TAXATION Report

The republic of GHANA

A report on the effectiveness of Value Added Tax and National Health Insurance Levy in the Republic of Ghana (September 2006)

By Sadat S Karim, Senior Consultant – Legal & Taxation, Karim & Powell Consultancy.

Ghana has been striving to rationalize its taxation regime over the past decade with a view to meeting its objectives on optimizing taxation revenue and meet revenue expectations across various sectors.

On the indirect taxation side, There has been an imperative need to implement an efficient mechanism needing optimal involvement of the government machinery and this is being met through an effective value added tax (VAT) and National Health Insurance Levy (NHIL) schemes in place for sometime now.

There have of course been serious concerns in the compliance angle with many companies finding ways to avoid the VAT system using loopholes in the mechanism or by sheer disregard for the regulations. There have been media reports that businesses also sometimes had the luxury of negotiating the tax amounts after prolonged default with the authorities and have managed to get better deals. The estimates on VAT evasion are varied but represent huge amounts that could make a phenomenal difference to the overall taxation revenue of the country.

The authorities charted out various measures to increase revenue and compliance through enhanced surveillance and test purchase exercises as well by establishing formal complaint and information desks covering the entire chain of VAT offices throughout the country. Debt management and collection efforts are also being intensified and better structured.

The NHIL scheme that was introduced in 2004 was to secure the provision of basic healthcare services to persons resident in the country through mutual and private health schemes.

This new tax is imposed at the rate of two and one half percent calculated on a) every supply of goods and services made or provided in Ghana; b) every importation of goods; and c) supply of any imported service unless otherwise exempted under the National Health Insurance Act. The levy is payable at the time the goods and services are supplied or imported.

This NHIL tax is collected and submitted under the same regime as Value-Added Tax (“VAT”). All rules and regulations applicable under VAT, equally apply to NHIL. The duty of collecting the National Health Insurance Levy (NHIL) has been added to that of the Value Added Tax (VAT) secretariat for convenience and cost effectiveness. Whilst VAT collections are paid into the consolidated fund, the NHIL contributions would deposited in a separate account to be handled by the National Health Insurance Council (NHIC) and to be utilized only for the implementation of the National Health Insurance Scheme (NHIS).

The Ghanaian government’s budget for 2006 has a targeted collection of more than 7000bn cedis which represents 29% of the total tax revenue. This is almost equivalent to the target for collection of direct taxes, underlining the importance of establishing efficient tax collections systems, widening the tax net and ensuring compliance.

The stated key objective in the budget is “is to strengthen tax administration to make room for reduction in some tax rates and to increase the focus on productive and pro-poor expenditures. Accordingly, the emphasis is on measures to realize efficiency gains and to broaden the tax base so that policy measures to lower the marginal tax burden have the minimum adverse impact on revenue mobilisation.”

To get things going, the authorities of the Enforcement and Debt management Unit of the VAT Secretariat recently made a bold move of closing down certain companies that were in default of the their VAT payments. The M Plaza bus terminal at Avenor in Accra was closed down and its assets were confiscated when its management declined to pay almost 375million Cedis to the department. However upon a partial payment subsequently, the terminal was reopened for operations.

In July, the authorities closed down twenty enterprises in Accra Central for not registering with the Service. It was reported that about 70 companies were targeted in the exercise and for failure to register; they may face the risk of closure and further prosecution. The fine could be 10 million cedis that could be accompanied by an imprisonment for five years. All enterprises that have turnovers of above 100 million cedis qualify to register with VAT, though all importers and exporters need to enroll, irrespective of turnover.

The VAT officials are also coordinating with the Ghana Union of Traders' Association for create better awareness amongst the traders and to promote voluntary compliance with registration and increased collection of revenue. Additionally, VAT staff is being provided with training programs to improve their skills on enforcement.

Recently the VAT department launched a Tax Week to try and increase awareness and collections. Mr Anthony Ewereku Minlah, Commissioner of the VAT Service, said the week being celebrated on the theme, "Voluntary Tax Compliance - A Shared Responsibility," and is meant for members and taxpayers to exchange ideas on how to mobilize enough revenue for the country's development. The week is also to improve public confidence in the operations of the Service through education on requirements of the taxpayer to ensure voluntary tax compliance.

He called for collaboration with traders to maximize revenue and promote the growth of business enterprises and on staff of the Service to work on correcting the negative perception the public had about their work.

In August 2006, after the government had introduced a proposal for a flat rate scheme on VAT, the Ghanaian Deputy Minister of Finance, Professor George Gyan-Baffour said that the introduction of the 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.

He was reported saying that the scheme was geared 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. A two day workshop was conducted for the Management of the VAT Service on the features, benefits and mechanics of the flat rate scheme. It was claimed that the new system would be easy to operate, would lead to a reduction in the cost of compliance and ensure flexible record-keeping regime. Besides it would facilitate the compliance of small-scale enterprises.

The document to enforce the three per cent 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 maximum of 1.2 billion cedis when it becomes operational.

In an effort to encourage voluntary declaration of VAT and NHIL by enterprises, the Ministry of Finance and Economic Planning instituted awards for payments and compliance across business sectors.

Early September this year, the Ministry announced awards within various categories for 45 companies and individuals considered as high performers in the VAT/NHIL areas.

The major companies include Areeba, Barclays Bank, Nestle, The Honda Place, Ashanti, Gold Fields, Afko-Imex (Malaysian Group), Stallion Industries & Investments, Olam, Polycraft, Diamond Cement and Primex Ghana Limited.

The awardees come from diverse industries and with varying business segments – both locally and foreign owned enterprises.

Areeba is the market leader in mobile telecommunications industry with more than 60% market share in Ghana. Olam Ghana, part of the international trading conglomerate, bagged the award in the export category with its large export base for Cocoa, cashew, cotton, Sheanuts and Timber. The principal office of the Olam operations is in Accra with branch offices in Tema, Kumasi and Takoradi.

Barclays Bank, the UK headquartered multinational bank is another recipient that has operated in Ghana for over 80 years, having branches in all commercial centres and providing the full range of banking services.

Nestle is the largest food company in Ghana that features in the awards list for contribution to tax revenues. Nestle produces locally well known brands such as IDEAL Full Cream Evaporated Milk, CARNATION Filled Milk, Carnation Tea Creamer, MILO, CHOCOMILO, CHOCOLIM, CEREVITA Porridges and CERELAC. Nestle also imports and distributes brands such as: NIDO Milk Powder, LACTOGEN Infant Formula, NAN Infant Formula, NESCAFE Soluble Coffee, and MAGGI Bouillon's and Cold Sauces.

The Diamond Cement (Ghana) Limited (DCGL) at Aflao in the Ketu District of the Volta Region is a foreign owned factory that won an award in the recent announcement. The factory has a capacity to produce 700,000 tonnes of cement annually.

Stallion Industries and Investments Limited (SIIL) which won the Platinum Award is part of a regionally reputed group handling multiple product lines, enjoying partnerships with globally acclaimed suppliers from Thailand, India, Vietnam, USA, Brazil and other countries. The company is highly reputed in the market for quality and affordability, selling brands like Golden Choice, Better Rice, Freedom, Americana and Sunflower.

The Honda Place (Ghana) Limited who is another nominee, is the exclusive distributor of Honda cars in Ghana, having established a comprehensive sales and after-sales infrastructure that meets international standards set in the industry.

SIIL and The Honda Place are part of the Stallion Group, the multinational business conglomerate. Stallion, owned by billionaire international businessmen Sunil Vaswani, Haresh Vaswani and Mahesh Vaswani has strongly established itself in Nigeria, Ghana, Benin, Ivory Coast, Senegal, Angola, Cameroon and other countries in Europe, Middle East and Asia.

It requires significant political will and sustained efforts to gradually increase the effectiveness of the VAT/NHIL systems anywhere in the world. Going by recent efforts of the authorities towards increased focus on compliance and willingness to act tough where warranted, Ghana seems to be moving in the right direction, notwithstanding various issues that impact the process.

Awards, awareness events, workshops, industry participation and other positive endeavours of the VAT Service coupled with unbiased action on defaulters would be the only way forward if the ambitious targets of the country in this area have to be met.