VAT won’t strangle financial sector - EIU

The introduction of Value Added Tax on financial services will do little to halt the sector’s expansion and robust growth, the Economic Intelligence Unit (EIU) has said.

Seen as one of the fastest-growing economic sectors, the value of financial services has increased from 3.8 percent of GDP in 2008 to 5 percent in 2012, with its value-added rising to GH¢3.4billion in the period.

The sector was hitherto exempted from VAT, but following amendment of the VAT law last November it has now been brought under its coverage -- placing Ghana among a very short list of countries in the world which charge VAT on financial services. The new regime also coincides with a hike in the rate from 15 percent to 17.5 percent.

But Philip Walker, an economist with the EIU, told the B&FT the new tax “does not affect our forecast of robust financial service sector growth in 2014 -- driven by a strengthening wider economy creating opportunities for expansion”.

His comments come after the revised VAT law caused a wave of discontentment among industry players, mainly banks and insurers, who, among other complaints say they were sidelined before introduction of the changes.

Banks are concerned that with the low penetration of financial services in the country -- less than 30 percent of Ghanaian adults have a bank account -- the imposition of VAT on bank account charges and other transactions will further deter participation in the formal financial sector.

And though life insurance and reinsurance services are exempted, insurers doing general business -- such as providing cover for vehicles and logistics -- are worried that increasing premiums due to VAT will discourage more businesses from insuring their assets.

Nevertheless, Mr. Walker pointed out that it is not likely government will back down from the new measure as it is confronted by a tight fiscal challenge.

“I know the financial sector is unhappy with the move, but as it is a sector of the economy performing well, it is difficult to see the government backing down.”

The Finance Ministry expects the changes to boost VAT revenues by GH?745million this year, and it has promised to spend the extra money exclusively on infrastructure -- as much of the current revenues are consumed by wages and interest payments.

The government is battling a deficit that rose to a provisional 10.2 percent of GDP in 2013, and according to Mr. Walker, the changes in VAT need to be viewed in this context.

“These changes alone will not solve the fiscal challenge, but they are intended to send the message that the government is aware of the need to tighten fiscal policy and that it is prepared to make the difficult decisions to achieve it. I would class the VAT rise along with the utility price increase last year as unpopular changes that needed to be made,” he said.

Based on a sector GDP of GH¢3.4billion in 2012, a 17.5 percent VAT on the full range of financial services could raise around GH¢0.6billion annually.