VAT reforms: Cleaning up the system without fixing the fiscal problem

By Prince OWUSU-ANSAH and Maud AVEVOR

Ghana’s recent VAT reforms mark an important, though often misunderstood, shift in the country’s tax policy. Public debate has largely centred on whether the changes will immediately reduce prices or weaken government revenue. These are fair concerns, especially in a high-inflation environment (currently stable with a single digit rate), but they miss the broader point. VAT reforms are rarely designed to deliver instant price cuts or quick fiscal gains.

At their core, the changes are neither a stimulus package nor a short-term revenue measure. They are an effort to fix long-standing structural weaknesses that had gradually crept into Ghana’s VAT system. Over time, multiple levies were layered onto VAT in ways that distorted pricing, penalised formal businesses, and blurred the original purpose of the tax. The current reforms are therefore best understood as a technical reset, aimed at restoring coherence to the VAT framework and making it work more efficiently within the broader economy.

How VAT drifted off course

VAT is tax only on the value a business adds at each stage of production processes, while allowing firms to recover taxes already paid on their inputs; purchases and expenses. Therefore, in principle VAT is relatively neutral and does not distort business decisions. Nevertheless, in Ghana that logic was gradually being eroded with amendments that increased the tax base for computing VAT.

Over the years, VAT became stacked with additional levies such as the National Health Insurance Levy (NHIL), the Ghana Education Trust Fund (GETFund) levy, and later the COVID-19 Health Recovery Levy. In practice, these charges were often layered in ways that businesses could not fully recover as a deductible input. For firms with long and complex supply chains, particularly manufacturers and large distributors, this created a tax-on-tax problem that inflated costs at every stage which affected the pricing of products as well as its consequential impact on margins

The result was a system that punished formal, compliant businesses, pushed up final consumer prices through hidden embedded taxes, and made operating outside the formal tax net more attractive. Therefore, the current VAT reforms should be seen not as a radical policy shift, but as a necessary correction to a system that had drifted away from its original purpose.

What the reforms change

The removal of the COVID-19 Health Recovery Levy is the most visible element of the reform, and understandably the one that has attracted the most public attention. Its abolishment is meant to signal a return to normalcy after an emergency period and to marginally ease the overall tax burden on consumption. However, on its own, this change does little to address the deeper weaknesses within the VAT system.

The more consequential reform lies in the treatment of the NHIL and GETFund levies. Allowing these levies paid on business inputs to be credited, in the same way as input VAT, is intended to reduce tax cascading across supply chains. For manufacturers and distributors, this helps prevent situations where taxes paid earlier in the production process become permanent costs that are repeatedly passed on. In effect, it restores some internal consistency to the VAT framework and makes pricing more transparent.

The sharp increase in the VAT registration threshold for goods-based businesses reflects a clear shift in policy priorities. By raising the threshold, government is effectively acknowledging that pursuing very small traders for VAT is costly, inefficient, and often counterproductive. The aim is to concentrate administrative effort on larger, higher-turnover firms where compliance gains are more meaningful, and enforcement can yield better results.

The decision to phase out the flat rate schemes follows the same reasoning. While the scheme offered simplicity, it also broke the VAT credit chain and created distortions within the system. Removing it is meant to move VAT closer to a single, coherent structure, even if the adjustment proves difficult for some businesses in the short term.

Revenue implications – Risk before reward

In the short term, the VAT reforms come with real fiscal risks that government must not pretend away. When a levy is removed, the first-round effect is straightforward: collections fall, at least relative to what they would have been. At the same time, expanding the ability of firms to claim input credits means compliant businesses will remit less net tax, because more of what they pay upstream can now be offset. Add to that the higher VAT registration threshold for goods, which inevitably reduces the number of registered taxpayers, and it becomes clear why some analysts worry about a temporary dip in VAT-related revenue. The one positive thing in this regard is the requirement for all service providers to register for VAT, as to whether this can fill in the revenue gap is yet to be determined.

But that is only one side of the story, and it is the side Ghana often fixates on. The deeper issue has never been whether the combined rate is a few percentage points higher or lower. Ghana’s revenue challenge is largely structural: a narrow formal base carries most of the burden, while large parts of the economy operate with weak invoice discipline, limited traceability, and inconsistent enforcement. In that environment, government can raise rates and still underperform, because the main problem is not the rate. It is the gap between what should be collected and what actually gets collected.

This is where the reforms create an opportunity, not just a risk. If the Ghana Revenue Authority improves administration, especially through electronic invoicing that captures transactions in real time, and audits that focus on high-risk sectors rather than random harassment, the state can end up collecting more from a smaller number of economically meaningful players. In simple terms, it is better to reliably collect from the big, high-volume nodes of the economy, wholesalers, import-linked distributors, large retailers, manufacturers, and service providers, than to spread limited enforcement capacity thinly across thousands of tiny operators where the yield is low and evasion is easy.

The reforms also have a behavioural element. A cleaner VAT structure reduces the incentive for formal firms to “game” the system through artificial supply-chain arrangements designed mainly to minimise cascading taxes. It can also make compliance easier to explain and harder to dispute, which matters for voluntary compliance. However, none of these benefits materialise automatically. If the invoicing system is weak, if audits remain inconsistent, or if enforcement can be negotiated away, then the reforms will simply translate into lower net payments from the compliant minority, while the non-compliant continues as usual. In that scenario, revenue losses are not just possible, they are likely.

There is also a cash-flow and trust dimension that affects revenue performance. If input credits rise but refunds and offsets are delayed or opaque, some firms will respond by under-reporting, delaying filings, or moving activity outside the formal chain to protect their working capital. That is how a technically sound VAT design can still fail in practice. Efficient refunds and predictable credit treatment are not a “nice to have”; they are central to keeping businesses inside the system and preserving the tax base.

Ultimately, this is why the reforms place such heavy responsibility on the Ghana Revenue Authority. The policy direction is clear, but the outcome will be determined by day-to-day execution: invoice capture, data matching, targeted audits, quick dispute resolution, and credibility in how credits and refunds are handled. If GRA gets the administration right, the reforms can strengthen the VAT base over time. If it does not, the country will have implemented a cleaner tax law while collecting less money.

Business effects – Efficiency gains with a caveat

For formal businesses, particularly manufacturers, importers, and large distributors, the reforms should reduce some of the hidden costs that have been quietly building up in prices over the years. When parts of the VAT “stack” behave like unrecoverable charges, they end up sitting inside the cost of raw materials, packaging, and intermediate goods. That is what people mean by embedded taxes.

Cleaning up the system and improving how input credits work makes it easier for firms to see what portion of their pricing is driven by real production costs versus taxes that have been carried forward from earlier stages. In practical terms, this improves pricing transparency, supports better planning, and can make locally produced goods slightly more competitive against imports, especially in sectors that add value through processing and manufacturing.

That said, it is important not to oversell the benefit. Ghana’s cost structure is still heavily influenced by exchange rate pressures, energy costs, logistics, and the cost of credit. VAT reform can reduce distortions, but it cannot cancel these bigger constraints. So, while the reforms support competitiveness, the size of the impact will vary by industry. Firms with long supply chains and heavy input use are likely to feel it more than businesses that operate mainly as final sellers.

The bigger issue, and one that only businesses truly appreciate, is that VAT is not just a tax issue, it is a cash-flow issue. A VAT system works smoothly when credits can be used quickly and predictably. As input credits become more significant under the new arrangements, the speed and reliability of credit offsets and refunds become a make-or-break factor. If refunds and offsets are delayed, firms are forced to carry the government’s cash needs on their balance sheets.

That ties up working capital that could have been used to buy inventory, pay suppliers, or expand operations. For a manufacturer already borrowing at high interest rates, a delayed refund is not a minor inconvenience, it is an added financing cost. Over time, this can wipe out the very gains the reform is supposed to create, and it can even discourage compliance as firms look for ways to protect liquidity.

Competitiveness is another key concern here. When refunds are slow, exporters and firms that sell to zero-rated or exempt segments suffer the most, because they naturally accumulate credits. In many economies, VAT refunds to exporters are treated as a priority because they affect foreign exchange earnings and the ability of local firms to compete internationally. If Ghana’s refund administration does not improve, the reform could unintentionally punish exactly the type of value-added, export-oriented activity the country says it wants to grow.

For smaller traders, the higher VAT registration threshold is a clear relief on paper. It reduces paperwork, filing obligations, and the risk of penalties for businesses that often operate with thin margins and limited bookkeeping capacity. It also acknowledges a hard truth: chasing micro traders for VAT can cost more than it brings in, especially when enforcement capacity is limited.

But the threshold change has side effects that cannot be ignored. Some businesses may deliberately restrict sales to remain below the threshold, which discourages growth. Others may split operations into smaller entities, “divide the shop into two names,” as people commonly say, to avoid registration. In competitive markets, this can create an uneven playing field where compliant, growing SMEs face higher administrative burdens than those that choose to stay small and informal. Without careful monitoring and smart enforcement around artificial fragmentation, the reform could unintentionally reinforce informality rather than curbing it.

So, from a business perspective, the reforms offer real benefits, but they come with a condition: administration must match policy. If credit offsets and refunds work reliably, and enforcement focuses on meaningful risks rather than small operators, the reforms can support growth and investment. Otherwise, formal firms may carry higher cash-flow strain, while the informal economy remains largely untouched.

What consumers should expect

Consumers should be careful not to expect broad and immediate price reductions because of the VAT reforms. While reducing tax cascading can lower costs within certain supply chains, especially where businesses are fully compliant and competition is strong, taxes are only one component of final prices. In many sectors, VAT-related costs are minimal compared to the influence of exchange rate movements, fuel prices, transport costs, and the cost of imported inputs, all of which remain major drivers of inflation in Ghana.

In markets where competition is intense, such as fast-moving consumer goods sold through formal retail channels, some firms may transfer part of the cost savings on to consumers in order to defend market share. In other sectors, particularly those dominated by imports or affected by high logistics and energy costs, there may be little or no room to reduce prices. Businesses may simply use these savings to offset other rising expenses rather than cut prices outright.

There is also the issue of how much of household spending actually flows through the formal VAT chain. A large share of consumer transactions still takes place in informal markets where VAT is not consistently charged or itemised. In those settings, changes to VAT design may have limited direct impact on what consumers pay day to day. For these reasons, any consumer relief from the reforms is likely to be modest, uneven, and sector specific. Where it does appear, it will come gradually rather than as an immediate and visible drop in prices across the economy.

The Broader Policy Lesson

The VAT reforms highlight a deeper issue in Ghana’s economy: a narrow formal sector bearing a disproportionate share of the tax burden. VAT design alone cannot solve this problem. Only consistent enforcement, credible refunds, and a tax system that rewards compliance rather than punishing it can broaden the base sustainably.

Conclusion

Ghana’s VAT reforms are economically sensible and long overdue. They clean up distortions and move the system closer to how VAT is meant to function. But they are not a fiscal cure-all. Without strong administration and execution, they risk delivering lower revenue and limited economic benefit. With them, VAT can become a more stable and growth-friendly pillar of Ghana’s public finances. As with many policy reforms, success hinges more on effective implementation than on the legislation itself.

>>>Prince Owusu-Ansah is a Monetary and Public Sector Economist, Policy Analyst and Tax Practitioner. He is a co-founder of the African Policy Foundation, a think tank dedicated to advancing sound fiscal, monetary, and public policy solutions across the African continent.

>>>Maud Avevor is a Strategist, Project Manager, Economist and, Actuary Specialist. Maud is a management consultant, economist, and researcher with expertise in strategy, policy analysis, technology-driven innovation, and inclusive economic growth. She is also a strong advocate for ethical AI and equity in financial systems

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