Revised VAT regime not business-friendly – PwC

Tax and audit firm PricewaterhouseCoopers (PwC) has called on government to rethink its VAT regime, which the firm has described as not helpful and hurting businesses – and has led to an increase in operational costs.

According to PwC’s analysis of the 2019 Budget, government’s bid to raise more revenue, through conversion of the NHIL and GETFund into straight levies, is turning out to be counterproductive for businesses who were not informed about the decision.

“There is a need for government to take a second look at de-coupling NHIL and GETFUND rates from VAT rates as industry concerns grow. Its complexity and the fact that industry was not pre-informed to enable them to factor it into their yearly projections seems to have resulted in an unexpected increase in operational costs, thereby overshadowing the policy’s intention of raising revenue,” the firm stated.

PwC added that while it supports government’s efforts at enhancing domestic tax revenue, in view of the expected increase in expenditure over the coming years, a simplified tax system would reduce compliance cost and widen the tax base as well as eliminate many exemptions and leakages, rather than increasing already-high marginal tax rates.

“We think that the tax system should not only remain broad-based, progressive and fair, but also be competitive and pro-growth,” the 2019 budget analysis read.

Speaking in an interview with B&FT at PwC’s post-budget workshop in Accra, PwC Senior Country Partner Vish Ashiagbor indicated that its assertion about the stifling VAT regime is born out of the implementation challenges which businesses and even the revenue authority face.

“What we are seeing in the implementation of these VAT rules is that the practical challenges on the ground create bottlenecks and delays as people grapple with a certain degree of complexity.

“Those measures could perhaps be fine-tuned to facilitate the VAT system’s workings. Practical challenges on the ground, if they are not considered adequately or structured in a way that promotes efficiency, will encourage people to switch to distribution as against production – which is obviously what we want to grow,” Mr. Ashiagbor added.

Progress

PwC commended government for listening to feed-back from industry – when the Minister announced a raise in the Personal Income Tax (‘PIT’) rate threshold from GH¢10,000 per month to GH¢20,000 per month, and reduced the rate from 35% to 30%.

“We believe this reduction will reduce the likelihood for tax avoidance and evasion, and motivate individuals to work harder. Potential revenue losses from personal income taxes should be compensated for by improved tax compliance and administrative measures."

“This is welcome, especially for the middle-class whose increase in disposable income is likely to stimulate household demand and encourage private investments – which have slowed down considerably in recent times,” PwC said.

Post-IMF

The Finance Minister, Ken Ofori-Atta – presenting the 2019 budget, said government in the post-IMF era will legislate a fiscal responsibility rule to cap the fiscal deficit to no more than 5 percent of GDP, and set up a Fiscal Council to serve as a watchdog for prudent fiscal management.

“While these measures have generally been found to contribute to improved fiscal performance by improving policymakers’ incentives to opt for sound fiscal policies, it has to be acknowledged that it is no ‘silver bullet’ for securing and maintaining fiscal discipline."

“Strong adherence and political commitment are required for their effectiveness; and the long-term success of the Fiscal Council in particular is hinged on a full legal and operational autonomy, supported by sufficient financial and human resources to be able to effectively deliver on its mandate,” the PwC said.