all the salaries of it workers – teachers (from kindergarten

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to the university), the police, military, lawyers, nurses, doctors, agricultural extension officers,
all workers at the various ministries, ministers, judges and other civil and public servants.

The private sector of the economy is doing well but government still renders social
responsibilities – health (protecting against the hazards of sickness), unemployment and old age.
They embark upon economic policies – this covers subsidies to agricultural and industry, help
for development area, workers training and the provision of capital to the national industries
(SOEs). They give money for road construction, building of school blocks from kindergarten to
university.

They also buy cars and vehicles every year for all the ministries and agencies. They provide
books, school fees for school children and feed all prisoners free.

In addition, governments spend on diplomatic services, provides grant to local authorities, and is
responsible for the interest on the national debt. In reality, nationals insist that governments
deliver more but governments in isolation have no such resources but need to compete with other
economic forces. They use a variety of means to fund the execution of public policy. When
budget battles erupt in parliament and local legislatures, it is the general fund that typically is at
stake.

Olden Roman Empire, Caesar Angustus was considered by many to be the most brilliant tax
strategist. During his reign as ‘’First citizen’’ the publican were virtually eliminated as tax
collectors for the central government. He authorized cities to collect taxes to provide retirement
funds for the military.

The acceptance of taxation makes its definition generally commendable. ‘’ The imposition of 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)

In Great Britain, Oliver Cromwell, impose exercise taxes on essential commodities to be used as
settlement for the army. America used a Stamp Act as direct tax on all newspapers printed in the
colonies.

Kaldor (1963) later emphasized that,’’ The revenue of the state is a part of his property which the
citizen gives in order to be sure of other part or to enjoy comfort’’. Irrespective of the forms of
revenue, taxes are the principal source of revenue for the general fund in all governments, and
those taxes that contribute to the general fund. It should be noted, however that, before the

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introduction of income tax in 1943, several attempts had already been made, as far back as April
1852, the Poll Tax Ordinance was passed to raise money to finance the increased cost of British
Administration.

According to Tilly 1990, ‘’Taxation has figured prominently in the evolution of states in Europe
and in North America.

The fight against poverty, economic stagnation, crime, diseases, etc, requires citizens to oblige
the payment of tax. A tax is a payment to an account made with funds from a worker’s pay
before Government income tax are deducted’’ Campbell R. Harvey, 1992 currently, taxation can
be defined as ‘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).

The act of levying tax, or of imposing taxes on the subjects of a state by government, or on the
members of a corporation or company, by the proper authority; the raising of revenue, also a
system of raising revenue.

The act of taxing or assessing a bill of cost: Tax; sum imposed, the imposition of taxes; the
practice of the government in levying taxes on the subjects of a state, a charge against a citizen’s
person or property or activity for the support of governments. ‘’The subjects, when properly
taxed, contributes only some of his property in order to enjoy the rest’’ (Otiek, 1992).

A precursor to the modern income tax we know today was invented by the British to finance
their engagement in the war with Napoleon. The tax was repealed and opponents of the tax, who
thought it should only be used to finance wars, wanted all records of the tax destroyed along with
its repeal. Records were publicly burned by the Chancellor of the Exchequer but copies were
retained in the basement of the tax court.

Convincingly, subjects or citizen has realized the need to contribute towards nation building
through fulfilling their compulsory payment of tax. Harley Lutz however, highlighted on this
issue by saying, ‘’the modern view point 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’’.

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Highlighting the history of Income Tax; the first income taxes were imposed by the U.S.
government to pay for the Civil War. Collected between 1863 and 1871, they were repealed in
1872. Secondly, in 1894 a 2% income tax on personal income over $ 4,000 was enacted. It was
rejected as unconstitutional by the U.S. Supreme Court in 1895. Thirdly, in 1909 a constitutional
amendment was proposed to permit a personal income tax. It was ratified by the required 36
states in 1913 and became law. Taxes have been collected ever since. Later in 1943, a
withholding was introduced to provide a steady stream of income to fund the costs of Waging
World War II. Also in 1952, the Internal Revenue Service was reorganized to end the system of
appointing its agents through political patronage, making it instead a career service.

Lastly, in 1987, the first online tax returns were filed. In 2002, 43.06% of all returns were e-filed
-source. The first Income Tax law in Ghana was thus the Income Tax Ordinance (No.27), 1943.
This ordinance was modeled to a large extent on the general principles underlying the Income
Tax Act then in force in the United Kingdom; it imposed the tax generally on incomes having
their sources in Ghana so that foreign source income was liable unless it was remitted in Ghana.
One characteristic feature of this Ordinance was the numerous personal reliefs’ deductions that it
contained.

Over the years the Income Tax law has seen several changes through amendments, and
modifications, such as the Income Tax (Amendment) Ordinance 1952. The first consolidated
edition of the Income Tax Ordinance was published in March, 1953; the following Acts then
introduced amendments to the consolidated edition Act 68 in 1961, followed by Acts 178 and
197 in 1963 and Act 312 in 1965. The second consolidated edition was published in September
1966, i.e. the Income Tax Decree, 1966 (No. 78). The Income T ax Decree 1975, SMCDS, which
was published in December, 1975, was the third consolidated edition. The current Income Tax
law is the Internal Revenue Act, 2000 (Act 592). This is thus the fourth consolidated edition to
which reference will extensively be made in the discussion.

The earliest taxes in Rome were customs duties on imports and exports. They relied on indirect
taxes instead of direct taxes. Caesar Augustus instituted an inheritance tax to provide retirement
funds for the military. The English and the Dutch referred to the inheritance tax of Augustus in
developing their own inheritance taxes.

Under the earliest taxing schemes an income tax was imposed on the wealthy, office holders, and
the clergy. A tax on movable property was imposed on merchants. The poor paid little or no
taxes. Charles I was ultimately charged with treason and beheaded. However, his problem with
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parliament came about because of a disagreement about the rights of taxation afforded the king
and the rights of taxation afforded the parliament.

The Kings Writ stated that individuals should be taxed according to status and means. Hence the
idea of a progressive tax on those with the ability to pay was developed very early. Other
prominent taxes imposed during this period were taxes on land and various excise taxes on
essential commodities. The excise tax was very regressive, increasing the tax on the poor so
much that the Smithfield riots occurred in those days 1647. The riots occurred because the new
taxes lowered rural labourers ability to buy their needs.

In addition to the excise tax, the common lands used for hunting by the peasant class were
enclosed and peasant hunting was banned (hooray for Robin Hood). This revelation shows that
the basic principles propounded by Adam Smith is lacking that is why nowadays, the increment
of tax rates and introduction of new ones attract opposition and abuses due to their computations,
as well as payments. Governments continue to make tax laws certain to the people.

Ghana in 1983, a new regime had consolidate power and began embarking on major economic
reforms, among the efforts to rapidly increase government revenues. Academic writing and
publication on taxation reform during the period tends to focus on major institutional reforms
undertaken in 1985-86.

These reforms fundamentally re-organized the institutional structure for tax collection creating
the National Revenue Secretariat (NRS), the Internal Revenue Service (IRS) and the Custom,
Excise and Preventive Service (CEPS), all with an expanding degree of independence from the
Ministry of Finance in a pioneering example of a semi- autonomous revenue authority (Terkper
1998).

Yet, while these administrative reforms set the stage for long-term developments in the tax
system, the most dramatic events occurred prior to these reforms as the PNDC, which was
incapacitated by the lack of public revenue, expanded tax collection. Part of the revenue
improvement can be attributed to the Economic Recovery Policy (ERP), which, than, thanks to
the depreciation of the exchange rate, led to increase export and imports, with corresponding
increases in import duties, exploit duties, excise taxes, and sales taxes.

That said, all of the taxes other than export taxes consistently, and sometimes dramatically, under
-performed relative to budgeted expectations. The case of export taxes warrants special attention
due to its centrality to the overall development of the Ghanaian economy and to the decline of
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the late 1970s. While these gains in export taxation were very significant, the more unexpected
source of increased revenue was a dramatic increase in corporate and personal taxation. Sources,
both inside and outside of government attribute these gains to the work of the Citizens Vetting
Committee (CVCs).

These citizens’ committees, reflecting the ideological radicalism of the early years, identified
citizens of conspicuous wealth who were suspected of tax evasion. Where that wealth could not
be accounted for and or taxes had not been paid. The CVCs enforced tax compliance in a
somewhat ad hoc and extra- legal manner, collecting not only annual taxes but also substantial
tax arrears, which accounted for the dramatic surge in revenue form 1983-85.

While many elites resent the events of this period and the methods employed to pursue these
revenues there is no question about the short – term effectiveness of the strategy.

From a political stand point the events of the period reflect the economic crisis of the period, the
entrenched position of the government, and the ideological convictions of the regime. The virtual
collapse of government revenue in the early 1980s created a desperate need to expand the fiscal
capacity of the state, while the government also held a strong belief in the importance of bringing
elites back into the tax net and reviving some notion of a ‘’social contract’’ ( Nugent 1995).

Lurking in the background were the IMF and World Bank, which were equally very strong
advocates for expanded tax collection and devaluation and played an important role that is
widely acknowledged by policy makers. While the rapid pace of reform, and the aggressive
nature of income tax collection, may have been expected to lead a public discontent, the
entrenched position of the government, the introduction of a more supportive policy regime in
rural areas, and an initially high degree of popularity, ensure that citizens largely fell into live.

In the words of one senior tax official, the government ‘’ put the fear of God in them. They were
practically running to the tax office to pay their taxes’’. Ultimately, the expansion of revenue
resulted from a combination of expediency, ideology and outside pressure, all implemented
effectively by government decree.

The rapid decline in corporate taxation was linked to the ideological evolution of the regime but
also had an important technical basis. Technically speaking, the dramatic increase in corporate
tax collection had been reliant on both improved enforcement and the collection of substantial
tax arrears. The collection of arrears implied a massive revenue windfall for government, but,

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evidently, could not go on indefinitely, while it also generated animosity between large tax
payers and government.

Thus the massive decline in tax collection 1988-89 would seem to reflect the confidence of three
factors. First, the technical reality that tax arrears, once paid, cannot be collected again. Second,
an ideological decision by government that with tax revenue stabilized, it was time to reduce the
burden on business and begin to pursue more rapid private sector growth through the reduction
of income tax rate.

And third, a compulsion on government to relax the aggressiveness of the sometimes extra- legal
pursuit of large tax payers, as such method became increasingly unacceptable as the revolution
any fervour of the early PNDC year began to subside. Of course, a reduction in rates was also
consistent with IMF and World Bank Priorities, while business were obviously growing as rates
reduced, but neither group seems to have played a particular dominant role in precipitating the
change. The decline of tax revenue prompted the government to assign the Harvard Institute of
International Development (USA) and the Crown Agent of the U.K to study the current tax
system and to make suggestions improve it. In their feasibility study, they came out with
recommendations.

This led to the introduction of Value Added Tax (VAT) in March 1995. The introduction of
VAT faced a lot of riots and demonstration so it later re introduced in 1998 with the passage of
the VAT Act, 1998 (Act 546). Because of the looming fiscal crisis it was introduced at a
relatively higher rate of 17.5%. However opposition to it brought the rate to 10% when later re
introduced. The VAT consist the importer, manufacturer, wholesaler and retailer. The final
consumer suffers because they bear the tax due to higher prices.

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).

To widen the tax net in the informal sector and the operation of VAT also brought frustration to
some traders in the sector. Complaints about record keeping in the retail sector, the desired
compliance requirements of the invoice- credit scheme. Others perceived complexities of the
invoice credit method of collecting and accounting for the tax problems that dog the
administration. This prompted GUTA, one of the leading trade associations in the country in a
ten- point resolution to the VAT service and copied the Minister of Finance and Trade.

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Due to the political and economical problem which is accentuated, it is from this paradoxical
situation that the Government through Value Added Tax (VAT) Service has introduced VAT
Flat Rat Scheme (VFRS).

1.2 Statement of the problem

The significant role play by taxation in the development of the nation cannot be overemphasized.
Revenue is raised by the government through taxation for its development projects. The internal
revenue service which is one of the main tax collection agencies, has introduced the value Added
Tax (VAT) Flat Rate Scheme as a revenue mobilization strategy.

However, the effectiveness of the VAT Flat Rate Scheme (VFRS) has not been assessed. It is
against this backdrop that this research seeks to assess the effectiveness of the VFRS.

1.3 Research Objectives

The study will proceed with the aim to assess the effectiveness of the VFRS. The research will
be accomplished through adherence to the following objectives:

1. To review about the definition , structures and operations of VAT Flat Rate Scheme;
2. To establish the effectiveness and efficiency criteria for VA FRS.
3. To assess the effectiveness and efficiency of the VAT FRS.
4. To identify the potential problem/ challenges confronting the administration of VFRS by
performing investigation;
5. To recommend appropriate measure to make the VFRS more effective and efficient.

1.4 Research Questionnaire

The analysis of the above stated purposes would be indicated in the following:

1. Why the introduction of the VAT Flat Rate Scheme (VFRS)?

2. How effective and efficient is the VAT FRS?
3. What are the potential problem/challenges to implement an effective and efficient VFRS?
4. How is the VAT Flat Rate Scheme administered?
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1.5 Significance of the Study

The study is intended to provide bases to assess the improvement of introducing VAT FRS with
registered businesses. Mechanism used in the collection of VAT FRS in Ghana gives a clear
distinction of VFRS method which is of great important to the researcher.

1.6 The researcher faces the following challenges.

1. Financial Problems:
The businesses are scattered all over the metropolis so the researcher spend a lot of money on
travelling, from one suburb to the other to seek information.
2. Do not want to give adequate information:
Many registered business owners were reluctant in giving information about the research
since they thought tax payment is secret and confidential.
3. Record keeping problem:
Low record keeping capacities 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
Data collection was restricting to the VAT Office, VFRS registered businesses and non-
registered in the Kumasi Metropolis, hence the findings of the study was generalized to cover
VFRS activities in the Kumasi Metropolis and the VAT Office.
The outcome of this research would be extended to other categories of revenue collectors in the
nation with similar features should be considered, care and extensive analysis and comparison.

1.8 Chapter Organization

The study is categorized into five chapters. Chapter one entails the background to the study,
the problem statement, the objectives, significance of the study, research methodology,
limitations and delimitations.

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The second chapter concerns the definition of concepts and systematic review of existing
Literature with emphasis on historical perspective of VAT in Ghana and introduction of
VAT FRS to simplify computation of tax.
The chapter three is the methodology which entails data collection, questionnaire,
Population, sampling techniques, methods of data collection and the research instruments
employed.
The chapter four would seek to analyze the result and findings.
Lastly, chapter five would consist of the summary, conclusion and recommendations.

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 CHAPTER TWO
LITERATURE REVIEW

2.1 INTRODUCTION

Definition of Tax

Tax is defined by the Cambridge International Dictionary of English as” an amount of money
paid to the government, usually a percentage of personal income or of the cost of goods or
service bought”.

A tax is an assessment by a government unit. All states, local governments and special taxing
authorities, levy taxes. Some taxes are paid by individuals and some by businesses. Both have a
decisive impact on contemporary business. Business taxes reduce profits and personal taxes cut
the disposable incomes that individuals can spend on the products of industry.

Governments spend their revenue from taxes to buy goods and services produced by businesses.
Taxes pay the bills of the government that collects them. Governments also act as transfer
agents, moving tax revenue to other consumers and transferring SSF taxes from the working
population to retired or disabled persons. Government can levy taxes on several different bases
on income, sales, business receipts, property and assets. The type of tax varies from one taxing
authority to another. The individual income tax is the biggest source of revenue for the
government; many states rely heavily on revenue generated from sales taxes. In addition to sales
taxes, some countries collect taxes on earnings.

2.2 Definition of Taxation

Taxation is often defined as the levying of compulsory contributions by public authorities having
tax jurisdiction, to defray the cost of their activities. No specific reward is gained by the tax
payer. The money collected is used for the common good, that is, for the production of certain
social amenities which are more efficiently provided by the state rather than by individuals, e.g.
the maintenance of law and order at home, and defense against external aggression.

Taxation is also regarded as a compulsion on the individual to surrender his control over private
goods and services so as to enable government to rechannel the inputs (monetary or physical)

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into the production of public goods and services. It is a means by which government implements
decisions to transfer resource from the private to the public sector. It is thus a major instrument
of social and economic policy. As professor P.A.V. Ansah puts it “I have come to the conclusion
that tax paying is such an unpleasant thing that anyone who loves paying tax or even pays
without complaining ought to have his or her head examined, but without revenue from taxes
there would be no social life as we know it and we would be nearer to the jungle whence we are
all presumed to have emerged”.

2.3 Effectiveness and efficiency

Many people equate the terms effectiveness and efficiency, however, treating these two related
but distinct concepts as inter changeable only servers to confuse the assessment process.

While effectiveness is the extent to which operative goals can be attained, efficiency is the cost /
benefit ratio incurred in the pursuit of those goals. Efficiency considers the issue of how many
inputs of raw material, money and people are necessary to attain a given level of output or a
particular goal. If two companies make the same product finished the fiscal year with equal
production levels, but the first attained the level with fewer resources invested than the second,
then the first company would be described as more efficient. It achieved the same level of output
with fewer resources / inputs. To be effective, an organization must obtain and efficiently use
resources to achieve operative goals.

2.4 Purpose of Taxation

The main purpose of taxation is to accumulate funds for the functioning of the government
machineries. No government in the world can run its administrative office without funds and it
has no such system incorporated in itself to generate profit from its functioning. In other words, a
government can run its administrative set up only through public funding which is collected in
the form of tax. Therefore, it can be well understood that the purpose of taxation is very simple
and obvious for proper functioning of a state. Taxes are charges levied against a citizen’s
personal income or on proper or for some specified activity.

Further, the other important purposes of taxation are as follows:

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 Increase in effective and productivity of the nation.
 Increase in the quantum of revenue collection.
 Improvement in services of the government.
 Improve employment at all industry verticals.
 Induction of modern technology into the system.
 Rationalization of terms and condition of the economic system.
 Rationalization of employment terms and conditions.

2.5 Attributes of a Good Tax System

A former customs official, Adam Smith in his book, “the wealth of nations” which was first
published in 1778, started the debate of this question in the United Kingdom. Smith set out four
principles that, in his view lead to better taxes. With certain modifications, they still influence
official thinking today. These principles are very significant and they are as true today as in his
days. They are:

 Equity: - The tax system should be fairness to both tax officers and tax payers. The subjects
of every state ought to contribute towards the support of the government as nearly as possible
in proportion to their respective abilities. Ability to pay refers to the economic resources
under a person’s control.
 Certainty: - The tax authorities should make all tax systems and mode of administration
very clear to the tax payers. In other words, tax payers should be made aware about the tax
system being used. They should also be aware about the obligations under the system.
Similarly the tax payer should be aware of the benefit to be derived. Additionally, the time of
payment, the manner of payment, the amount to be paid, the place of payment as well as all
rights and obligations under the tax laws must be known to both the Tax Administrator and
the tax payer, the tax system should be made very convenient to the tax payer. This principle
introduces voluntary tax payment.
 Convenience: - Every tax ought to be levied at the time or in a manner in which it is most
likely to be convenient for the contributor to pay it. The method of collecting the tax should
be such that the majority of tax payers would understand and routinely comply. The
collection method should not overly intrude on taxpayers’ privacy but should offer minimal
opportunity for – non-compliance.

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 Economy: - The tax revenue should exceed the cost to be incurred in generating the tax
administration. Every tax ought to be so contrived as both to take and keep out of the pockets
of the people as little as possible over and above what it brings into the consolidated fund.

2.6 Other attributes include:

 Simplicity: - A major component of economic efficiency is the tax structure’s simplicity that
is what it costs taxpayers to comply with tax policy.
 Elasticity / Flexibility: - A system of taxation ought to respond automatically to changes in
the community’s wealth, population ad other important variables.
 Productivity: - The system ought to produce a high net yield of revenue but not so high as to
damage the source of that revenue.

2.7 Taxation Efficiency

The cost – effectiveness of a tax system is partly a matter of success in enforcement and partly a
matter of the total cost of running it and complying with it. The general opinion is that
enforcement, in the case of income tax, is not showing an appreciable rate of success. There has
been a growth in moonlighting and other forms of tax evasion.

Moonlight is the practice of earning and paying tax on a source of income property, but then
undertaking a second job without declaring the tax. Then, there are the “ghost” – those who earn
income but do not appear on any tax office records and therefore do not pay tax.

There are also hidden compliance costs, that is, the costs incurred by tax payers in paying taxes.
Two notable examples of these compliance costs are the cost of an employer for staff hours
acting as an unpaid collector of income tax for the Internal Revenue Service (IRS) under the
PAYE System. The other is the cost incurred by a trader in complying with the VAT system.
Both may also incur substantial cost for professional assistance and advice concerning tax
affairs.

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2.8 Impact, Incidence and Taxable Capacity

i. The impact of a tax is the pinch of payment and this is on the person who pays the tax
initially, that is, it is upon those who bear the first responsibilities of paying it to the tax
authorities.
ii. The incidence of a tax refers to the ultimate economic burden represented by the tax.
It is the money burden and this is on the person who finally pays the tax and is not
able to pass it on to other. The term thus indicates the “final resting place” of the tax.
iii. The taxable capacity of a country is the limit of a country’s capacity to accept and
absorb taxation and this is determined to a large extent by:
a. The country’s real wealth.
b. The attitude of the population to taxation in general.
c. The type of taxes levied.
d. The possibilities of tax evasion.
e. The level beyond which any increase in taxation might lead to a reduction in national
income (e.g. the effect of taxes on incentive, wage demands, price in creases).

2.9 Types of Tax Systems

1. Progressive Tax System: - It is a system of taxation whereby those with higher income pay
more whereas lower income earners pay less tax. In Ghana PAYE uses progressive system
because the graduated tax rate reflects.
2. Regressive Tax System: - Under this tax system, the higher income earner pays
proportionately lower whilst the lower income earner pays higher. Regressive tax systems are
practiced in few developed countries.
3. Proportional Tax System: - It is a system whereby all persons pay a flat rate of tax
irrespective of the size of your income; you pay the same rate of tax.

2.10 Kinds of Tax

A tax is commonly described as direct or indirect. This distraction is from an administrative

point of view, although it may not always be correct.

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2.10.1 Direct Tax

This is a tax extracted directly from the person who will bear the burden of it (without
reimbursement to the expense of others), as a poll tax, a general property, or an income tax. The
administering authority is the Internal Revenue Service.

Advantages of Direct Taxation

a. Incidence and yield are easy to determine.

b. The taxpayer knows with certainty what he is expected to pay.
c. Yield increases automatically as wealth and population increase.
d. Direct taxes are in general progressive.

Disadvantage of Direct Taxation

a. The cost of administration is very heavy.

b. The effect on incentive, enterprise and savings in the case of those with large incomes, may
be considerable.

2.10.2 Indirect Tax

This is a tax levied indirectly as one which is levied on commodities before they reach the
consumer; but ultimately paid by the consumer as part of the market price. Here the impact and
incidence are of different persons. They are called indirect taxes because the administering
authorities i.e. Customs, Excise and Preventive Service and VAT Service, which levy the taxes
on goods and services, do not collect the taxes from the consumer but do so indirectly through
importers manufactures or other intermediaries. The shifting or passing on of the liability is
effected by loading the tax element on the selling price of the commodities sold to the next
person in the commercial chain until it is finally borne by the consumer.

Advantages of Indirect Taxation

a. Payment and collection of the taxes are easy and convenient.

b. In general, it yield is elastic.
c. Evasion is difficult.

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d. Restriction of harmful consumption, as government policy is possible.
e. Incentives and enterprises are not harmed, as in the case of the direct taxes.

Disadvantages of Indirect Taxation

a. They are often regressive.

b. Revenue may be uncertain where the demand for the taxed good is elastic.
c. Incidence is not easy to determine.
d. They are not always equitable

Revenue Agencies

 The Customs Excise and Preventive Service (CEPS). They are responsible for collecting
Import Duties and Export Duties. These taxes are collected at the entry points of the country.
 The Internal Revenue Service (IRS) is one of the three main organizations in charge of tax
collection in the country. It is required by law that any person intending to do business in
Ghana should register with the service.
 Value Added Tax Secretariat (VATS) VAT is one of the three forms of taxation in the
country. All manufacturers, service providers and wholesalers businesses are required to pay
tax. All retailers of goods who make taxable sales (turnover above 200 million GH cedis a
year).

2.11 Form of Indirect Taxes

Indirect taxes take the following form:

Ad valorem duty: - This is where the rate of duty is determined as a percentage of the valued of
the goods, e.g. wrist watches, 30% ad valorem.

Specific Duty: - This is where the rate of duty is based on some physical attribute or a
combination of physical attributes of the commodity being taxed e.g. weight, gallons. What flour
at ¢25p per kilo.

Excise Duty: - This is collected on only petroleum, tobacco (e.g. cigarettes) beer, spirits and
some soft drinks. This tax therefore has a narrow base. It ca be seen from these examples that the

17
taxation of most of these goods is often to discourage consumption and therefore the rate of
excise duties tend to be high.

Import Duty: - Is collected only on goods imported into the country there is no equivalent duty
on similar goods produced in Ghana. Sometimes raw materials imported for production may
attract import duty.

2.12 Value Added Tax (VAT) in Ghana

VAT is a tax on consumer expenditure and is thus classified as an indirection. VAT is the
common consumer tax adopted by European Union (EU) member states. Its manufacture is set
out in a series of directives made by the EC council of ministers, which have been translated into
status and statutory instruments made by Parliament. VAT is administered by HM Customs and
Excise (Customs), and the main legislation is set out in the VAT Act 1994 some Business
Taxation (FTC Foulks Lynch, 2004).

VAT was first introduced in Ghana on 1st March, 1995 by the VAT Act, 1994 (Act 486) as part
of the Tax Reform Programmed which began in 1993. It was however repealed by the
government on 14th June, 1995 in response to a general public outcry, including demonstrations,
against a steady increase in the prices of goods (including food items) which was blamed mainly
on the introduction of VAT. VAT was reintroduced in 1998 with the passage of the Value Added
Tax Act, 1998 (Act 546) and the Value Added Tax Regulations, 1998 (Li. 1646).

The ensuring discussion will thus make references to these laws. The bulk of indirect taxation is
comprised of the VAT and excise taxes, the latter of which have declined consistently over time.
The VAT was initially introduced to replace the existing sales tax in 1995 under significant
pressure from the IMF, which was concerned about high levels expenditure increases
surrounding the 1992 election. Because of the looming fiscal crisis it was introduced at a
relatively higher rate of 17.5%, with somewhat less public education that may have been
desirable and without the support of the opposition, which was boycotting parliament over
alleged electoral irregularities.

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2.13 Importance of VAT

Currently there is no uniform way of collecting the general consumption taxes. A large portion of
tax on expenses incurred by consumers is collected under the Sales Tax regime by Customs
Excise and Preventive Service (CEPS). Since the sales tax is collected only goods, the IRS is
also charged with collecting a number of expenditure taxes on some selected services. Under the
VAT, all the goods and service taxes will be administered under one regime. Moreover, to ensure
fairness to all taxpayers a number of goods and services which were not previously covered by
the sales or service taxes will be brought together under the VAT regime. It’s only fair that one
citizen pays a tax on his or her expenses and then other citizens must also pay the same on their
expenses. The only exemption will be exempted under the VAT Law. It’s also important to note
that by extending the tax to cover all services and the retail sector, the base of the tax system will
be widened. At the moment, the tax system depends on only a few goods like cocoa, beer,
cigarette and petroleum for a large amount of revenue accruing to the state. This makes the tax
system rather unstable and unfair because it’s over-dependent on these goods. VAT is the only
tax impose on a wide-range of goods and service without undue attention being given to the
place of manufacture of the item (local or imported) or the peculiar nature of the commodity
(luxury and harmful products).

2.14 Exemptions from VAT

VAT covers the sale of goods and services which will not be specially exempted under the law.
The exemption granted under the previous VAT law includes the following:

 Food Stuffs
Produced and sold in the raw state (e.g. rice, millet, cassava, yam, guinea corn, plantain,
vegetables, meat, etc). The traditional forms of smoking, drying frying and cooling didn’t
affect the expression “raw state”.
 Agricultural and fishing inputs specified in the law.
 News papers and books (this does not makes the paper used in producing these items
exempt).
 Petrol, diesel and Kerosine
 Essential drugs approved by the Ministry of Health.
 Transport fares: Land, Sea and Air etc.

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2.15 How VAT is collected

It’s only businesses which will be registered by the VAT authority which can collect VAT from
customers. All businesses which have annual sales above a certain amount are registered to
collect VAT. However the law will permit businesses with lower amounts of annual sales to
register voluntarily. This means that most artisans and petty traders will not be registered for
VAT because they will be exempted. It’s important to note that these businesses will pay VAT
on their taxable purchases and expenses but cannot charge VAT on sale. The VAT paid on
purchases by these small firms may therefore beaded to cost (compare this with the explanation
below for registered businesses). VAT is a consumption tax applied on the value added resulting
from the own-activity of a business enterprise. It is imposed on the expenditure incurred in
buying goods and service.

Value added is the difference between the value of sales and the value of purchased inputs used
in producing the commodity sold.

It is a consumption tax borne by the consumer and it ensures that the same commodity is never
taxed twice by avoiding the taxation of inputs. By its definition as consumption tax, it is a tax
paid by the consumer, often as part of the price. However it is practically impossible to collect
the tax from every single consumer who walks into retail out let to buy a commodity or have a
service.

Rendered to him, thus, the seller that is trader, manufacturer, importer, etc. it’s often registered
as an agent for collecting the tax on behalf of the VAT Service. A registered person or enterprise
making taxable suppliers accounts for VAT for an accounting period which is usually one
calendar month. The amount paid to the tax authorities is the difference between the total VAT
collected from customers on sales (output VAT) and the total VAT paid on purchase and
expenses (input VAT).

Registered tax payers are allowed the cost of production and / or distribution unnecessarily.
However, a registered enterprise or business must be in possession of a tax invoice before it can
claim the input tax credit.

In the case of imports, the business must be in possession of a Customs Entry or other approved
evidence of tax payment approved by CEPS. It should be noted that all registered persons must

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issue tax invoices for the supply of taxable goods or services to their customers and clients and
they should in turn obtain invoices for the supply of goods and services received in their
business.

At the end of each calendar month, all taxable persons must total their Output Tax and Input Tax
and use these to complete the VAT Return issued by the VAT Service. It should be noted that
registered tax payers cannot off set any input tax relating to exempt or non-deductible suppliers
from the output tax on taxable sales.

2.16 VAT Rate

The standard rate for all goods ad services is fixed by law. It is applied as a percentage of the
selling prices or import value of the item. However, a rate of zero percent is applied to all goods
exported and also the locally produced textbooks and exercise books as well as locally
manufactured agricultural machinery and other agricultural implements. No rate is applied to
goods that are exempted by law. Those are outside the scope of the tax. The current standard rate
of VAT is 12.5% as indicated in the VAT (Amendment) Act 2002, (Act 579).

2.17 Taxes Paid On Purchases and Expenses (Inputs) By VAT Registered Businesses

Often VAT registered businesses pay VAT on purchases and expenses related to their
businesses. However, because they need to claim the tax paid, they must request for VAT
invoices from their suppliers, showing the amount of VAT paid. The VAT mechanism makes
provision for these businesses to deduct the VAT paid on purchases (input tax) from the VAT
charged on sales (output tax). Only the difference (or balance) is paid to the VAT Service.

Output Tax less Input Tax payment due since the business is allowed to make this deduction (i.e.
take a credit for the input tax) it is unnecessary to add the input tax to other costs in pricing the
final product. When the input tax is added to other costs, the tax would then be charged on the
cost plus input tax, instead of a tax on value added only, thereby unnecessarily increasing the
final price of the product. In a few cases, the input tax may exceed the output tax. The trader ca
carries the credit form and or reply to the VAT service for a refund provided certain conditions
in the VAT law are met.

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2.18 Tax Avoidance and Tax Evasion

Tax avoidance is an arrangement of one’s tax activities or tax transactions with the aim of paying
minimum tax. It is not an offence to avoid the payment of tax. This is because the person
avoiding the tax has planned his /her tax abilities to take advantage of the tax laws. For instance
ABC limited does nothing wrong by establishing its company within the free tax zone defines by
the government tax law.

However, there are some specific tax avoidance strategies mentioned by law described as illegal
ad these could be equated to tax evasion and it includes among others. Tax Evasion is a
deliberate attempt made through illegal means with the aim of not paying tax at all or paying a
small amount of tax. This is a crime punishable under the laws of Ghana. Tax evasion is a crime
and an old problem.

Centuries ago Patio observed that where there is an income tax the first man will pay more and
the unjust less on the same amount of income. If a tax on books is levied and you sell fever
books, it is tax avoidance. If you fail to report you sales of books to the government, it is tax
evasion. Some of the common ways people commit tax evasion are as follows.

a. Keeping two sets of books to record business transaction. One records the actual business
and the other contains false records and this is shown to the tax authorities. Others use two
cash registers – actual ad false, presenting the false cash record for tax assessment.
b. Working an extra job for cash. Though, there is nothing illegal in working an extra job or
overtime however, in may cases, the payment is done by cash and not in cheque, hence there
is o legal record and the income is not recorded to the tax authorities.
c. Engaging in barter trade. “I will write up your books for your as an accountant if you give me
two bags of rice every month”. When the payment is mad in kind as above instead of by
money, it is legally a taxable transaction; however, such income is seldom reported.
d. Dealing in cash transaction, which is paying for goods and services with cash or by cheques,
made out to “cash” and not the payee’s name makes it very difficult for the Internal Revenue
Service to take transactions.

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2.19 Supplies

“Supply” is used to refer to refer to the supply of both goods and service (5.9 and 10 of Act 549)
whether taxable or exempt the term “taxable supplies” refers to supplies of goods and services
made by a registered person for consideration in the course of, or as a part of the person’s
business activities and include the following transactions (5.13).

i. The sale, supply or delivery of taxable goods to another person including imports.
ii. The sale or provision of taxable services to another person.
iii. The appropriation by the registered person of taxable goods for his personal use or for use
by other.
iv. The making of a gift of any taxable goods or taxable service in the course of business.
v. The letting of goods on lire, leasing or other transfers.
vi. The acceptance of a wager or stake in any form of gambling, including lotteries or
gamming machines.
vii. The processing of data or supply of information or similar service.
viii. The supply of staff.
ix. The sales, transfer, assignment, or licensing of patents, copyrights, trademarks, computer
software and other proprietary information.
x. Any other disposal of taxable goods or provision of taxable service.
xi. Exports of non-traditional products. A supply is made for consideration if the supplier
directly or indirectly receives payment wholly or partly in cash from the customer / client
or from any other person.

2.20 Exempt Supplies

A number of goods and services are exempt fro VAT under the VAT law (Act 546 – 5.15 ad
schedule) goods and service which are exempt.

 Live Animals:
All live animals such as cattle, sheep, horses, asses, mules, hinnies and similar exotic
animals.

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 Goods for the disabled:
Articles designed exclusively for use by the disabled.
 Educational Service / Items:
The supply of educational services at any level by a educational establishment approved by
the Minister of Education. Laboratory equipment and fully assembled computers imported or
produced locally by educational establishment approved by the Minister of Education.
 Medical Service and Pharmaceuticals:
Medical service, essential drugs are listed under chapter 30 of the “its code” produced or
supplied by retail in Ghana specified active ingredients for essential drugs and selected
imported special drugs determined by the ministry for Health and approved by parliament.
 Transportation:
Include transportation by bus ad similar vehicles, train, boat and air.
 Machinery:
Machinery, apparition, appliances and parts there of, designed for used in
a. Agriculture, Veterinary, Fishing and Horticulture.
b. Industry
c. Mining (as specified in the mining list) and dredging
d. Railway and tramway
 Crude oil, and hydrocarbon products:
Petrol, Diesel, liquefied petroleum gas, kerosene, residual fuel oil.
 Land Building and Construction:
Land and building:- the granting, assignment or surrender of an interest in kind or buildings,
the right to occupy and or buildings excluding hotel accommodation, warehousing, storage
and similar occupancy incidental to the provision of the related services. Civil engineering
works relating to public infrastructure this exemption exclude professional service such as
architectural or surveying (i.e. these are taxable services).
 Financial services:
Provision of insurance; issue, transfer receipt of, or dealing with money (including foreign
exchange) or any note or order of payment of money; provision of credit; operation of any
bank (or similar in situation) account this exemption excludes professional advice such as
accountancy, investment and legal (i.e. these are taxable services).

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 Animals, livestock, poultry ad fish imported for breeding purpose:
Live asses, mules and hinnies, live bovine animals, live swine, live sheep and goats, live
marine mammals, live fish and aquatic invertebrates.
 Animal product in its raw state produced in Ghana:
Edible meat ad offal of the animals, livestock ad poultry earlier listed, provided any
processing is restricted to salting, smoking, freezing or similar simple processes of
preparation or preservation. It excludes pate, fatty livers of geese ad ducks and similar
products (i.e. these are taxable).
 Agricultural and aquatic food product in its raw state produced in Ghana:
Fish, crustal beans and mollusks, vegetables, fruits, nuts, coffee, cocoa, Shea butter, maize,
sorghum, millet, tubers, guinea corn and rice. These animals are considered to be in their raw
state even if they have undergone simple processes of preparation or preservation such as
freezing, chilling, drying, salting, smoking, stripping or polishing.
 Seeds, bulbs rooting and other forms of propagation of edible fruits, nuts, cereals, tubers and
vegetables.
 Agricultural inputs:
Chemicals including all forms of fertilizers, acaroids, fungicides, growth regulators,
pesticides, veterinary drugs and vaccines, feed and feed ingredient.
 Fishing Equipment:
Boats, nets, floats, twines, hooks and other fishing gear as well as imported inputs for fishing
 Water:
Supply of water excluding bottled and distilled waters (i.e. bottled and distilled waters are
taxable).
 Electricity:
Domestic use of electricity up to a specified consumption level prescribed in regulations by
the minister and compact florescent lamps (i.e. all commercial use of electricity and domestic
consumption above the limit specified is taxable).
 Printed Matter (books and newspapers):
These must be fully printed or produced by any duplicating process. It includes atlases,
books, charts, maps and music. (It must be noted however that locally produced textbooks
and exercise books are taxable at zero rate). The exemption excludes imported newspapers,
plans ad drawings, scientific and technical works, periodicals, magazines, price lists, greeting
cards, almanacs, calendars and stationery. These are taxable at standard rate.
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 Transfer of a Going Concern:
This is the supply of goods as part of the transfer of a business as a going concern by one
taxable person to another taxable person.
 Postal Services:
Supply of postage stamps (i.ie. other commercial services rendered by postal agencies are
taxable).

 Salt:
Denatured salt, compressed salt used in animal feeding and salt for human consumption
including table salt.
 Mosquito Net:
Mosquito nets of non-made textile material whether or not impregnated with chemicals.
 Musical instruments:
As listed under chapter 92 of the “its code. VAT is to chargeable on the sale of exempt
supplies but at the same time no credit may be allowed to the business making exempt sales
for the VAT paid on purchases or expenses applied for he purpose of the exempt sales
5.24(3). The business can however recover these input taxes by including it in the cost of
production / distribution. It must be noted that businesses which make only exempt supplies
are not eligible to register for VAT.

In VAT could serve as part of a large-scale tax reform strategy. VAT stands for Value Added
Tax. This type of multistage tax on goods produced has achieved widespread adoption in several
countries worldwide, though as yet, the VAT is yet to employ such a system. A VAT passes
taxes on a given product through the manufacturing pipeline, raising the price of the product
during the production phase instead of adding a separate sales tax at the time of purchase.

2.21 Initial Concept

According to former treasures department adviser and Fobes Contributor Bruce Bartlett a
German Businessman named Wilhelm Von Siemens first developed the VAT concept as a
response to the double-levying of manufacturer excise taxes commonly seen after the First
World War Siemens envisioned a chain of tax payments in which each link in the production

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chain would receive a credit for taxes previously paid in the production chain, eliminating double
taxation.

2.22.1 Process

According to CBS News, most value added tax systems assess a tax on a product at multiple
stages of its production, including materials purchasing, manufacturing, shipping ad retail sale.
Each participating company keeps a record of the entire taxation chain, deducting the tax
payment made at the pensions point in the chain to calculate it own VAT. The accountability and
visibility of the VAT chain makes cheating or payments almost impossible. At the same time, the
fact that the VAT does not appear on shoppers receipts allows it to recede from public
consciousness.

2.22.2 Rate

VAT rates vary from nation to nation, ranging from Japan’s five percent to the 25% rate seen in
Sweden and Hungary, according to worldwide tax. Some European countries have introduced a
VAT at a relatively low rate and then raised the rate as needed over time. Among the Americas,
Canada currently imposes a five-percent VAT while braid’s VAT ranges from 17 to 25%.

2.22.3 Variations

Because of the rate, value added tax would hurt lower income citizens’ more than higher income
citizen. Some proponents have suggested combing it with other reforms to the current tax
systems. Michael Gratz, a law professor at Columbia University has suggested combing a VAT
of 10 to 14 percent with renditions in income and corporate taxes at all income levels, and people
earning less than$100,000 per year paying no income tax.

Ref. Forbes: VAT Tim (14).

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2.23 Formal Sector Taxes

The government has shown an increasing desire to tax the informal sector and has introduced
several taxes to specifically target informal sector operators. These include the Vehicle Income
Tax on public transport operators, the Tax Stamp for collecting income tax from small traders
and the Flat Rate Scheme for expanding the reach of the VAT these taxes all collect relatively
very little income, but the government is determined to continue to expand their collection.

Challenges of the Informal Retail Distributive trade sector under the invoice – credit system from
the perspectives of both Retail Trade Associations and the VAT service the present initiative
which as seen Ghana Union of Traders Association (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:

1. Difficulty in claiming back input VAT as traders do not have invoices for purchases from
traders that are not VAT-registered.
2. Low record keeping capacities of small scale retailers which in evitable increases the burden
of compliance.
3. Unfair competitive advantage in favour of non-VAT registered retail businesses.
4. 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.

2.24 Tax Administration

Despite dramatic improvements in tax collection and the success of Ghanaian tax collection
relative to its neighbours, there is little doubt that taxation remains subject to very large leakages.
These leakages are more a question of administration than of policy, which is a reflection of the
off-cited claim that in developing countries “tax administration is tax policy” casanegra de
jantscher, 1990.

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2.25 Problem Identified

a. Who is addressing the case of leakage ad non-compliance of the tax payer?

b. What about those evading tax?
c. Who is to list them?
d. What was the impact of taxes introduced earlier in this country?
e. What happened to the introduction of VAT ad the controversial under cover NYEP, Talk
Tax?

2.26 The VAT Service Management Holds Work Shop on Flat Rate Scheme

Deputy Minster of Finance, Professor George Gyan-Baffour said on Tuesday August 15, that the
introduction of VAT Flat Rate Scheme to get operatives in the informal sector to register and pay
tax would not come with prescriptions of any new laws on VAT. Rather, he said, the scheme was
general towards the simplification of the provisions in the VAT Act, 1998 (Act 546) and its
subsidiary legislation aimed to optimize revenue collection at the informal retail level. Prof.
Gyan-Baffour was speaking at the opening of two-day training workshop for the Management of
the VAT service on the features, benefits and mechanics of the Flat Rate Scheme. The document
to enforce the three percent flat rate scheme, which is currently before the Revenue Agencies
Board, requires the VAT Service to register businesses with yearly turnover of 200 million cedis
to a when it becomes operational. But the VAT Servicer Senior Staff Association (VATSSSA)
has called on the authorities to exercise caution to ensure that the experiment was not abuse to
devalue the key objectives for introducing VAT.

1. They called on the ministry of finance to limit the flat rate scheme to small scale enterprises
of limited turnover band so as not to discourage investments into other sectors, notably
manufacturing. Professor Gyan-Baffour said the scheme, which was easy to operate, would
lead to a reduction in the cost of compliance and ensure flexible record-keeping regime.
2. Besides, it would facilitate the compliance of small-scale enterprises. Professor Gyan-
Baffour, however, warned that these intrinsic advantages of the scheme would be mere
rhetoric unless tax returns and invoices wee simplified in structure and language to make
them comprehensible to the average taxpayer.

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3. There is also the need to intensify education while notices ad statements on the scheme must
be in simple ad plain terms that are understood by the taxpayer.
4. In addition, technical training sessions on the scheme should be organized for staff on
sustained basis to equip them with skills and competences. He, therefore, urged the service
not to compromise on the control mechanisms built into the scheme to make its
implementation effective. Mr. Anthony Ewereko-Minlah, VAT commissioner, said the
scheme was part of interventions to under the tax net ad to collect move revenue for
development. He said the VAT service was working hand-in-hand with GUTA for education
purposes to ensure Voluntary Compliance with registration and collection of the tax.
5. The service is also embarking on various programmes to educate personnel to enhance skills
for enforcement purposes. The VAT service hopes to start the implementation of the scheme
in October 2006 – GNA.

2.27 VAT Flat Rate Scheme in Perspective

Government, in its vision of bringing rapid development to the nation and reducing poverty o a
sustainable basis as articulated by the GPRSI and II documents has over the years consistently
pursued tax reform policies geared towards the simplification of the compliance requirement of
tax legislation in general. It has encouraged, in particular, tapping into the immense revenue
potential of the retail /informal sector in the nation’s collective effort to, in the medium to long
term, build a buoyant revenue mobilization base to wholly support government expenditure
budgets there by reducing support from her developmental partners.

In consonance with this vision and recognizing:

i. That in an enraging economy like Ghana with low level of literacy and low record keeping
capabilities 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 trade frustration and the difficulties that dog the
administration of the tax within the sector, the VAT service in its Action Plan dating back to
2005, has consistently proposed a number of initiatives for the sector, the most significant
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 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, on a ten-point resolution to the VAT service, copied to the Minister 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 that 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 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 proposed by
the minister of finance and economic planning in the 2006 budget statement and economic
policy that a special that rate scheme for the informal / retail distributive trade sector would
be evaluated for implementation in the course of the year.

2.28 Operative of VAT Flat Rate Scheme

The Value Added Tax (VAT) Flat Rate Scheme became operative effective September, 2007.
Mr. Anthony Ewereko Minlah, Commissioner of VAT service, announced at the launch of the
scheme on Thursday. The VFRS is a simplified tax collection system that will ensure that
retailers of goods and supermarkets charge VAT NHIL at a marginal rate of three percent.
Addressing members of the Ghana Union of Traders Association (TUTA), Mr. Minlah noted that
it was a social obligation for people to voluntarily pay taxes due the state and urged the
consuming public to always demand VAT receipts /invoices for services and goods they pay for.
The VAT commissioner noted that credible enforcement of the scheme was an integral part of
any compliance strategy as it acted not only to dater tax evasion, but also service to remind
taxpayers that the VAT service was working to maintain the fairness of the tax system by
ensuring that everybody paid their share.

Mr. Minlah said, cooperation between the VAT service and businesses was the foundation for
meeting the challenges of the future and commanded GUTA for their contribution in making the
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scheme a reality. “However, cooperation should not be misconstructed to mean that the service
will link at wrong doing”, he said. He stressed that the service would not hesitate to apply
sanctions to defaulting traders and urged all qualified traders and businesses to voluntarily
register if they had not already done so.

The commissioner of the VAT service may also compile only register any business that qualifies
but refuses to apply for registration. The punishment for business that deliberately refuses to
register is a fine of 10millon cedis or imprisonment for a term not exceeding five years or both.
In addition business or individuals will be liable to pay the amount of tax not collected on
taxable sales made from the date registration should have taken place. Finally the VAT officers
had been on the field to conduct on-on-on education and registration of business in the retail
sector and had so far registered over 3,000 new retailers.

2.29 Ministry of Finance Involvement

Mr. Kwadwo Baah-Wiredu. Minister of Finance and Economic Planning officially launched the
scheme and noted that the fundamentals of any economy included a strong revenue base and
Ghana was no exception. “Tax revenue plays a crucial role in the economy. It represented about
21 percent of the Gross Domestic Product (GDP) as at December, 2006, up from about 16
percent in 2000” he said. Giving statistics, the finance minster said the country’s revenue
envelop was only 54.3 trillion cedis (GH¢5.43billion) out of which 37.5 trillion cedis (GH
¢3.75billion) was realized from domestic taxes. He said in the 2007 budget, the country’s total
need was projected at 100 trillion (GH¢10billion) hence the remainder of the country’s need
came as support from development partners. Simpliar, our domestic revenue is far lower than our
development needs. This is critical for all of us, not only for the government.

Mr. Baah-Wiredu expressed concern about the inability to meet the revenue target and said it
meant the government would not be able to provide the needed public goods. Explaining further,
he said the law revenue generation also meant that government must go borrowing form banks.
He thanked GUTA for proposing the concept of a flat rate scheme for the informal / retail sector
and said; it was a good example of public-private partnership. Efforts were made to ensure a
smooth implementation of the scheme and called for more publicity messages in the form of
flyers and brochures targeted at both customers and retailers.

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2.30 Chairman of the Revenue Governing Board Involvement / Comments

Mr. Osei Kwabena, chairman of the Revenue Governing Board, said the scheme marked a
significant step in simplifying the tax collector system. He stressed the need for all businesses to
voluntarily register and comply with the VAT Flat Rate Scheme saying, it was a step in the right
direction, which would ginger voluntarily compliance. Mr. George Kwaku Ofori, Acting
President of GUTA, advocated that all traders should be part of the scheme, said members of the
association had earlier companied that the 12.5 percent paid was high. He, however, said
members had now agreed to work with three percent while identifying problems associated with
the implementation for future review. He urged businesses to register as a matter of urgency to
avoid facing penalties. The VAT service donated three vehicles to GUTA to facilitate their
contribution of educating the public about the scheme.

2.31 Reasons for the 3% Flat Rate.

The flat rate of 3% was chosen because:

1. The effective tax rate of the retail sector averages around 3%.
2. The tax payable at a flat rate of 3% is equivalent in value to the effective tax payable by
retailers on the current invoice-credit scheme at a rate of 15% which employs the input-
output mechanism.
3. Given that the VFRS does not allow recovery of input tax from output tax, the flat rate of 3%
on the selling price is not likely to cause any loss in the total revenue when compared with
transactions under the invoice-credit scheme which requires the application of 12 1/2% VAT
and 21/2% NHIL on sales and simultaneous recovery of input tax.
4. The rate of 3% lends itself easily to splitting between VAT (2 1/2%) and NHIL (1/2%).
Qualifications for operate VFRS only retailers of taxable good who are currently registered
with the VAT service and those who will subsequently be registered for VAT qualify to
operate the VFRS. Retailers of goods registered under the VFRS would be provided with
special decals indicating that they are authorized to operate the scheme. It is important to
note that retailers of taxable goods who are not registered to operate either the VFRS or the
invoice-credit scheme cannot by law charge VAT/NHIL.

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 However, manufacturers, wholesalers, service providers as well as retailers authorized by the
Commissioner of the VAT Service to operate the invoice-credit schema cannot operate the
VFRS.

Item that Registered Retailers cannot charge the VFRS.

The VFRS does not change the tax status of goods and service supplied. Goods and services
specified as exempt suppliers under the VAT Act 1998 (Act 546) as amended remain exempt. In
the same way, the status of Zero-rated and relief suppliers remain uncharged. Therefore a VFRS
operator is not required to charge the tax on-exempt items stated under schedule 1 of the VAT
Act such as.

i. Agricultural products in their raw state produced in Ghana.

ii. Agricultural inputs
iii. Fishing equipments
iv. Mosquito nets
v. Postage stamps
vi. Goods designed for the exclusive use of the disable.
vii. Petrol, Diesel and Kerosene
viii. Essential drugs approved by the Ministry of Health (MOH)

Income Tax Ordinance (No.27), 1943, This ordinance was modeled to a large extent on the
general principles underlying the Income Tax Act then in force in the United Kingdom; it
imposed the tax generally on incomes having their sources in Ghana so that foreign source
income was not liable unless it was remitted in Ghana. One characteristic feature of this
ordinance was the numerous personal reliefs and dedications that it contained.

Over the years the Income Tax Law has seen several changes through amendments and
mortifications, such as the income tax (Amendment) Ordinance 1952. The first consolidated
edition of the Income Tax Ordinance was published in March, 1953. The following acts then
introduced amendment to the consolidated edition Act 68 in 1961, followed by Acts 178 and 197
in 1963 and Act 312 in 1965. The second consolidated edition was published in September,
1966, i.e. the Income Tax Decree, 1966 (No.78). The Income Tax Decree 1975, SMCD 5, which
was published in December, 1957, was the third consolidated edition. The current Income Tax
Law is the Internal Revenue Act, 2000 (Act 592). This is thus the fourth consolidated edition to
which reference will extensively be made in the discussed.

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Other factors such as tax reliefs, exemptions, remittances, avoidance, evasion etc, impede the
efforts of these revenue institutions to achieve their given targets. Macro and Micro economic
conditions in a country are known to have an influence in the revenue mobilization capacity of
that country. Among these economic conditions are interest, exchange and inflation rates. All
these economic indicators invariably depend on the action of various forces which changes from
time to time. All hands must therefore be on dock to make the integration a success by racking in
more revenue for national development. More so as, its has become necessary due to lee fact that
Ghana’s GDP has now risen to Gh¢44.8 billion after rebasing. This has now classified Ghana a
middle-income status though low. This means that Ghana has to do everything possible to
increase significantly it tax revenue collections to match its current status. The integration has
thus appears to have come at the appropriate time. Countries like Kenya, Uganda and others here
already pared the way for successful integration of tax revenue agencies in their respective
countries. Ghana cannot afford to fail. The writer works with the GRA Domestic Revenue
Division (VAT).

Source: email adaahluke@yahoo.com. By Francis Yaw Daah some BFT

2.31 Tax Reforms in Ghana the Way Forward

Governments all over the world depend largely on tax revenue for their developmental projects.
There is therefore the need to mobilize more revenue to match fiscal expenditure in order to
reduce budget deficit. This is more so if the country is to achieve its developmental objectives. It
is in the light of this that institutions, organizations and agencies are established solely to
mobilize revenue for the state.

Until the end of December, 2009 in Ghana, three main tax agencies, namely the Internal Revenue
Service (IRS), customs Excise and Preventive Service (CEPS) and the value Added Tax Service
(VATS) were establish to mobilize tax revenue for the state. These revenue institutions have
gone through several changes since their establishment. The IRS was one of the three main tax
revenue intuitions charged with the collection ad administration of direct taxes in Ghana. The
service started with the name Income Tax Administration Department in the then Gold Coast in
September, No. 27 of 1943. Initially, the Department Collected Tax from only a few limited
liability companies and a very small number of individuals. Over the years, other taxes and
duties wee added to the income tax. These were Mineral Duty (1952), Betting Tax (1952) and

35
Casino Revenue Tax (1955). Between 1961 and 1963, additional taxes and duties were
introduced. Among these was Property Tax (1961), Entertainment duty Tax (1962), Airport Tax,
Hotel Customers Tax, Standard Assessment and Excess Profits Tax, all in 1963.

In July 1963, with addition of more taxes, the Income Tax Department was renamed central
Revenue Department to reflect the broad scope of taxes collected.

From 1943 to 1985, the department was a civil service department. In July 1986, government
took a decision on structural changes in the department. The IRS law 1986 (PNDC law 143) was
passed. This law transformed the hither to Central Revenue Department into a public service
organization, the IRS, with its own Board of Directors. This principal enactment was replaced
with the Internal Revenue Act 2000(Act 592) as amended.

The Custom Excise and Preventive Service (CEPS) was a tax revenue institution that contributes
most to be government’s consolidated fund. It was established in 1839 and has performed several
functions through the years as a civil service department. However, in 1986 it became an
autonomous institution under PDC Law 144 of 1986. At present CEPS law 330. Under the CEPS
management law, the service is tasked to among other things collect the understated taxes:
Import Duty, Export Duty, Petroleum Tax, Import Excise, Excise Duty and any other taxes
levied on imported and exported goods. CEPS also have the duty of performing duties on behalf
of a number of government agencies. The most significant of thee duties was the collection of
import VAT on behalf of the VAT service. The service also enforces laws and regulations on
imports and exports. As part of its functions, CEPS collected other important government levies
including: ECOWAS levy for the ECOWAS Secretariat, Export Development and Investment
Fund (EDIF) for the EDIF Secretariat, Exploration levy on behalf of Ghana National Petroleum
Corporation (GNPC), Energy find or Energy Commission and Road Fund for the Road Find
Secretariat. Also as part of its preventive and securing functions, CEPS was tasked to ensure
protection of the revenue. It collects by preventing smuggling. This is done through examination
of documents and goods imported and exported from the country and also patrolling the frontiers
and other strategic points to prevent smuggling.

The VAT Service (VATS), the youngest of the three tax agencies was first introduced in Ghana
on 1st March, 1995 by the VAT Act, 1994 (Act 486) as part of the Tax Reform Programme which
began in 1993. It was however withdrawn by the government on 14 th June, 14995. This was in
response to a general public outcry against a sudden increase in the prices of goods (including
foods items) which was blamed mainly on the introduction of VAT. VAT was reintroduced in
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1998 under the valve; Added Tax Act, 1998 (Act 546) and the VAT regulations, 1998 (L1 1646).
Its primary aim was the administration and collection of the value added Tax (VAT) that
replaced the sales and service Taxes previously administered by customs, Excise and preventive
service (CEPS) and the IRS, respectively.

The VAT service was mandated to collect indirect taxes (i.e. taxes on goods and services). The
Value Added Tax rate from inception was ten percent (10%). However, in 2000, an At of
Parliament, (Act 579) was passed to amend the rate to twelve and a half percent (12.5%); the two
and a half percent (2.5%) was to be give to the Ghana Education Trust Fund (GET Fund)
Secretariat to support quality education delivery ad infrastructural development. In 2004, another
Act of parliament, (Act 650) was promulgated to add a further two and a half percent (2.5%) to
support NHIS. This additional rate was called HIL.

The service in its quest to mobilize move revenue, from 1 st September, 2007 introduced a special
method of collecting and accounting for VAT called the VAT Flat Rate Scheme (VFRS). It was
designed for traders operating I the retail sector only who charged a marginal rate of 3% on the
value of each taxable item sold.

2.32 The Ghana Revenue Authority

As part of the tax reforms strategies in moving with the modern trend of tax revenue
mobilization in the global world, the GRA was established. This was to integrate the three main
tax revenue institutions for improve revenue mobilization. The GRA is a semi-autonomous
public institution which as a corporate body by the Ghana Revenue Act, 2009 (Act 791) passed
on 31st December, 21009. This was passed to replaces the Revenue Agencies Governing Board
(RAGB) and also the customs, Excise ad preventive taxes and customs duties in Ghana.

The passage of the GRA Law in December 2009 and the subsequent appointment of a
commissioner.

General in March, 2010 are significant landmarks and attest to the quest of government for
improve revenue collection. Under the GRA Act 791, the commissioner General is the Chief
Executive Office of the Authority who reports to the board. The GRA has three divisions namely
the Domestic Tax Revenue Division (DTRD), the customs Division and the Support Services

37
Division. Each to the Division is to be headed by a commissioner who will report to the
commissioner General.

2.33 The way forward

The integration of the three main tax revenue institutions is a major step of modernizing tax
revenue collection in the country. This brings the focus on functional revenue administration and
improved customer service delivery.

Expected benefits with the integration of the revenue institutions for the country and tax payers
are enormous. Some of these include providing a holistic approach to Domestic Tax and
Customs Administration.

Promote efficient collection of revenue and the equitable distribution of tax burden; ensure grater
accountability to government for the professional management of tax administration. More
importantly, it would enhance revenue mobilization through the use of a common data source
and provides effectiveness through the use of shared services within the information. Technology
system as well as better customer services delivery and providing common tax procedures that
would enable tax payers to be governed by a single set of rule and tax enquires.

Since the successful implementation of policies of every government in any country lies in its
ability to raise revenue, it is imperative on government to put in the needed effort to achieve its
revenue targets in order not to throw government plan eat of gear. Whenever any revenue
institutions fail to achieve its target, it is either attributed to the fact that the give targets are
mostly unachievable, or better still unrealistic considering the economic conditions prevailing in
the country as that particular point in time.

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 CHAPTER THREE

METHODOLOGY AND SCOPE OF THE STUDY

3.1 Introduction

This chapter is concerned with the sources of data collected, the population, sampling techniques
used and the sampling size. It also explains the instruments employed in collecting data, data
collection procedures and problems encountered during the research. Besides, the research
analyses the data collected and presents the result for this study.

3.2 Area of Research

The research was conducted at Kumasi metropolis, the administrative capital of the Ashanti
Region of Ghana in general and VAT office in particular. The Kumasi metropolis ‘’Garden city’’
covers an area of about 254 square kilometers and has VAT Flat Rate Scheme(VFRS) registered
business scattered all over the metropolis.

The VAT office is located at State Insurance Company (SIC) Building, Near Prempeh Assembly
Hall. The major functions of the metropolitan VAT office includes, Ensure that registered traders
have files, issue VAT certificates, confirm the accuracy of returns filed and payment made,
provision of VAT education, examine business records method and procedures, prosecute those
traders engaged in tax evasion as well as those recalcitrant traders.

Taking Kumasi metropolis as a whole and VAT office specifically, was to show diligent care and
effort due to its representation, easy to approach and limited time constraints as well as financial
problems. To make possible this study covers the entire VAT fraternity in Ghana and to give a
holistic view.

3.3 Sources of Data Collection

For the purpose of this study, two types of data were used. These are primary and secondary
data.

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The primary sources of data were:

Observations: The researcher considered all staffs of the VAT Service office in Kumasi,
Wholesalers, Retailers, service providers and a section of the consuming public in the
metropolis.

Questionnaires: Questionnaires was the main instrument employed to seek quantum of data. The
items in the questionnaires were open – ended, close-ended and multiple - choice questions,
skillfully administered for the study.

The secondary source of data:

Review of literature meets the secondary data required by the research. Secondary data
comprised of concepts, definitions, past statistics, and research results contained in raw data and
published summaries to serve as the foundation and context for the study. Secondary data
extracted from selected books, journals, internet and magazines on the study topic.

Documentary data, extensive interview-based data and others were compiled from revenue
agencies about their views on the introduction of VAT Flat Rate Scheme as a revenue
mobilization strategy.

The interviews comprise the most important research input, for two reasons. First, because there
is a little existing literature on the Ghanaian tax system in general but that of VAT FLAT RATE
SCHEME is significant, interviews are the most viable method for capturing the historical
evolution of VAT.

Moreover, interviews ensure that the study told reflects an assessment of what changes appeared
most important to the administration of the scheme. Secondly, the fundamental questions being
posed by the research deal with the tax administration and its efficiency.

In this study, both qualitative and quantitative research methods proved useful as structural and
contest guides for the research. In terms of data collection approach, the study focuses on
literature review and a case study investigation to address the objectives of the project work in
other to assess the effectiveness and efficiency of introducing VFRS.

This research explores various sources of secondary data on VAT FRS to find information
supporting the research objectives. The study utilizes the qualitative research method because the

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research requires definitions of ‘’effective’’ and ‘’efficient’’ in the context of assessing VFRS
Administration.

Questions were carefully and skillfully administered to seek need information to accomplish the
objective of the study.

3.4 Sample Size and Sample Frame

Investigation refers to the inquiry and examination of gathered facts and information in order to
determine solutions to a problem (Northmore 1994).

The researcher considered all categories of groups in the Kumasi metropolis for investigation.
They are as follows:

25 Staffs of the VAT office, Kumasi

10 Wholesalers

45 Retailers

5 Service providers

35 Consumers of goods and services.

In totality, a sample size of 120 people was taken into consideration because of financial and
time constraints of the researcher.

3.5 Sampling Techniques

Sampling is the act or process of selecting a sample for testing and analyzing. The researcher
employed purposive sampling in the selection of samples in the study area.

Purposive sampling type has a reasonable cost and reasonable control over sample content. It
works with small sample size and representation is by choice. The researcher considered giving
equal right to select males and females in the strata or group.

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This gives opportunity to the researcher to sample the view of all the strata’s under investigation
as to assess the effectiveness and efficiency of the introduction of VFRS as a revenue
mobilization strategy.

A self- administered questionnaire were sent, under personal cover to all members of the strata.
Besides, selecting a representative, accurate and unbiased research sample is an important step
towards the success of the study.

Random selection of the individual observations of the research sample is a significant way to
obtain an accurate and representative sample. The research questionnaire emphasized on
questions relevant to the objectives.

Observation is also a valuable source of data. The researcher made interesting revelations
through observation when visited some shops in the metropolis, both retail and wholesale. The
views were discussed in detail in the next chapter. The respondents of few traders refused to
complete the questionnaires: claiming that it is sensitive and confidential information.

Completed questionnaire and apologies for lack of co- operation for understandable reasons were
received from the others.

3.6 Research Population

Population consists of the summation of items which samples can be drawn. This study is
centered on the VAT Service office and the Kumasi metropolis. Also, the population constituted
staffs of the VAT office, Retailers, Wholesalers, Service Providers and a section of the
consuming public. Other revenue agencies that collect VAT on behalf of the government were
consulted for this study.

Completed questionnaires of 120 were sent, but 105 were returned and it was necessary to
discard 5 of these, so that the research has 100 reports to be analyzed.

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3.7 Data Collection Techniques

The data collection technique forms main part of this study. Taken into account, the researcher
used questionnaires to gather needed data and also used published materials, such as newspapers,
scholarly journals and government documents.

Reliability text has been carried out on the questionnaire to explore its internal consistency,
based on the average inter-item correlation. The result of the reliability test shows that, the
questionnaire design is highly reliable, and the collected data related to the assessment of
effectiveness and efficiency of introducing VFRS as a revenue mobilization strategy.

3.8 Data Analysis and Interpretation

The researcher used both qualitative and quantitative methods in the data analysis. The collected
data had been analyzed using the statistical package for social science (SPSS) version 16.
Descriptive statistics (such as frequencies and percentages) of the collected data had been carried
out to recognize the main characteristics of the research variability.

Data collected was analysed using quantitative statistical models such as pie chart and bar graph.

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