Possible effects of VAT payments on SMEs amidst COVID-19

In a middle income country like Ghana where the development of Small and Medium Scale Enterprises (SMEs) is pivotal to socio-economic development, the growth and survival of these enterprises become very crucial.

SMEs in Ghana represent about 85% businesses, largely within the private sector and contribute about 70% of Ghana’s GDP. Although the government of Ghana, in an attempt to combat the negative impact of the pandemic and also cushion the economy, adopted some fiscal and social measures, particular attention has not been given to some SMEs.

Generally speaking, SMEs often thrive on the availability of funds, ready market, and swift movement in the supply chain. With disruptions in this line of activities, it is prudent to conclude that COVID-19 has posed a greater challenge to the growth and survival of some SMEs in industries like transport & aviation, hospitality etc.

To fully understand the possible effects of VAT on SMEs in this pandemic, let’s look at how the performance of some SMEs has been hit by the pandemic.

Disruption in supply chain

The COVID-19 has administered a negative impact on key elements of supply chain such as warehousing and custom operation, especially for businesses connected to external supplies. The intermodal means by which goods and services are supplied within the supply chain is either by air, cargo or land. However due to the pandemic, most economies have placed restrictions on the movement of supplies outside the borders of their country. This has made it difficult for SMEs that obtain their raw materials outside the borders of the country to continue production. On the other side, it is a perfect opportunity for some businesses to venture into much more self-sufficient ventures, just like what some SMEs are doing with the locally produced Personal Protective Equipment (PPEs).

Fall in productivity

Although the lockdown has been lifted, restrictions on social gathering still remain at 25. This has caused many SMEs especially those in the manufacturing and service industries to ration their employees, leaving only the skeletal staff within the organization. Although it is worth mentioning that demand in industries like Agriculture remains high, productivity still remains low thereby having an adverse impact on the supply of most agriculture enterprises. Aside the issue of staff rationing, the restrictions on imports has also affected productivity.

Availability of Funds

In the past, it has always been a challenge for most businesses within the SMEs category to obtain funding due to their vulnerability to market fluctuations. The COVID-19 is no exception to this case, therefore making it even more difficult for most businesses to obtain funds now.

Impact of VAT on some industries

The question with an obvious answer that lingers on most minds in light of the pandemic is the impact that COVID-19 is having on businesses in terms of taxation. On 18th February 2020, the Finance Minister introduced some VAT simplification rules which will raise small businesses to a level playing field, nonetheless, the new scheme will only be applicable from 1 January 2025. In light of the pandemic, the Ghanaian custom measures still remain the same.

Let’s take a look at how SMEs contribute to VAT

According to the Value Added Tax (Amendment) Act, 2018, Act 970, standard rated taxable supplies is subjected to 12.5% input and output VAT. The usual situation is that, supply of goods made by VAT- registered businesses are subjected to the imposition of tax and allied levies (VAT). Therefore, so far as a business is engaged in buying and selling of goods and services that qualifies as taxable supplies, the Ghana Revenue Authority will require them to file for VAT. Although VAT is borne by the final consumer, VAT registered businesses have the administrative obligation to act as VAT collectors.

Now, assuming company A, makes purchases of GH¢1000.00 for its business input, it will be required to file for an input VAT of 12.5% on the GH¢1000.00 purchases. Also, for every sale that they make, they will be obliged to charge an output VAT of 12.5%. The difference between the input VAT and the output VAT is what is paid to the Ghana Revenue Authority. This simple scenario gives an understanding of how VAT comes off as a cost to businesses.

With the current uncertainties of the COVID-19 coupled with low demand in some industries, to sustain growth, SMEs can administer their VAT either by cutting down their inputs (employment or the raw materials purchased) or adding VAT to prices. The former is what is evident now in the Ghanaian economy as most businesses, especially those in the hospitality, aviation & transport etc. is undertaking.

Although the agricultural industry has not exactly been operating at the optimum due to limited supply of raw materials, demand has been high. In the state of the nation’s address on 10th May 2020, President, Nana Akufo-Addo, mentioned the importance of consuming agricultural produce like fruits and vegetables to enhance the immune system. This statement, together with the fact that most workers are currently working remotely from home, has tremendously increased the consumption of farm produce. So for businesses in the agricultural industry, VAT can be added to prices of goods and services as there is a high demand for these produce without necessarily affecting the business adversely.

Pharmaceutical Industries in light of the pandemic

As the focus now remains on the health industry, most SMEs in the pharmaceutical industry are benefiting from the pandemic. As such, they are not negatively affected by VAT. This is because demand for their product is currently high. This makes it easier for these businesses to add VAT to their prices. Aside that, most pharmaceutical industries are obtaining funding from government and other international bodies.

Recently, Tobinco pharmacy received $5 million from Ghana Exim Bank to support the production of hydroxychloroquine. Also, the government of Ghana have administered a COVID-19 trust fund which has particularly been beneficial to businesses which are into the production of PPEs. So one can confidently say that, yes, success has found businesses in the pharmaceutical industry, and with the high demand for the pharmaceutical industry, consumers can still bear VAT without necessarily affecting consumption.

In conclusion, most people are tempted to compare the 2008 recession to the COVID-19 pandemic, as some economic indicators suggest that the world might be in a recession territory. I like to think that the impact of the pandemic hasn’t been totally negative. Some businesses are still doing well and can afford to pay VAT to the government, which comes off as revenue. We can however hope that things take a turn and the economy bounces back.

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