On March 1, 1995 the Value Added Tax (VAT) Act came into effect throughout the country. In the period since its introduction the application of the VAT has been subjected to public criticisms.
These Include:
a. Inadequate public education prior to its introduction;
b. Lack of effective monitoring by the VAT Service which is itself
in its formative stage;
c. The timing of its introduction which coincided with the lean farming season as well as the 1995 Budget, both of which affected prices in the economy; and
d. The 17.5% level at which the VAT was pegged compunded by the uncertainty over the mode of calculation.
The effect of the above in addition to other factors have contributed to the rather high cost of living over which many Ghanaians have expressed so much concern.
In the first month of the introduction of the VAT, government acted to ameliorate the situation by initiating a review of the implementation of the new system with a view to identifying and removing the bottlenecks. In furtherance to this, the Ministry of Finance announced some interim administrative measures which sought to broaden the list of exemptions under the VAT Act and ease the difficulties encountered by the manufacturing sector as a direct consequence of the introduction of the VAT. In addition, the Ministry of Information was tasked to assume direct responsibility for effective public education on the VAT. Meanwhile, the broader work of the review of the implementation of the VAT continued. This included consultations with a number of organisations and groups with a view to establishing an acceptable framework for the continued operation of the VAT.
On May 17, 1995 when Parliament reconvened the Minister of Finance laid a Bill before the House to amend the VAT Act while proposing to reduce the tax from 17.5% to 15.0%. This reduction coming alongside an expanded list of exemptions as well as the raising of the minimum turnover of retail traders eligible to collect VAT from o25m to o50m meant a virtual reinstatement of the Sales Tax regime applicable as at 31st December, 1994.
On June 1, 1995 following its deliberations on the Amendment Bill the Finance Committee of Parliament submitted its report to the House the Highlight of which is the proposal to further reduce the VAT to 10% as against the 15% originally proposed by the Minister of Finance. The Implications of reducing the VAT to 10% are serious and the Minister is expected to detail these out when Parliament sits tomorrow.
While it is generally acknowledged by Ghanaians that the principle behind the VAT is acceptable and defensible, there is no doubt that the implementation has left a lot to be desired. In this regard the government is of the view that a thorough discussion on the merits and demerits of the two proposals before Parliament is essential and that the forum should even be broadened to ensure that the remaining issues are thoroughly discussed once and for all. Government is also aware that while further debate and discussion on the proposal to review the VAT is necessary, the situation is having a negative impact on the economy.
For instance, the is evidence that imports have slowed down considerably over the past few months because most importers have adopted a wait -and-see attitude as the debate over the future of VAT continues. Meanwhile, the slowing down of imports is having an adverse effect on production and supply of goods and consequently affecting prices. Above all, government revenues on imports are being affected.
In consequence of this, and arising out of government's concern to reduce the cost of living as well as allow for time to carry through the review process, the Minister of Finance will formally withdraw the VAT Amendment Bill when Parliament meets tomorrow. In the intervening period it is proposed to reintroduce the Sales Tax regime which would remain in force until the completion of the review process after which a new programme of implementation of the VAT would be announced. The appropriate legislation to this effect will be placed before Parliament.
The repercussions of the option which has been made in the circumstances will seriously affect a number of projects and slow down the momentum of our nation's development, but the decision to withdraw the VAT amendment Bill has been Taken. Government will remain true to its commitment to place the welfare of the people first before any other consideration hence its preparedness to review its policies whenever the need arises.
signed: Minister of Information
June 6, 1995
