VAT on financial services

Ghana implemented a new VAT law last year. This law introduced various changes to the VAT landscape of Ghana including revising the effective standard VAT rate from 15 per cent to 17.5 per cent and imposing VAT on some financial services.

For the purposes of readers new to the VAT regime of Ghana, VAT is administered with another tax known as the National Health Insurance Levy (NHIL) and the standard rate of that levy is 2.5 per cent. VAT in this paper therefore includes NHIL.

On the issue of financial services, the new VAT law generally exempts financial services from VAT.

This exemption, however, does not cover financial services rendered for a fee, a commission, or a similar charge except where they relate to life insurance and reinsurance. This means that life insurance, reinsurance and other financial services provided but not charged for do not attract VAT.

Clarity around what constitutes “financial services rendered for a fee, commission or a similar charge” triggered debates and subsequent push-back mainly from the public and service providers which consequently resulted in delay in implementation for about one year.

After public education by the Executive Government and subsequent agreement with the Ghana Bankers Association, the implementation of VAT on some financial services, with emphasis on the banking sector, commenced in January 2015. The application of VAT on services provided by non-bank financial institutions is yet to see the light of day.

In this brief paper we will seek to address in broad terms the implication of VAT on financial services in respect of banks and businesses that deal with those banks with respect to accounting and reporting to the tax authorities.

Implication for banks Following enforcement of VAT on some financial services, providers of fee-based financial services (emphasis on banks), are required to apply, register and charge VAT on “qualifying services” thereby adding banks to the group of unpaid VAT collectors.

The position of the tax authority is that banks that fail to register for the tax will be registered and notified accordingly.

This position is in line with the VAT laws of Ghana. However, banks should note that the risk in waiting for the tax authority to register and notify may come with sanctions.

The sanction which can be imposed by the tax authority without recourse to a court is up to two times the tax that the state has lost as a result of the failure of that bank to charge the VAT.

VAT charges should be appropriately raised using a VAT invoice. As you may have read, the tax authority has set up a task force to visit taxpayers and check if VAT invoices are being raised.

Failure to raise VAT invoice may attract a penalty of at least GH¢1,200 and up to three times the amount of tax in question. Obviously, a change may be required to our laws to practically deal with the case of issuing VAT invoice for all financial services attracting VAT.

With the responsibility to charge VAT comes the ability to claim a portion of the VAT incurred. Banks are entitled to deduct a portion of VAT incurred in providing services on which they charge VAT.

The portion of VAT that the banks can claim is limited to VAT that is ordinarily permitted under the general rules for deduction and in addition directly incurred in the making of supplies for which banks charge VAT.

Therefore in addition to having an appropriate document such as an approved invoice, a bank cannot claim VAT that is not directly attributable to taxable supplies that it makes.

The VAT denied should be treated as part of the cost of those goods or services purchased and this ultimately may affect the financial performance of that bank through increased cost.

On a monthly basis, banks - unpaid tax collectors - are expected to report and remit the net of tax collected to the tax authorities - their principals.

This reporting is done through the use of an appropriate document known as a return. Failure to file a return attracts a penalty of at least GH¢500 in addition to interest on any unpaid amount at a rate in excess of the Bank of Ghana discount rate.

It is expected that all banks (as per the law) which were in existence before the start of this year should have filed at least six returns as at the time of reading this paper.

Implication for corporate clients Historically, evidence of bank charges have been shown as debits on the bank statements. Corporate clients of banks that are registered for VAT are permitted to deduct the 17.5 per cent VAT that they incur when dealing with their bankers if certain conditions including having a valid VAT invoice in place are met.

As per the law bank statements currently do not qualify as an approved tax invoice. Corporate clients of banks may risk not receiving deductions for their VAT incurred unless such clients demonstrate to the satisfaction of the tax authorities that all reasonable steps were taken to acquire the tax invoice.

It is important to note that the three-year grace period that was available for deducting VAT has now been reduced by over 80 per cent to just six months.

Therefore clients who incurred VAT in January of this year may have lost their right to have a VAT deduction for VAT on bank charges incurred during that month.

Therefore businesses will need to take the proactive step to enter into suitable invoicing arrangements with their bankers in order to claim the input VAT.

In conclusion, banks and other providers of taxable financial services should keep track of costs incurred in providing taxable services in order to deduct qualifying input VAT.

Also, businesses that incur VAT on financial services should consider making invoicing arrangements with their bankers in order to be able to deduct the input VAT incurred.

If no such arrangements are in place, VAT on financial services are likely to result in significant costs to both banks and customers alike. Want to know more? Let’s talk. — GB