1 Assessment of Value Added Tax Debt Management Of

ASSESSMENT OF VALUE ADDED TAX DEBT MANAGEMENT OF FIRMS IN TAMALE METROPOLIS

EMMANUEL OWUSU SEKYERE, B.ED SOCIAL SCIENCES

KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

(KNUST), KUMASI

COMMONWEALTH EXECUTIVE MASTERS IN BUSINESS ADMINISTRATION.

INSTITUTE OF DISTANCE LEARNING

MAY 2011

ASSESSMENT OF VALUE ADDED TAX DEBT MANAGEMENT OF FIRMS IN TAMALE METROPOLIS

EMMANUEL OWUSU SEKYERE B.ED (SOCIAL SCIENCES)

A thesis submitted to the Institute of Distance Learning, Kwame Nkrumah University of

Science and Technology in partial fulfillment of the requirements for the degree of

COMMONWEALTH EXECUTIVE MASTER IN BUSINESS ADMININSTRATION,

KNUST

INSTITUTE OF DISTANCE LEARNING

MAY 2011

Declaration

I hereby declare that, except for specific references, which have been duly acknowledged, this work is the result of my own field research and it has not been submitted either in part or whole for any other degree elsewhere.

EMMANUEL OWUSU SEKYERE ………………. ……. …………………… (STUDENT.ID PG 3091309) SIGNATURE DATE

CERTIFIED BY: MR. ABUBAKARI ABDUL-RAZAK……………………….. ………………..… (SUPERVISOR) SIGNATURE DATE

CERTIFIED BY: PROFESSOR KWAME DONTWI …………………… ……..…………… (DEAN, INSTITUTE OF SIGNATURE DATE DISTANCE LEARNING).

Acknowledgement

My greatest appreciation and gratitude goes to the Almighty God for his love and care. His mercies and blessings gave me the strength, knowledge and perseverance in completing this work.

I am very appreciative of the encouragement, patience and invaluable suggestions and guidance provided by my Supervisor, Mr. Abubakari Abdul-Razak. My profound gratitude also goes to Mr. Kofi Owiredu-Gorman and Mr. Philemon Ashigbui Mawuli who provided great assistance to make this work a success.

The assistance provided by the personnel of the Tamale VAT Service as well as the VAT clients in the collection of data is highly appreciated. Assistance from Messrs Kwame Siaw, Kwame

Adu-Kwakye, Ali Imoru, Erasmus Tei, Abass Harruna and Joseph Tayiba (all of Tamale VAT office) is acknowledged with many thanks. I am also grateful to my parents, sisters and brothers for their encouragement.

Furthermore, assistance and encouragement from Messrs Frederick Nenevie, Kofi Britwum,

Frank Boakye and Agartha Ayirewogye is highly appreciated and I am grateful for their support.

May the good Lord richly bless us all.

Dedication

This work is dedicated to my wife, Mrs. Vida Owusu-Sekyere and my child, Asubonteng Owusu-

Sekyere

TABLE OF CONTENTS Declaration ………………………………………………………… iii Acknowledgement………………………………………………… iv Dedication………………………………………………………….. v Table of Contents……………………………………………………. vi Abstract…………………………………………………………….. viii

CHAPTER ONE GENERAL INTRODUCTION 1.1 Background of the Study………………………………………….. 1 1.2 Statement of the Problem…………………………………………. 3 1.3 Objectives of the Study…………………………………………… 4 1.4 Research Questions………………………………………………… 5 1.5 Significance of the Study………………………………………… 5 1.6 Scope of the Study………………………………..……………… 6 1.7 Limitation of the Study………………………………………….. 6 1.7 Organization of the Study………………………………………… 6

CHAPTER TWO LITERATURE REVIEW 2.0 Introduction………………………………………………… 8 2.1 Definition of Concepts…………………………………… 8 2.2 Conceptual Framework…………………………………….. 14 2.3 Various Ways Debts are Accumulated By Firms………… 15 2.4 Assessment of Debt Management Practices in Organization 19 2.5 Effects of Debts on Business Operations………………… 24 2.6 Measures for Proper Debt Management…………………… 27

CHAPTER THREE RESEARCH METHODOLOGY 3.0 Introduction……………………………………………………… 32 3.1 Research Design……………………………………………….... 32 3.2 Population………………………………………………………. 32 3.3 Sampling Techniques…………………………………………… 33 3.4 Data Collection Techniques……………………………………. 33 3.5 Organizational Profile of VAT Service, Ghana……………….. 33

CHAPTER FOUR DATA PRESENTATION, ANALYSIS AND DISCUSSIONS 4.0 Introduction……………………………………………………. 36 4.1 Socio-Demographics of Respondents………………………….. 36 4.2 Various Ways Debts are Accumulated by Firms……………… 40 4.3 Debt Management Practices in Relation to Tax Obligations…… 48 4.4 Effects of Debts on Business Operations………………………. 60 4.5 Measures for Proper Debt Management………………………….. 64

CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.0 Introduction…………………………………………………. 69 5.1 Summary of Findings……………………………………… 69 5.2 Conclusion…………………………………………………. 71 5.2 Recommendations………………………………………… 71

REFERENCES……………………………………………. 74 APPENDIX A - Questionnaire………………………….. 77 APPENDIX B – Interview Guide………………………… 83

Abstract

Debt Management is very crucial in VAT Service in mobilizing revenue to develop the nation to better the standard of living of people in Ghana. However, VAT Service inability to retrieve most of its debts from VAT debtors has the tendency to affect revenue agencies from achieving their targets and will also affect revenue mobilization in Ghana. To forestall such unfavourable situations, it is prudent for VAT Service to institute and observe a good debt management practices as a means of controlling and minimizing nonpayment of debts. It is for this reason that the research is being conducted on Value Added Tax Debt Management in Tamale

Metropolis to identify why debts accumulate and ways to improve debt management practices to reduce debt stock. The researcher used questionnaire and interview guide to obtain the needed data for the work. Fifty VAT clients who owe the Service were served with questionnaire and forty four were retrieved and analyzed. Five personnel from Enforcement and Debt Management Unit (EDM) were also interviewed to obtain the needed information for the study. The research revealed inter alia that, VAT debts accumulate due to unfavourable tax audit and this comes about as a result of either lack of understanding with the VAT laws or poor records keeping. The work also revealed that, although there are constant reminders by

VAT officials for debtors to honour their tax obligations, due to the leniency of VAT officials in applying the laws, debts are not paid. It is recommended that, there should be an intensive tax education on the VAT laws, proper records keeping and the need to make provision for future tax liabilities. There should also be strict application of the tax laws and distress actions should be melted out to non compliant debtors to enforce payment of debts. Outsourcing of debt management department could also be considered.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In Ghana, Value Added Tax was introduced in 1995 but was withdrawn and reintroduce in 1998. The total VAT collection contributes about 9.35% to Gross domestic Product

(Supplementary Budget Statement 2005). This is not significant as compared to the developed countries like France and Canada where VAT contribute about 37.1% and

37.2% respectively (Wikipedia.com).

Prior to the introduction of the VAT, it had been determined that the tax system then operating in Ghana was rather complex and sometimes inefficient. Something thus had to be done about the inadequacies. Government in 1985 started to address these problems by launching a series of programmes to reform the structure and administration of taxation in the country. Efforts made in addressing the tax systems in

Ghana include reduction in individual tax rate, reduction in corporate tax rate, elimination of taxes which have outlived its usefulness, widening the income tax net, streamlining tax administration among others.

There was still an urgent need to broaden the base, hence further attention had to be given to the indirect tax regime. VAT was introduced to replace the Sales and Service

Taxes then administered by Customs Excise and Preventive Service (CEPS) and Internal

Revenue Service (IRS) respectively. These taxes operated under different regimes and were therefore not uniform for all taxpayers and also costly to administer. The VAT

9 brought the Sales and Service taxes under one umbrella with a single positive rate to replace the multiple-rates indirect tax regime (ranging from 10% to 15%) that earlier operated. This made administration of the indirect tax system in the country simpler, fairer and more efficient (Public Notice 1: Why VAT and NHIL in Ghana 1998).

In global perspective, the essence of VAT is to improve the efficiency of VAT collection and revenue mobilization for the development of the countries. In Ghana, apart from this general objective, the tax was introduced to address the following objectives among others.

1. VAT was introduced to improve revenue mobilization for National development.

It has improved educational and the health systems in Ghana. There is a trust

fund purposely for education called Ghana Education Trust Fund (GETFund)

and the main source of revenue is from VAT collection. The National Health

Insurance Levy (NHIL) is one of the sources of money for the National Health

Insurance Fund, established to provide finance to subsidize the cost of provision

of healthcare services to members of licensed Mutual Health Insurance Schemes

and generally facilitate access to health service in the country.

2. VAT provides for lower income groups by exempting basic goods and essential

services such as foodstuffs, essential drugs and medicines, healthcare, education,

housing and public transportation. No VAT is charged on these exempt items.

3. VAT was supposed to help in records keeping of the businesses because it is

mandatory under the law to keep records of the business activities. This helps

the businesses in assessing loans from the financial institutions to improve upon

their businesses.

VAT is a more efficient way of collecting the general consumption taxes and is a fair tax because it covers both goods and services at a uniform rate unlike the previous sales and service tax which had different rates (Public Notice 1: Why VAT and NHIL in Ghana,

1998).

According to Nakyea (2006), the reasons for the introduction of VAT in Ghana may be summed up among other things to improve efficiency and equity in tax collection, to expand the tax base, to adopt a uniform basis for collecting the general consumption taxes, to control or curtail smuggling, to raise revenue for development, to control inflation and to reduce government borrowing.

Notwithstanding the advantages enumerated above, VAT collection in Tamale

Metropolis is saddled with challenges. Some of the challenges are difficulties in tracing clients who have relocated, nonpayment of VAT debts, low level of education on tax compliance and high level of illiteracy among others.

Nonpayment of tax debts have led to the accumulation of debts by registered traders and managing those debts is critical to revenue mobilization. It is in the light of this challenge that, the researcher wants to determine why debts are accumulated and ways in which those debts could be managed.

1.2 Statement of the Problem

Debt Management of firms‘ level is a problem in all the three main revenue institutions in Ghana and the government loses a lot of revenue from non-payment of debt owed by individuals and organizations. VAT payment is a challenge to many firms across the

11 country and the challenge may be even more serious among firms in Tamale Metropolis.

Debt Management may be the bane of the failure of the firms to meet their VAT debt obligations. It is against this background that this research is conducted to assess the

VAT debt management of firms in Tamale Metropolis.

1.3 Objectives of the Study

The research seeks to address the following general and specific objectives.

1.3.1 General Objective.

Debt Management is very essential in revenue mobilization and effective and efficient debt management cannot be overlooked. The general objective is to assess Value Added

Tax debt management of firms in Tamale Metropolis.

1.3.2 Specific Objectives

The general objective will be realized considering the following specific objectives;

1. To identify various ways in which debts are accumulated by firms in relation to

their tax obligations;

2. To assess Debt Management practices in relation to the tax obligations of VAT

registered traders;

3. To identify effects of debts on business operations; and

4. To outline measures for proper debt management of VAT registered traders in

relation to their tax obligations.

It is envisaged that, the achievement of the objectives would help improve revenue mobilization in Tamale VAT Service in particular and the VAT Service in general.

1.4 Research Questions

In the bid to achieve the research objectives, the following questions would be answered;

1. How is VAT debts accumulated by registered traders in relation to their tax

obligations?

2. To what extent do firms adhere to debt management practices?

3. What are the effects of VAT firms‘ debt on business operations?

4. What measures could be instituted to minimize firms‘ VAT debt stock?

1.5. Significance of the Study

It is envisaged that, the findings will improve revenue mobilization in VAT Service in particular and the nation in general and can act as a basis of policy formulation in relation to debt management practices. If the findings are implemented, it is believed that, it would improve revenue mobilization in the country and that would help government in meeting its recurrent and capital expenditures through VAT revenue.

The VAT registered traders can also benefit from the research in that, it can help them in managing their debts not only VAT debts but other debts in general. By understanding the ins and outs of VAT debt management practices, it will help them to avoid some of the debts they accumulate.

The research will broaden the knowledge of the researcher in terms of good debt management practices. It will also add to knowledge and contribute to the advancement of knowledge because it can act as a springboard for future research into VAT debt management practices.

1.6 Scope of the Study

VAT Service has been chosen for the study. It is the wish of the researcher to cover the whole VAT Service in the country but due to time and financial constraints, Tamale

Metropolis was selected for the study. Fifty traders who owe the Service were selected for the study and five officers from the Enforcement and Debt Management Unit (EDM) will also be interviewed. The research spanned for four months period, thus from

February 2011 to June 2011.

1.7 Limitation of the Study

The research is limited to VAT Service in Tamale Metropolis due to time and financial constraints. In spite of this limitation, everything is being done to ensure the internal validity of the research.

1.8 Organization of the Study

The whole study comprised five (5) chapters. Chapter one dealt with the general introduction of the work with special emphasis on the background of the study, statement of the problem, objectives of the study, significance of the study, scope and limitation of the study and the organization of the study.

Chapter two dealt with the literature review. Thus, this chapter dealt with the views of other writers or what other people have worked on the topic of VAT debt management.

Chapter three (3) is on the research methodology that was used in collecting, processing and analyzing data. Chapter four (4) of this study dealt with the analysis of the gathered data and the presentation of the findings. Chapter five (5) is the last chapter which

14 focused on summary of the findings, conclusion and recommendations for future consideration.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

The chapter presents the definitions of concepts; conceptual framework; various ways debts are accumulated; debt management practices in organizations; effects of debts on revenue mobilization and proper debt management practices.

2.1 Definition of Concepts

This section of the report presents definitions of relevant concepts as may matter to the research. This section focuses on the concepts of Tax, Value Added Tax, Debt and Debt

Management. According to Zikmund, (1994) concept is defined as a generalized idea about a class of objects, attributes, occurrences or processes. A concept is an idea generalized from a particular example (Seybert 1991). These concepts are therefore defined to put them in context of the study.

2.1.1 The Concepts of Tax

Richardo (1821) defines taxes as a portion of produce from the land and labour of a country placed at the government and is always ultimately paid either from the capital or from the revenue of a country.

Taxes are compulsory payments associated with certain activities. Revenues collected from taxation are used to purchase the inputs necessary to produce government-supplied goods and services or to redistribute purchasing power among citizens (Hyman 2005)

Nakyea (2006) defines taxation as the levying of compulsory contributions by public authorities having tax jurisdiction, to defray the cost of their activities. No specific reward is gain by the taxpayer. Related to Nakyea is the definition of Internal Revenue

Code of United State of America (1986) which states that, tax is an enforcement contribution, exacted pursuant to legislative authority in the exercise of taxing powers and imposed and collected for the purposes of raising revenue to be used for public or governmental purposes. Taxes are not payment for some special privilege and services rendered and are therefore distinguishable from various other charges imposed for particular purposes under particular powers or functions of government.

Taxation is the demand by the central government or local government for a compulsory payment of money by citizens of a country other than as payment for some specific service or a penalty for some specific offence. The key aspect is that, it is legal compulsion to pay or to provide and one common element between taxes is that, they are imposed by law. It is one of the most important elements of any organized community throughout history (Agyemang 2005).

For the purpose of this study, taxation is defined as a compulsory payment of money by residents of a country to Central Government or local Authority to raise revenue to meet public or governmental expenditures.

2.1.2 Concepts of Value Added Tax

Hyman (2005) defines Value Added Tax as a general tax on consumption levied on the value added to intermediate products by businesses at each stage of production. Value

Added is the difference between sales proceeds and purchases of intermediate goods and services over a certain period. Related to Hyman (200) is the definition of Value Added

Tax (VAT) by Tait (1999) which says that, it is a general sales tax on all goods and services. It is levied at each stage of production and accumulates so that it is equivalent to a tax on all final household consumption. It has become the most popular sales tax in the world.

Also, Orissa‘s Value Added Tax Act (2004) asserts that, Value Added Tax is a form of sales tax collected at each point of sale of goods in the production and distribution chain with a provision to set off or credit the tax paid on purchase of such goods against the tax payable on its sales. Thus, tax is essentially collected, on the value addition at each point of such sale. VAT is payable, when there is sale of taxable goods;

1. by a registered dealer assigned with Tax Identification Number (TIN);

2. within the State and

3. in the course of business of the dealer.

In simple terms ―Value added‖ means the difference between the sale price and purchase price. Goods pass through various stages in the manufacturing and distribution chain till they reach the consumer. At each stage, some value is added. VAT works on the principle of tax on the value addition at each such stage.

Value Added Tax is a multi-stage tax levied at each stage of the value addition chain with a provision to allow Input Tax Credit (ITC) on tax paid at an earlier stage which can be appropriated against the VAT liability on subsequent sale (Jariwala 2009).

Akpakpo (2009) posits that, Value Added Tax is the general tax imposed on the expenditure incurred in buying goods and services. It is a tax on final consumer; but in practice it is charged as an addition to the price of supplies at all stage in the chain of production and distribution. Value Added Tax is levied on the ‗value added‘ created at the various stages in the production and distribution of the product to which the tax is applicable. Akpakpo‘s definition confirms the National definition of Value Added Tax which states that, it is a general consumption tax imposed on the expenditure incurred in buying goods and services (VAT, A Guide For Facilitators, 1998).

For the purposes of this research, Value Added Tax is defined as multi stage indirect tax imposed on consumption expenditures which are incurred in patronizing commodities.

2.1.3 The Concepts of Debt

Encarta (2008) defines debt as, in law, obligation, enforceable by legal action, to make payment of money. In modern law the term debt has no precisely fixed meaning and may be regarded essentially as that which one person legally owes to another. Under common law, however, an action for debt was a lawsuit undertaken for the express purpose of recovering a precise sum of money.

Tatum (2003) advances that, tax debt is simply the amount of taxes that are incurred during a particular tax period and are payable to some type of governmental jurisdiction.

For many people, arranging to pay tax debt is not a difficult task, especially if employers routinely calculate and withhold earnings from the weekly or monthly pay cheque to forward to the appropriate tax agency. However, people who work for themselves or who own businesses are usually very concerned with managing and paying tax debt in a timely manner, in order to avoid punitive actions on the part of the tax agency involved.

Tax debt is any amount incurred from a tax payment that you cannot afford to pay. Tax debt can also arise if you are not able to file your taxes on time and you accumulate penalties. The Internal Revenue Service (IRS) takes a dim view of people with tax debts, and may exhaust all necessary measures to ensure that you pay the government the taxes you owe plus the appropriate penalties (howtogetridofstuff.com 2008).

Aspen Law and Business (2004) defines debt as an amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements.

These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms.

For the purposes of the work, VAT debt is defined as any amount due to any tax authority for which payment has not been effected.

2.1.4 Concepts of Debt Management

Wallitsch (2007) asserts that, a simple definition of the term Debt Management is any action or method utilized in order to help an individual manage his or her debt. While

20 this definition is rather broad, it includes services such as debt consolidation, debt settlement, bankruptcy, personal loans, as well as any other technique that might help consumers deal with outstanding debts. Root (2009) contends that, debt management is a term that applies to any act of trying to get your debt under control and become responsible for repaying your obligations. You can develop your own debt management plan, or you can hire a financial professional.

Debt management, by the standard financial definition, involves a designated third party assisting a debtor with repayment of his or her debt. Many companies specializing in credit counseling offer debt management plans to help people with heavy debt and damaged credit get their financial situation under control. A simpler definition of debt management could be the routine practice of spending less than one earns. However, for all intents and purposes, debt management is a structured repayment plan set up by a designated third party, either as a result of a court order or as a result of personal initiation (Beam 2010). Anderson (1999) affirms that, debt management is a term that applies to any act of trying to get your debt under control and become responsible for repaying your obligations. You can develop your own debt management plan, or you can hire a financial professional.

International Monetary Fund and World Bank (2003) defines debt management as the process of establishing and executing a strategy for managing the government‘s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management goals the government may have set, such as developing and maintaining an efficient market for government securities. Debt

21 management therefore means any conscious measure adopted by a debtor or agents hired on his or her behalf to reduce the debt burden or strategise to eliminate the debt through acceptable payment terms.

2.2 Conceptual Framework

The conceptual framework delves into how debts are accumulated by businesses in relation to their tax obligations, debt management practices in organizations, effects of debt on revenue mobilization and suggestions for proper debt management practices.

Figure 1. Debt Management Framework

NON DEBT LOW REVENUE FOR NEEDS PAYMENT ACCUMULATION NATIONAL INTERVENTION OF VAT BY REGISTERED DEVELOPMENT WHICH IS

DEBT BUSINESSES  GETFUND PROPER DEBT  HEALTHCARE MANAGEMENT

 ROADS, ETC. PRACTICES

Source: Author‘s construct, May 2011

From Figure 1, it is realized that, nonpayment of tax debts leads to accumulation of debts by businesses that are registered as agents of VAT Service. This affects revenue mobilization to develop the nation. Ghana Education Trust Fund (GETFUND) and

Ghana Health Insurance Authority receive 16.67% each of the total collection of VAT in

Ghana (VAT and NHIL: Guide to Filling the VAT/NHIL Form 2007). If taxes are not paid, it affects education, healthcare and other infrastructural development. This seriously needs intervention to make sure VAT registered traders pay their debt. It calls

22 for appropriate strategies to be adopted to check the debt accumulation by firms of their

VAT payment requirement.

2.3 Various Ways Debts are Accumulated By VAT Registered Businesses

In reviewing literature on various ways debts are accumulated by businesses, various writers mentioned poor record keeping, lack of understanding with the tax laws, penalties, interest and leniency on the part of VAT officials among others.

2.3.1 Poor Records keeping

Ingraham (2010) advances that, keeping up with your tax record is one of the most important factors involved in lowering your tax liability. Yet many taxpayers lose thousands of dollars a year in legal tax write offs, because they did not keep good records. Keeping good records is your only defense, should the Internal Revenue

Service (IRS) audit you. Keeping good records cannot only help to lower your tax liability, but can provide solid information on how you can improve your financial future.

International Finance Corporation (World Bank Group, 2007) states that, some form of recordkeeping is essential for all business operations and is one of the most important elements of running a successful business. Research into small businesses in Australia concludes that, one of the reasons that small businesses fail is inadequate, inaccurate or non-existent books and records.

Records provide feedback on the effectiveness and profitability of operations on a regular basis. With regard to taxation, good records lead to more accurate reporting of

23 income and expenses in business tax returns. Recordkeeping is an essential element of business meeting its tax obligations. Taxpayers are required to retain records that are relevant to the calculation of their taxable income, including records that verify claims for deductions.

International Finance Corporation emphasis on good records keeping has been affirmed by Ghosh (2010) who asserts that, keeping records is an excellent habit. Keeping records makes you more organized, systematic and methodical. Record keeping is crucial if you have to refer to the records, if you have to consult the records at some date far in the future or even a few days hence. Maintaining records properly is essential.

History is all about keeping records. Education is all about studying records kept by others. Someone, your mum or dad or grandparent or legal guardian, kept records for you from the day when you were born or how else would you know your birthday or enter school? Businesses financial records are so important that, it creates opportunity for every stakeholder to determine his or her stake in the business profits.

2.3.2 Other Views on Debt Accumulation

Cox (2011) opines that taxpayers find themselves deep in tax debt for a number of reasons. Some are more common than others and those listed here are by no means exhaustive. Some common reasons we see people get in over their head with Internal

Revenue Service (IRS) debt include unfiled tax returns leading to accumulation of back taxes, unfavorable tax audit results, inability to pay balance due, accrual of fees, penalties, and interest on tax balance and falling victim to tax protestor or untaxed plans and schemes.

Vos, (2005) posits that, the following can lead to accumulation of debt by small businesses in Australia. There is a broadly held view that, the tax office is lenient in its debt collection approach towards small businesses and offers small businesses adequate opportunity to trade out of debt. The Tax Office describes its broad approach as one of seeking to encourage businesses to remain ‗engaged in the system‘.

The inability, on a broad systemic basis, to distinguish between the different general categories of tax payment compliance attitudes: those businesses wanting to meet tax payment obligations but unable to do so without short term assistance; and those businesses either incapable of meeting tax payment obligations or in serial default. This inability has broad effects, potentially disadvantaging both compliant small business competitors and other creditors (ibid).

The business community highlighted a competitive disadvantage where the same payment leniency shown to normally compliant businesses, facing ‗manageable‘ cash flow problems, was also shown to serial defaulters and those incapable of meeting their tax payment obligations. More small business debt cases are in default of their repayment arrangements than those not in default. Non-compliant businesses have reduced operating costs where tax debts continue to remain unpaid and are therefore believed to be able to undercut compliant businesses prices (ibid).

Difficulty in meeting tax payment obligations can also forewarn a small business of potential non-viability and signals wider problems for all creditors. Continued trading by

25 small businesses on Tax Office-supplied credit can significantly disadvantage creditors

—usually other small businesses — by their increased exposure to loss. The Inspector-

General acknowledges that the Tax Office‘s relatively lenient approach may create a competitive disadvantage to self-funding small businesses or businesses that borrow funds on the open market to meet their tax payment obligations. Small businesses with established tax debts are effectively using the Tax Office as a source of funding for their business, on either a short-term or a long term basis, to enable them to continue to trade.

The Tax Office‘s debt collection policy is directed towards identifying and applying the most appropriate debt collection response to each particular case, having regard to individual circumstances. However, there are many obstacles in applying this policy in practice to all tax debtors. Obstacles include large numbers of debt cases, Tax Office resource allocations, unsophisticated risk identification techniques and varying quality and reliability of small business financial information. The Tax Office also has a policy of minimizing the costs of tax compliance (ibid).

Yusuf (2007) in his presentation assigns the following as reasons why debts are accumulated by firms:

1. Inability to recover debt due to lengthy litigation process;

2. Ineffective audits;

3. It is very difficult to keep track of Small and Medium (S&M) taxpayers;

4. Most of the Small and Medium Enterprises (SME) are revenue constraint and

they have limited access to capital;

5. Political lobbying and interference hampers the debt collection process;

6. Penalties provided in the law though harsh, but are not implemented effectively;

and

7. The rate of additional tax is low as compared to market rate of capital.

Caplin (1962) explains that, a large proportion of under-reporting which are uncovered as result of tax audit of small farmers in United States of America is due to the lack of understanding of the complex tax laws. This normally results in accumulation of debts which affect the small scale farmers. Should this be the case in United States of

America, then the developing countries experience would be worse giving the low level of literacy among them.

Bis (2011) in his analysis in debt management mentions that, credit card debt has become a huge problem in America. People have become too accustomed to just using their plastic to get whatever they want, whenever they want, without truly having the money to pay for it. There are three reasons why people are becoming so swamped with credit card debt.

2.4. Assessment of Debt Management Practices in Organizations

This section of the report seeks to review literature on debt management provisions in

VAT Service, debt management practices in other organizations and individuals.

2.4.1 Debt Management Provisions in VAT Service

It covers the procedures for recovery of unpaid tax, including assessments, penalties and interest. The effective enforcement of debts is essential if revenue flow is to be

27 maintained and the integrity of the tax safeguarded. When a client is notified of the tax liability, that client is given 21 days within which to honour the tax obligations.

The Operations Manual (ND) outlines the following procedures for debt recovery.

2.4.2 Stages in the Enforcement Process

There are three main stages to the enforcement process;

1. Action on receipt of the computer generated debtors lists

2. Action to obtain outstanding payments

3. In the absence of payment, distress and sale of goods or civil recovery action in

satisfaction of debt.

2.4.3 Action on receipt of debtors lists

1. Each debtor on the lists is to be treated as a case and entered in an Enforcement

2. Enforcement Section should obtain the trader‘s folder and prioritize by value and

age in order that, the largest and the oldest debts are pursued first.

3. For each debt notified, an Enforcement Progress sheet should be completed.

4. An Immediate Demand Notice (IDN) should be prepared and the issue recorded

in the Enforcement Register.

2.4.4 Action to obtain outstanding payments

1. Enforcement staff should ensure that, an Immediate Demand Notice (IDN) has

been issued for the current debt.

2. In limited circumstances, the registered person can be contacted by phone if this

can be easily and quickly done and it is considered that, it is likely to result in

payment.

3. Where, 14 days after the issue of the Immediate Demand Notice, the debt

remains unpaid, preparation for an enforcement visit and distress action should

be made.

2.4.5 Enforcement Visits and Distress Action

Where issue of IDN does not result in payment, the registered person should be visited and the reason for the visit should be explained to the person and invited to come and pay the debt. If the person refuses to pay or cannot pay, then distress action is taken.

Section 34 of the Value Added Tax Act 1998 (Act 546) explains that, the Commissioner may in writing authorize the levying of distress where any tax, interest or penalties remain unpaid after the time by which the Act requires. The distress involves the seizure of all assets, property, building, machinery, plant, tools, means of transport and communication, accessories, land, animals and all goods used in Ghana in the manufacture, production, sale or distribution of any taxable supplies. This provision means that the VAT law has provided ample opportunity for any debtor to be able to organize to pay the VAT debt.

2.4.6 Recovery of Debt by Garnishment and Civil Recovery

The Commissioner can also apply to the court to seek an order for any individual or business from whom any money is due or is accruing or may become due to a taxable person or hold money for or on account of the taxable person to pay to the

Commissioner that money, or such of it as is sufficient to tax, interest and penalties due and payable (Value Added Tax Act 1998, Act 546). Related to this, VAT Operations

Manual (ND) puts it that, in the following circumstances, civil recovery action in court may be appropriate;

1. There are no distrainable assets.

2. The business continues to trade and the debt is still accumulating.

3. The money is owed to the trader by third party.

Section 73 of the Value Added Tax Act, Act 546 (1998) states that, a certificate by the

Commissioner that, tax shown as due in any return or assessment made under this Act has not been paid shall be sufficient evidence for civil or criminal proceedings of that fact unless the contrary is proved.

Nakyea (2006) explains the following offences and sanctions with regards to taxation in

Ghana

OFFENCE PENALTY Failure to keep books of records 5% of amount payable by that person for the year under review Failure to furnish a return One penalty unit in a case of a company and half penalty unit in a case of self employed in respect of each day of default Failure to pay tax on due date Failure not more than 3 months; 10% of tax debt, plus tax debt Failure exceeding 3 months; 20% of tax debt plus tax debt. Understating estimated tax payable by 30% of the difference between the tax in installments (Self Assessment) respect of the estimated chargeable income, where the estimated is less than 90% of the actual chargeable income. Making false or misleading statements Double the under payment of tax which may result if not detected, if made without reasonable excuse. Triple the amount of the under payment of

tax which may result if not detected, if made knowingly or recklessly. Aiding and abetting Triple the amount of under payment of the tax, which may result if the offence went unnoticed. Failure to comply with the Act Where the resulting underpayment is more than GH₡500.00 between 50 and 300 penalty units. Failure to withhold tax Personal liability to pay to the Commissioner the tax due, but not withheld. Source: Nakyea (2006)

2.5 Debt Management Practices By Individuals

David (2005) acknowledges that the majority of small businesses do have an effective understanding of their cash flows, there are measures that can further assist small business to avoid or resolve tax debt:

1. Measures that encourage small businesses to make provision for future tax

liabilities;

2. Measures that encourage small business tax debtors to critically examine their

ongoing viability at a very early stage of tax payment difficulties; and

3. Measures that identify willfully non-compliant small businesses at an early stage

and escalate those cases for prompt and appropriate responses.

Anderson (2005) argues that, Debt management involves certain steps. First is to prepare a schedule and follow it strictly until the borrower gets out of his debts. Another step will be to reduce the unnecessary expenses. For debt consolidation, all your debts will be merged in a single debt and interest will be charged on that particular amount. Finally, in the debt negotiation plan, the borrower devises a repayment plan for his debts. It is

31 drawn out in such a way that both the borrower, as well as creditor does not suffer any loss. It is usually based on a negotiation between both the parties.

Caplin (1962) asserts that, a large proportion of under reporting after tax audit is due to lack of understanding of the complex tax laws. Stronger enforcement would obviously make some contributions to a reduction of this gab and would plan to make wider and more sophisticated audits in the farm field. He explains that, the way to go is not sophisticated audits to accumulate debts but outline better education of the public on some of the technicalities and on various obligations in complying with the tax laws, a book on ‗Farmers‘ Tax Guide‘ has to be released and written in simple language and it is expected to educate farmers on the dos and don‘ts of taxation, plans to expand public information programmes on Televisions, Radios and Press Releases, tax staff have agreed to make themselves available for a reasonable number of public speaking engagements and there will be education on simple record keeping.

2.6 Effects of Debt on Business Operations

Section 31 (1) of the VAT Act, 1998 (Act 546) states that "any tax due, any penalty and interest which remain unpaid after the due date may be recovered by the Commissioner as a debt.

The review of the Adabraka LVO‘s status report disclosed that traders owed a total amount of GH¢ 2,912,738.23 as at the end of November 2007. Mr. Stephen Asare‘s

Original Pay All lottery and Geocrest Security Limited owed a total of GH¢1,445,090.41 representing 50% of the total amount outstanding. We recommended that management

32 should take the necessary steps to apply institutional and legal measures to recover the amounts owed by the traders (Auditor General‘s Report 2007).

The review of the VAT debt stock at Tema Large Taxpayers‘ Unit (LTU) as at 31

December 2006 disclosed that 21 traders owed the VAT Service a total of

GH¢36,235,000; a substantial portion of which, according to management, was owed by state institutions like Ghana Telecommunication Corporation, Volta River Authority and

Electricity Company of Ghana. Management indicated that it had employed administrative measures to collect the debt but to no avail. It however gave the assurance that the issue was being handled at the highest level of management and efforts were also being made to recover the debts owed by non-state institutions.

We recommended that management should liaise with the Enforcement and Debt

Management Unit (EDM) and the Legal Department of the Service to recover all outstanding debts. Additionally, management should invoke the relevant sanctions against the recalcitrant offenders. It should also embark on education campaign to educate traders on the need to pay their taxes promptly to help develop the nation

(Auditor General‘s Report 2007).

Hanson (2010) in his study says that, always remember that debt takes more from you than just money. It is easy to think of debt simply in terms of bills to be paid, but it is so much more. There are four major debt effects which are Loss of freedom, loss of cash flow, loss of time and loss of opportunities. Certainly debt may cause problems beyond these four, but most difficulties come in some form of them. Debt will eventually keep you from doing what you want to do. When you are loaded with debt, your options narrow considerably. I have often said, "Working while carrying a load of debt is like a

33 prison work-release program. You are released each day to work, but the balance of your time is spent in a mental prison."

According to Moneymatters101.com (2011), some of the most telling side effects of negative debt are evictions, bankruptcies, foreclosures, wage garnishments, divorces, emotional breakdowns, suicides, and in some cases, murder.

Evictions: Because of the inability to pay their rent, many tenants have to cope with the prospect of being evicted.

Bankruptcy: Every day, thousands of people file for protection under the bankruptcy laws of this country.

Foreclosure: People who cannot pay their mortgage payments, risk foreclosure and the loss of their homes.

Wage Garnishments: Wage garnishment can be an embarrassing event if you are sued and the judge orders your employer to send your pay directly to a creditor.

Divorce: A happily married couple can find themselves in a very unhappy situation caused by excessive spending by either spouse or by both of them together.

Emotional Breakdown: Some people cannot handle the relentless pressure put on them by demanding creditors, especially the phone calls, the mail, and the embarrassment of losing their homes or apartments, cars, and other items.

Suicide: Every year, hundreds of people commit suicide because they can't cope with their inability to pay their debt.

Murder: Debt and the emotional stress that accompanies it is one of the main causes of murder in this country. Some people will kill for money.

2.7 Measures for Proper Debt Management

This section of the report reviews literature on debt management practices in Internal

Revenue Service and other views on debt management practices.

2.7.1 Debt Management Practices in Internal Revenue Service

This section of the report focuses on the due date and payment of tax; delinquent accounts, payment by installments, collection by distress and collection by garnishment.

2.7.2 Due Date and Payment of Tax

Section 134 of the Internal Revenue Act (2000) specifies that, subject to this Act, tax assessed shall be due on the date on which the person assessed is served with a notice of assessment. Subsection 2 emphasizes that, tax due in an assessment shall be paid by the person assessed, in the case of a person subject to self assessment, on the due date for furnishing of the return of income to which the assessment relates or on the date specified in the assessment and in any other case, within thirty days from the date of service of the notice of assessment.

Permission to pay tax by installments does not preclude a liability for interest arising on the unpaid balance of the tax due.

Section 135 of the Internal Revenue Act (2000) stipulates that, tax, when it becomes due and payable, is a debt due to the Service and is payable to the Commissioner in the manner and at the place prescribed. Tax that has not been paid when it is due and payable may be sued for and recovered in any Court by the Commissioner with full costs of suit from the person sued.

2.7.3 Delinquent Accounts

Delinquent Accounts are prepared for each unpaid assessment. Timely actions are essential for successful collection of delinquent assessments. The older it becomes, the more difficult it is to collect. Stronger and more aggressive steps are used as the taxpayer continues to neglect or refuse to pay (Adeyiga et. el. 2007).

The first step is to mail the Notice of Tax Due (IT Form 129 A) and note the history record with the date sent. If payment is not made within 15 days from the date of this notice, add penalty (interest) in accordance with section 143 of the Internal Revenue Act

2000, Act 592 as amended and post the assessment to the delinquent account.

Send penalty assessment and final demand notice (IT form 132-E) by registered mail or deliver it to the taxpayer. This notice warns the taxpayer of an enforcement action if the tax is not paid within 30 days and gives the taxpayer 30 days to object to assessment of penalty. You may make a field call if the tax is not paid within 30 days after the second notice. While visiting a taxpayer‘s business, determine if the assessment amount is appropriate for the business you are observing. If not, advice the Assessor what the assessment should be. (Adeyiga et. el. 2007).

Additional steps that can be taken if the tax is not paid. After appropriate investigations, possible outcomes of collection cases are;

1. Immediate full payment. This is the best method of collection and should be

your first objective before considering other methods.

2. An extension of time to pay.

3. Recommend an installment payment agreement. This may include asking the

taxpayer to defer payment of other debts so that, the tax can be paid.

4. Enforcement Actions. If the taxpayer‘s compliance history is poor, this will

support enforcement. Enforcement actions include garnishment and distress.

2.7.4 Installment Agreement

When a taxpayer cannot pay in full immediately, sometimes an installment payment agreement is appropriate. Installment agreements have the advantage of helping prevent taxpayer being unable to support themselves and their families and or keeping them in business, and are less expensive for Internal Revenue Service than enforcing collection.

The Commissioner‘s guidelines for accepting installment payment applications from taxpayers are; delinquent final assessments must be paid in full within 6 months; delinquent provisional assessment installments must be paid within 3 months; agreements are not permitted for withholding taxes; all agreements must be guaranteed with post dated cheques; all current taxes must be paid on time; and management officials must approve all agreements (Adeyiga et. el. 2007).

2.7.4 Collection of Tax by Distress

Section 136 of the Internal Revenue Act (2000) authorizes the Commissioner to recover any unpaid tax by distress proceedings against the movable property of a person liable to pay tax, referred to as the "tax debtor", by issuing an order in writing specifying the person against whose property the proceedings are authorized, the location of the property, and the tax liability to which the proceedings relate; and may require a police officer to be present while distress is being executed. For the purposes of executing distress, the Commissioner may, at

37 anytime, enter any house or premises described in the order authorizing the distress proceedings. Subsection 7 of the Act authorizes that, all costs incurred by the

Commissioner in respect of any distress may be recovered by the Commissioner from the tax debtor and the provisions of this division shall apply as if the costs were tax due and payable.

2.7.5 Collection of Tax by Garnishment

Section 138 of the Internal Revenue Act (2000) authorizes the Commissioner to garnish the taxpayer‘s money that someone else is holding. Examples are bank deposits, wages

& salaries and business receivables. Once the garnishment is served, it continues to garnish money payable to the taxpayer until it is released or the amount of garnishment is paid.

2.8 Other Views on Proper Debt Management

Dave (2004) posits that, the good news is that there's not some magical, mystical formula to good debt management. The solution is common sense and having a plan for your Total Money Makeover. Good debt management is 80% behavior and 20% head knowledge. It isn't rocket science as some debt management companies try to make you believe.

Is it easy? No. In fact, it's really hard most of the time. But it's worth it. It is amazing to see people change their lives through simple determination and having a plan that works every time. Once you have a real debt management plan in place, it is only a matter of time.

Cox (2011) says that, regardless of how much you owe, there are multiple programs the

IRS in United State of America offers to encourage you to pay off your tax debt and, in some cases, negotiate a settlement. Common ways you can deal with out-of-control IRS debt include; negotiating a monthly payment plan (referred to as an installment agreement by the IRS); setting up a partial payment installment agreement; negotiating a tax settlement with the IRS (offer in compromise) and proving to the IRS that the tax debt is not currently collectible

Kappaggoda (1993) contends that, effective debt management requires a capacity to monitor and manage a country's debt comprehensively and efficiently. This could be achieved by implementing debt management projects which include the following components: a well-defined legal and institutional framework to monitor the contracting of loans, their utilization and repayment; the administrative arrangements for the compilation of data required for debt monitoring and management; facilities for the storage, retrieval and analysis of debt data, either by a manual system or computer software; the organizational arrangements for debt management which involves the creation and staffing of a Debt Management Office (DMO) in an appropriate location and training in aspects of debt management that are relevant to the needs of the borrowing country.

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

This chapter focuses on the research methodology used in carrying out the study. The areas covered are research design, population, sampling techniques, data collection techniques and organizational profile.

3.1 Research Design

Saunders et al., (2007) define research design as the general plan of how the research questions would be answered. A research design is a framework or blueprint for conducting the marketing research project. It details the procedures necessary for obtaining the information needed to structure and/or solve marketing research problems

(Patrangelo 2010).

The staff of the Enforcement and Debt Management unit (EDM) were interviewed and questionnaires were also used in sourcing primary data for the study.

3.2 Population

Population refers to the entire group of people, events or things of interest that the researcher wishes to investigate (Sekeran, 1990). The population of this study includes clients (registered traders) of Tamale Metropolis and staff of the VAT Service in

Tamale. Due to time and financial constraints, the researcher could not cover the entire population and therefore a representative sampling is chosen for the study.

3.3 Sampling Techniques

Sekeran, (1990) defines a sample as a portion of the population that has attributes as the entire population. The VAT registered traders of Tamale Metropolis are used for the study. Fifty out of eighty five clients who owe the Service are selected at random for the study using simple random sampling techniques. As stated earlier, the research is centered on debt management and therefore all the five (5) members of staff from the

Enforcement and Debt Management Unit (EDM) were interviewed.

3.4 Data Collection Techniques

The researcher used questionnaire and interview guide as the main instruments for data collection. The questionnaires were used to obtain data from the VAT registered traders while some EDM officials were interviewed. The staff were interviewed to get in-depth information on clients debt and debt management strategies.

3.5 Organizational Profile of VAT Service, Ghana

The Value Added Tax Service (VAT Service) was established in 1998 under the Value

Added Tax Act (Act 546). Its primary function is the administration and collection of the

Value Added Tax (VAT) that replaced the Sales and Service Taxes previously administered by Customs, Excise and Preventive Service (CEPS) and the Internal

Revenue Service (IRS) respectively.

3.5.1 Vision Statement

The vision of VAT Service is to be efficient, effective and modern tax administration that meets national and global standards.

3.5.2 Mission

The mission of the VAT Service is to ensure successful management and suitable development of VAT in Ghana. It is committed to mobilizing revenue for national development by engendering public confidence in the administration of VAT through continuous education and fair application of the Tax Laws as a means of promoting voluntary compliance. It will achieve these goals through a highly motivated staff who will act at all times with integrity. This means that the study on registered traders of

VAT is well placed especially in context of the VAT debt management by the firms.

3.5.3 Management Structure

The Chief Executive of the Service, the Commissioner of VAT Service, administers the tax from the VAT Headquarters located in Accra with the assistance of his Deputy

Commissioners who head the four main departments of the Service namely; Finance and

Administration, Operations, Audit, Investigations & Research, Monitoring and Planning.

The VAT Commissioner reports to the Minister of Finance through the Revenue

Agencies Governing Board (RAGB), the body with oversight responsibility for the three revenue institutions. The management of VAT has been pursuing programmes with the definite aim of increasing revenue mobilization at minimum cost to justify the introduction of the tax in the country. As of August 2005, the Service employed 949 staff which included 24 management staff, 548 senior staff and 377 junior staff.

3.5.4 Operations

The Service devotes much time and effort to public education activities and customer care. The Service publishes the quarterly VAT Newsletter, VAT News. The successful

42 implementation of VAT has been attributed largely to the VAT education and publicity campaign with which the tax was ushered in. Implementation of the tax commenced in

December 1998 at a standard rate of 10%. Since then, the tax has passed through the challenges of policy initiation and has generally been acclaimed as successful as compared with sales and service operated previously. This success has been underlined by reasonable performance of the tax measured by taxpayer satisfaction and adequate revenue contributions to national coffers. The rate was increased from 10% to 12.5% to generate funds for the Ghana Education Trust Fund (GETFund). The GETFund has now become a vehicle for the provision of equipment and infrastructure to educational institutions throughout the country. The VAT Service also administers the collection of the National Health Insurance Levy (NHIL) at a rate of 2.5% which provides funding for the National Health Insurance Scheme. (VAT Service 2008)

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSIONS

4.0 Introduction

Chapter four is on presentation, analysis and discussions of data relating to Value Added

Tax debt management of firms in Tamale Metropolis. The chapter is divided in sections which comprise: Socio-demographic issues; various ways debts are accumulated by firms; assessment of debt management practices in relation to tax obligations of registered businesses; effects of debts on revenue mobilization; and measures for proper debt management.

4.1 Socio-Demographics of Respondents

The socio-demographic description of respondents presented for analysis included the sex, duration with VAT Service, educational background, age and marital status.

4.1.1 Gender Distributions of Respondents

The gender distribution of the respondents was studied. From Table 4.1.1 below, out of the 44 respondents, 75% were males and 25% of the respondents were females. This indicates that, there are more males who owe the Service than females.

Table 4.1.1 Gender Distribution of Respondents Response Cumulative Frequency Percent (%) Percent Male 33 75.0 75.0 Female 11 25.0 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.1.2 Age Distribution of Respondents

The age distribution of respondents is dominated by the age groups between 30 years to

50 years. The Histogram 4.1.1 below shows that, out of the 44 respondents, 15.91% were within the ages of 20-29, 31.82% were within the ages of 30 - 39 years, 34.09% also fell within the ages of 40-49 years, 9.09% were within the ages of 50-59 years and

9.09% were above 60 years. This implies that most people in active business are of youthful age.

Figure 4.1.1 Age Group of Respondents

Source: Field Survey, April 2011

4.1.3 Educational Background of Respondents

The level of education shows respondents‘ level of understanding of the questionnaire and the issue at stake in particular and the understanding of the VAT Act in general.

The options for the respondents were Senior High School Certificate/Ordinary Level,

Higher National Diploma/Diploma/Advanced Level, First Degree and others. The responses received indicated that, out of the 44 respondents, 27.3% had completed

Senior High School, 38.6% had gone through Higher National Diploma, 22.7% had completed first degree University education and 11.4% had completed other educational institutions which include Junior High School, Middle School Leaving Certificate among others. This shows that, most of the respondents were well educated and therefore could appreciate the tax payment requirements by VAT Service.

Table 4.1.2 Educational Background of Respondent Response Frequency Percent Cumulative Percent SSS/O‘Level 12 27.3 27.3 HND/DIPLOMA 17 38.6 65.9 First Degree 10 22.7 88.6 Others 5 11.4 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.1.4 Marital Status of Respondents

The categories given to the respondents to answer were married, widowed, divorced and single. It was seen that, out of the 44 respondents, 63.6% were married, 9.1% were widowed, 11.4% were divorced and 15.9% were single. The age distribution has a

46 direct bearing on marital status as 75% of respondents were between the ages of 30-60 years which is the marriageable age.

Figure 4.1.2 Marital Status of Respondents

Source: Field Survey, April 2011

4.1.5 Length/Time of Registration with VAT Service.

The length of registration will give a fair idea about the respondents‘ familiarity with the operations of the VAT which includes how debts are created, how debts are accumulated, the VAT Act and activities of VAT officials among others. The Table

4.1.3 below shows that, out of the 44 respondents, 22.7.5% of the respondents have been with VAT Service for three years, 31.8% had been registered with VAT Service for the period between 4 to 6 years, 29.5% had been registered with the Service for 7 to 9 years and 15.9% had been with the Service for more than 10 years. This shows that, majority of the respondents are familiar with the activities of VAT Service since 77.25% of the respondents have been with the Service for more than 3 years.

Table 4.1.3 Length of Respondent‘s registration with VAT

Response Frequency Percent Cumulative Percent 1-3years 10 22.7 22.7 4-6years 14 31.8 54.5 7-9years 13 29.5 84.1 10 and above 7 15.9 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.2 Various Ways Debts are Accumulated by Firms

In the quest to find out various ways debts are accumulated by firms, respondents were asked the type of businesses they operate, how long VAT debtors have owed the

Service, causes of tax debt, reasons why they allow debts to accumulate and sanctions for nonpayment of debts.

4.2.1 Types of Business Operated by Respondents

The respondents were asked the type of businesses they operate. From the Figure 4.2.1, the clients who owe VAT Service are dominated by retailers who engage in petty trading. Total respondents of 44, 52.3% were retailers, 29.5% were service providers and 18.2% of the respondents were wholesalers.

Figure 4.2.1 Type of Business Operated

Source: Field Survey, April 2011.

4.2.2 How Long Respondents have Owed VAT Service?

On the issue of how long respondents have owed the Service, the Table 4.2.1 below shows that, out of the 44 respondents, 15.9% have owed the Service for 1-6months,

11.36% have owed the Service for 7-12 months, 43.18% have owed for the period of 13-

18 months and 29.56% of the clients have owed the Service for more than 18 months.

Majority of VAT debtors have owed the Service for more than 7 months. This shows that, majority of debtors do not pay their debt within the stipulated 21 days given to debtors to pay their debts (Operations Manual ND).

Table 4.2.1 How long Respondents have owed VAT Service? Response Frequency Percent Cumulative Percent 1-6months 7 15.9 15.9 7-12months 5 11.36 27.26 13-18months 19 43.18 70.44 Above 18 months 13 29.56 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.2.3 Causes of Tax Debt

Respondents were quizzed as to what brought about their tax debts. The Figure 4..2.2 below clearly shows that, out of the 44 respondents, 86.4% of debts of registered clients come about as a result of assessment, 4.5% of the respondents owe as a result of submission of returns but payment is deferred, 2.3% incurred debts as a result of penalty and 6.8% were due to interest on overdue debts.

Figure 4.2.2 Cause of Debt

Source: Field Survey, April 2011.

4.2.4 Reasons for the Accumulation of Tax Debts by Registered Clients

In sourcing for the reasons why tax debts are accumulated by clients, respondents were allowed to tick more than one from the various options given and therefore total responses were 74. It came out that, 16.22% are of the opinion that, poor records keeping contribute to accumulation of debts, 24.32% also mentioned that, unfavourable tax audit leads to accumulation of debts, 17.58% says that, poor sales account for accumulation of debts, 20.27% chose lack of understanding with the tax, 4.05% attributes debt accumulation to lack of constant reminders, 13.51% attributes accumulation of debts to accrual of fees, penalties, interests on balance due, 2.70% are of the view that, bad spending habits lead to accumulation of debt and 1.35% assigned his own reason for debt accumulation. Cox (2011) and Yussif (2007) have similar view that, unfavourable tax audit leads to accumulation of debts.

Table 4.2.4 Reasons for Accumulation of tax Debts Response Frequency Percent Cumulative Percent Poor records keeping 12 16.22 16.22 Unfavourable tax audit 18 24.32 40.54 Poor sales 13 17.58 58.12 Lack of understanding of tax 15 20.27 78.39 Lack of reminders on tax 3 4.05 82.44 debts Accrual of fees, penalties, 10 13.51 95.95 interests on balance due Bad spending habits 2 2.70 98.65 Others 1 1.35 100.0 Total 74 100.0 Source: Field Survey, April 2011.

4.2.5 Prominent Reasons for Tax Debt Accumulation

Most of the respondents were of the view that, unfavourable tax audit leads to accumulation of debts because out of the 44 respondents, 27.28% supported that view whereas 22.73% attribute it to poor records keeping. That is not all, 20.45% attribute it to lack of understanding with the tax laws, 18.18% attribute it to poor sales and 11.36% are of the view that, debt accumulation comes about as a result of accrual of fees, interest and penalties.

Poor records keeping bring about unfavourable tax audit and this argument is supported by Ingraham (2010) and Ghosh (2010). It was also noted that, lack of understanding with the VAT law brings about unfavourable tax audit which eventually leads to accumulation of debts and this confirms Caplin‘s (1962) view.

It could be emphasized here that, either lack of understanding with the tax laws or poor records keeping result in unfavourable tax audit which eventually lead to accumulation of debts.

Outcomes of the interview conducted with officials from Enforcement and Debt

Management Unit (EDM) on the reasons why debts accumulate were not different from responses from registered clients. It came to light that, debts accumulate due to poor records keeping and lack of understanding with the tax laws which leads to unfavourable tax audit and huge assessments are raised.

Table 4.2.5 Prominent Reasons For Tax Debt Accumulation Response Frequency Percent Cumulative Percent Poor records 10 22.73 22.73

Tax audit 12 27.28 50.01

Poor sales 8 18.18 70.46

Lack of understanding 9 20.45 88.64

Accrual of fees 5 11.36 100.00

Total 44 100.00

Source: Field Survey, April 2011.

4.2.6 Existence of Sanctions for Nonpayment of Tax Debts

When respondents were quizzed whether there are sanctions for non-payment of VAT debts. Out of the 44 respondents, 97.7% said that, there are sanctions for non-payment of VAT debts and only 2.3% responded that, there are no sanctions for non-payment of debts. This clearly shows that, most of the registered clients know about the existence of the sanctions and that, they could be sanctioned for nonpayment of debts and yet the debts are not being paid. This supports Yussif (2007) argument that, penalties provided in the law though harsh, but are not implemented effectively. This is illustrated in the

Figure 4.2.3 below.

Figure 4.2.3 Existence of Sanctions for nonpayment of Debts

Source: Field Survey, April 2011.

4.2.7 List of Sanctions for Nonpayment of Tax Debts

With regards to sanctions for nonpayment of debts, respondents were allowed to choose more than one and therefore total responses were 86. From the Table 4.2.7 below,

31.40% were of the view that, interest on overdue debts, 44.18% chose seal off, 8.14% chose garnishment, 9.30% chose civil recovery and 6.98% stated others

Table 4.2.7 List of Sanctions for Nonpayment of Tax Debts Response Frequency Percent Cumulative Percent interest on overdue debts 27 31.40 31.40 Seal off 38 44.18 75.58 Garnishment 7 8.14 83.72 Civil Recovery 8 9.30 93.02 Others 6 6.98 100.0 Total 86 100.0 Source: Field Survey, April 2011.

4.2.8 Most Effective Sanctions for Nonpayment of Tax Debts.

Most of the respondents were of the view that, seal off is the most effective way of dealing with non-compliant traders in that, out of the 44 respondents, 75% support that view, 9.1% were also of the view that, interests on overdue debts were the most effective way of dealing with recalcitrant traders. Out of the number, 11.4% were of the view that, civil recovery is the most effective way of collecting debt whereas only 2.3% of respondent is of the opinion that, garnishment was the most effective way. This is in agreement with section 34 of the Value Added Tax Act (1998) which recommends distress action for non-compliant clients.

From the interview with the officials of EDM, it confirms what the registered clients have already emphasized that, seal off is the most effective sanction for nonpayment of tax debts.

Table 4.2.8 The Most Effective Sanction Recommended Response Frequency Percent Cumulative Percent Interest on overdue debt 4 9.1 9.1 Seal off 33 75.0 84.1 Garnishment 1 2.3 86.4 Civil recovery 5 11.4 97.7 Others 1 2.3 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3 Debt Management Practices in Relation to Tax Obligations

In sourcing views on debt management practices in relation to their tax obligations, respondents were asked how they keep records on their businesses in general, records on

VAT collection, records on their debts, leniency of VAT officials, sanctions for nonpayment of debts and rescheduling of debts.

4.3.1 Degree of Record Keeping on General Business Activities

In an attempt to know whether clients keep proper records of their business activities, out of the 44 respondents, 2.3% were of the view that, they keep excellent records of their business activities, 29.5% also answered that, their records keeping were very good, 13.6% also said that, their records keeping were good, 40.9% think that, their records keeping were poor and 13.6% mentioned that, there is no records of business activities. This shows that, most of the respondents do not keep proper records of their business activities.

Table4.3.1 General Business Records of Business Activities

Response Frequency Percent Cumulative Percent Excellent 1 2.3 13.6 Very Good 13 29.5 54.5 Good 6 13.6 68.2 Poor 18 40.9 97.7 No records 6 13.6 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3.2 Degree of Record Keeping on VAT Collection and Payment

The Table 4.3.2 below explains that, out of the 44, 15.91% of respondents have good records of VAT collection and payments, 18.18% also keep good records of VAT collection, 50% conceded that, their records keeping in relation to VAT collection were poor and 15.91% said that, they have no records of their VAT collection.

Table 4.3.2 Records on Vat Collection and Payment Response Frequency Percent Cumulative Percent Very Good 7 15.91 15.91 Good 8 18.18 34.09 Poor 22 50.00 84.09 No Records 7 15.91 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3.3 Degree of Record Keeping on General Business Debts

In finding out whether clients keep records of their business debts in general, out of the

44 respondents, 2.3% answered that, records on his business debt were excellent,

22.73% were also of the view that, they have very good records on their debts, 15.91% also intimated that, their records on debts are good, 38.61% conceded that, they have poor records on their debts and 20.45% do not keep records on their debts.

Table 4.3.3 General Business Debt Records Response Frequency Percent Cumulative Percent Excellent 1 2.3 2.3 Very Good 10 22.73 25.03 Good 7 15.91 40.94 Poor 17 38.61 79.55 No Records 9 20.45 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3.4 Degree of Record Keeping on Tax Debts

It is evident from the Table 4.3.4 below indicating responses from 44 respondents that, most registered clients do not keep records of their tax debts as 50% of respondents made it clear that, they have poor records of their tax debts and 13.64% were of the view that, they do not keep records of their tax debts. Only 4.5% keep excellent records of their tax debts and 18.2% were of the view that, they keep very good records of their tax debts. From the analysis on records keeping, it came to light that, most of the respondents do not keep proper records of their business activities. This confirms

Ingraham (2010) and Ghosh (2010) belief that, keeping up your tax record is one of the most important factors in lowering your tax liabilities.

An interview with VAT officials indicated that, there is widespread poor records keeping among registered clients in Tamale Metropolis and this greatly affects their businesses.

4.3.4 Degree of Record Keeping on Tax Debts

Table 4.3.4 Records on Tax Debts Response Frequency Percent Cumulative Percent Excellent 2 4.5 4.5 Very Good 8 18.2 22.7 Good 6 13.64 36.34 Poor 22 50.00 86.34 No Records 6 13.64 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3.5 Leniency of VAT Officials to VAT Debtors

With regards to the leniency of VAT officials, one could see from the Table 4.3.5 below that, out of the 44 respondents, 50% agree that, VAT officials are lenient in their debt collection activities, 20.4% disagree that, they are lenient, 18.2% strongly agree that, officers of VAT Service are lenient and only 9.1% strongly disagree that, officers are lenient. This shows that, VAT officials are too lenient in their debt collection exercises and therefore they do not enforce the law. This supports Vos (2005) argument that, tax officials are too lenient in applying the sanctions for debt collection and this leads to accumulation of debt.

An interview with the officials from Enforcement and Debt Management Unit mentioned that, they are unable to apply the laws on debt management to the latter and therefore are unable to deal decisively with recalcitrant clients.

Table 4.3.5 Leniency of Vat Officers Response Frequency Percent Cumulative Percent Strongly agree 8 18.2 18.2 Agree 22 50.0 68.2 Disagree 9 20.4 88.6 Strongly disagree 4 9.1 97.7 Not sure 1 2.3 100.0 Total 44 100.0 Source: Field Survey, April 2011

4.3.6 Sanctions Applied for Nonpayment of Debts are not Deterrent Enough

Respondents were asked whether sanctions applied for nonpayment of tax debts are deterrent enough. From the Figure 4.3.6, out of the 44 respondents, 4.5% strongly agree that, laws for the enforcement of the payment of debts are not deterrent enough, 20.5% support that view, 50% disagree that, the laws are not deterrent enough and 25% strongly disagree to that view. This shows that, the laws governing the collection of debts are deterrent enough but for the leniency of the VAT officials, they are not being applied. This is in agreement with Yusuf (2007) explanation that, the penalties in the law although harsh, but are not implemented effectively.

Figure 4.3.1 No Deterrent Sanctions

Source: Field Survey, April 2011. 60

4.3.7 Non Regular Reminders from VAT Officials The researcher wanted to know whether VAT officials remind clients of their debts.

Most of the respondents were of the view that, VAT officials remind them of their tax liabilities regularly as 50% disagree that, they are not being reminded, 25% of respondents agree to that view, 13.6% strongly disagree that, they are not constantly reminded, 6.82% strongly agree that, they are not constantly reminded and only 4.55% of respondents are not sure of the answer.

Officials from EDM explained that, letters are sent regularly to VAT debtors to remind them of their debts and take steps to honour their debt obligations but some of them do not heed to the advice.

Figure 4.3.2 No Constant Reminders

Source: Field Survey, April 2011.

4.3.8 Non Personal Visits by VAT Officials

On the issue of whether VAT officers do not visits VAT debtors regularly for debt collection exercises, out of the 44 respondents, 4.5% strongly agree that, there are no regular visits, 25% agree that, there are no regular visits, 52.3% disagree that, there are no regular visits and 18.2% strongly disagree that, there are no regular visits. It is evident that, clients were constantly visited to remind them to pay their debts but because the VAT officials are too lenient, they are unable to apply the VAT laws to the latter and therefore some VAT debtors refuse to pay their debts.

It was also evident from the interview with officials of Enforcement and Debt

Management Unit that, VAT officials visit clients who owe the Service to come and pay their debts but some do not heed to the advice and refuse to pay.

Table 4.3.8 No Constant Visits Response Frequency Percent Cumulative Percent Strongly agree 2 4.5 4.5 Agree 11 25.0 29.5 Disagree 23 52.3 81.8 Strongly disagree 8 18.2 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3.9 Debts are not Rescheduled for VAT Debtors

Some VAT debtors are not aware that, debts owed to the Service can be rescheduled although most of them were aware of that. Out of the total respondents of 44, 9.1% of respondents strongly agree that, debts are not rescheduled, 31.8% agree that, debts are

62 not rescheduled, 43.2% disagree that, debts are not rescheduled, 13.6% strongly disagree that, debts are not rescheduled and only 2.3% was not sure of the answer.

An interview conduct with EDM officials revealed that, debts are sometimes rescheduled for clients who apply for rescheduling. This sometimes gives them flexibility in honoring the debt obligations.

Figure 4.3.4 No Rescheduling of Debts for Payment

Source: Field Survey, April 2011.

4.3.10 Non Flexibility of Rescheduled Debts for Registered Clients

The respondents expressed their view that, rescheduled debts are not flexible enough.

Out of the total responses from 44 respondents, 18.2% strongly agree that, rescheduled debts are not flexible enough, 36.4% agree that, rescheduled debts are not flexible,

15.9% disagree that, rescheduled debts are not flexible, 6.8% strongly disagree and

22.7% are not sure of the answer.

The interview with the VAT officials contradicts what the clients said as the officials were of the view that, debts rescheduled are made flexible enough for payment to be effected but some of them are noncompliant and still do not honour their debts obligations even after rescheduling.

Table 4.3.10 Non flexibility of payment of rescheduled debts Response Frequency Percent Cumulative Percent Strongly agree 8 18.2 18.2 Agree 16 36.4 54.5 Disagree 7 15.9 70.5 Strongly disagree 3 6.8 77.3 Not sure 10 22.7 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3.5 Existence of Strict Schedules for Tax Debt payment

In finding out whether clients have strict schedule for payment of their tax debts, out of the 44 respondents, 38.64% answered that, they have strict schedule for payment of debts whereas 61.36% do not have strict schedule for payment of debts.

This is not in agreement with Anderson‘s (2005) claim that, debt management involves preparing a strict schedule for payment of debt and follow it till one gets out of debt. The

Figure 4.3.5 below illustrates the point.

Figure 4.3.5 Existence of Strict Schedules for Tax Payment

4.3.12 Proportion of Debt Paid Within a Month

The researcher wanted to find out proportion of debts paid within a month where there is strict schedule for payment of debt. It was clear that, out of the 44 respondents, 61.4% have no strict schedule for payment of debts, 4.5% of respondents were of the view that, they pay 100% of their debts within the first month, 9.1% of respondents also pay 50% of their debts within the first month and 9.1% of respondents also pay 30% of their debts within the first month of owing.

Table 4.3.12 Proportion of debt paid within a month

Response Frequency Percent Cumulative Percent 100% 2 4.5 4.5 50% 4 9.1 13.6 30% 4 9.1 22.7 Others 7 15.9 38.6 No Strict Schedule 27 61.4 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3.13 How VAT debtors fulfill their Tax Obligation in the Absence of Strict

Schedules

From Table 4.3.13 below, out of the 27 who have no strict schedule for payment of debts, 40.9% of respondents wait till VAT officials come around before payment is made, 15.9% only pay when sales improves and 4.5% pay their debts when they submit returns.

Figure 4.3.6 How Tax is Paid in the Absence of Schedules

Source: Field Survey, April 2011.

4.3.14 Provisions for Future Tax Liabilities

Most of the VAT debtors do not make provisions for future tax liabilities because from the total of 44 respondents, 77.73% do not make provision for future tax debts and

22.27% make provision for their tax liabilities.

David (2005) is of the opinion that, in debt management, there should be measures that encourages small businesses to make provision for future tax liabilities but the views of respondents do not support that argument.

Table 4.3.14 Are There Provisions for Future Tax Liabilities?

Response Frequency Percent Cumulative Percent Yes 10 22.73 22.73 No 34 77.27 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.3.15 Key Provisions Made for Settling Future Tax Liabilities

When the respondents were asked as to how they make provisions for future tax liabilities, out of the 44 respondents, 2.3% sees VAT liabilities as expenditure and make provision for them, 15.9% keep separate VAT accounts and 4.5% set aside money for

VAT payments.

Table 4.3.15 Provisions Made for Future Tax Liabilities Response Frequency Percent Cumulative Percent VAT as Expenditure 1 2.3 2.3 Separate VAT A/C 7 15.9 18.2 Provision for VAT 2 4.5 22.7 No option 34 77.3 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.4. Effects of Debts on Business Operations

This section of the report focuses on the effects of the payment of VAT debts on their businesses cash flows and profitability. Also, whether payment of debt is seen as a means of fulfilling their social responsibilities and developing the nation.

4.4.1 Does Tax Debt Affects Business Cash Flow?

Majority of the respondents believe that, tax debt affects their business cash flows because out of the 44 respondents, 29.5% strongly agree to that view, 56.82% agree that, tax debts affect their businesses, 4.05% disagree with that view and another 4.05% strongly disagree that, tax debt affects their businesses. This supports Hanson (2010) assertion that, tax debts affect cash flows of businesses.

Figure 4.4.1

4.4.2 Whether Tax Debt affects Business Profitability

Respondents were of the view that, tax debt affects their profitability. From the total respondents of 44, 22.7% of respondents strongly agree that, tax debt affects their business profitability, 52.3% agree to that view, 15.9% disagree and 9.1% strongly agree that, VAT debt affect their profitability. The Table 4.4.2 below illustrates the point.

Table 4.4.2 Tax debt affects Business Profitability Response Frequency Percent Cumulative Percent Yes I Strongly agree 10 22.7 22.7 Yes I Agree 23 52.3 75.0 No I Disagree 7 15.9 90.9 No I Strongly disagree 4 9.1 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.4.3 Payment of Tax Debt as a Means of Fulfilling Social Responsibilities.

Some of the respondents think that, to be socially responsible, one needs to honour his or her tax obligation. From Figure 4.4.3 below, out of the 44 respondents, 25% strongly agree that, to be socially responsible, one needs to honour his or tax obligation, 65.9% supported that notion, 6.8% disagree with that notion whereas 2.3% strongly disagree with that notion.

Figure 4.4.2 Tax Payment is Fulfilling Social Responsibilities

Source: Field Survey, April 2011.

4.4.4 Payment of Tax Debt as a Means of Developing the Nation

The respondents were quizzed whether they consider payment of tax debts as a means of helping to develop the nation. The Table 4.4.4 below shows that, of the 44 respondents,

34.1% strongly agree that, payment of tax debt helps in developing the nation, 61.4% support that idea whereas 2.3% of respondents disagree and another 2.3% of respondents strongly disagree that, payment of tax debt helps in building the nation.

The result of the interview with the officials of Enforcement and Debt Management Unit showed that, nonpayment of tax debt results in non achievement of revenue target which affect retention of money to run the Service, healthcare services, Ghana Education Trust

Fund (GETFund) and other developmental projects.

Table 4.4.4 Tax Payment as a Means of Helping to Develop the Nation Response Frequency Percent Cumulative Percent Yes I Strongly agree 15 34.1 34.1 Yes I Agree 27 61.4 95.5 No I Disagree 1 2.3 97.7 No I Strongly disagree 1 2.3 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.4.5 Tax Debt Payments Facilitate Businesses

In Ghana, Procurement Law stipulates that, if a business is not registered with VAT

Service, it cannot transact business with any government Ministries, Departments and

Agencies (MDAs) and any business who intends to deal with these departments must register with VAT Service (Procument Act 2003). In view of this some businesses think that, registering with VAT Service and payment of the tax facilitates their businesses.

From Figure 4.4.3, out of the 44 respondents, 25% strongly agree that, VAT payment facilitates businesses, 50% agree to that assertion whereas 15.9% disagree with that assertion and 4.5% strongly disagree. Only 4.5% were not sure of the answer.

Figure 4.4.3 Tax Payment Facilitates Businesses Success

Source: Field Survey, April 2011.

4.5 Measures for Proper Debt Management Practices

Respondents were quizzed to find out whether tax education will help improve debt management practices.

4.5.1 One on One Education to Improve Debt Management Practices

Respondents were asked whether one on one education will help improve debt management practices. It is evident from the Table 4.5.1 below that, almost all the 44 respondents were of the opinion that, one on one education improves debt management practices as 65.9% strongly agree to that opinion, 31.8% agree to that assertion and only

2.3% disagree with that view.

Table 4.5.1 Does Education Improves Debt Management Practices Response Frequency Percent Cumulative Percent Yes I Strongly agree 29 65.9 65.9 Yes I Agree 14 31.8 97.7 No I Disagree 1 2.3 100.0 Total 44 100.0 Source: Field Survey, April 2011.

4.5.2 Seminars as a means to Improving Debt Management Practices

Respondents also affirmed the view that, seminars on debt management will help improve debt management practices. From Figure 4.5.1 below, out of the 44 respondents, 40.9% strongly agree that, seminars can help improve debt management practices, 56.8% agree to that view and only 2.3% disagree with that idea.

Figure 4.5.1 Seminars to Help Improve Debt Management Practices

Source: Field Survey, April 2011

4.5.3 Radio Discussions as a means to Improving Tax Debt Management

On the issue of radio discussions, Table 4.5.3 below shows that, out of the 44 respondents, 34.1% strongly agree that, radio discussion will help improve debt management practices, 59.1% agree to that assertion, only 2.3% disagree and another

2.3% strongly disagree.

Table 4.5.3 Radio Discussions to Improve Tax Debt Management Response Frequency Percent Cumulative Percent Strongly agree 15 34.1 34.1 Agree 26 59.1 93.2 Disagree 1 2.3 95.5 Strongly disagree 1 2.3 97.7 Not sure 1 2.3 100.0 Total 44 100.0 Source: Field Survey, April 2011

4.5.4 Effectiveness of Debt Management through Publications

In this section, respondents were asked whether publications such as newsletters, brochures, magazines among others help to improve debt management practices. In responding to this questionnaire, out of the 44 respondents, 31.8% strongly agree that, publications can help improve debt management practices, 59.1% agree to that belief,

2.3% of respondents disagree and 4.5% of respondents strongly disagree. The view of 1 respondent could not be expressed.

Caplin (1962) encourages that, understanding the tax laws help to reduce tax debts and therefore advocates for tax education on radio, television, printing of brochures and press releases among others.

Figure 4.5.2 Publications to Enhance Tax Debt Management

Source: Field Survey, April 2011.

4.5.5 Other Means of Enhancing Debt Management

Respondents were asked to suggest ways to enhance debt management practices. The views expressed were that, out of the 44 respondents, 34.1% advocated for tax education, 15.9% mentioned that, there should be flexibility in payment, 15.9% advocated for improvement in records keeping, 9.1% belief that, enforcement of tax laws can help improve debt management practices, 13.6% are of the opinion that, there should be constant reminders and 11.4% expressed other opinions such as short intervals for tax audits and making provisions for future tax liabilities. This is illustrated in the

Figure 4.5.3 below.

An interview with officials from Enforcement and Debt Management Unit (EDM) also explained on the issue of measures for proper debt management practices, the emphasis

75 were on education to ensure voluntary compliance and strict enforcement of the debt management laws to ensure payment of debts.

Figure 4.5.3 Means of Enhancing Proper Tax Debt Management

Source: Field Survey, April 2011.

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter presents a brief summary of findings, conclusion and recommendations based on the study. The study was to examine Value Added Tax debt management of firms in Tamale Metropolis.

5.1 Summary of Findings

The research revealed that, tax debts basically come about as a result of tax audit. The study also revealed that, VAT clients allow debts to accumulate as a result of unfavourable tax audit. The unfavourable tax audits come about due to either poor records keeping or lack of understanding with the tax laws.

The study also uncovered that, registered clients for that matter VAT debtors do not take records keeping of their businesses very serious as most of them either do not keep records at all or have poor records on their businesses and VAT debts. It was realized that, VAT debtors have poor debt management practices as most of them either do not keep proper records of their debts or have records on debts at all. This affects their businesses as they would not know whether they are making profits or losses. Poor records will not help them to secure loans from the banks to expand their businesses.

The study also brought to light that, sanctions applied for nonpayment of tax debts is very strict, yet some VAT debtors refuse to pay their debts. The study also disclosed

77 that, there are constant personal visits by VAT officials and letters are also issued to remind debtors to pay their debts, yet some debtors refuse to pay their debts. Most of the respondents also said that, seal off is the most effective sanction for nonpayment of

VAT debts. It was clear in the research that, VAT officials are too lenient and they do not apply the tax laws effectively to retrieve VAT debts.

The research also showed that, the VAT debtors do not make provisions for their future tax liabilities and in situations where they are confronted with unfavourable tax audits which results in huge assessment, they are unable to pay immediately because they do not make provisions for their debts.

It was also made known from the study that, VAT debts affect their cash flows and hence reduce their profitability. It was also evident that, nonpayment of tax debts denies the Service from achieving their target and affects their retention (money used in running the Service). It also affect healthcare as monies channeled to that sector is reduced as a result of nonpayment of tax debt. Ghana Education Trust Fund (GETFund) also suffers as revenue channeled to that sector is reduced. The government is also denied revenue for developmental projects as people fail to pay their tax liabilities.

Again, the study revealed that, debts can be rescheduled in rare situations by VAT officials but rescheduled debts are not flexible enough to allow debtors to honour the obligation.

5.2 Conclusion

Tax is collected in order to help develop the nation and VAT tax debt is no exception.

However, the success of this endeavour depends upon prompt payment of tax debt. An efficient and effective debt management practices would help not only Revenue

Agencies in achieving their targets but also help in revenue mobilization for development in the country.

The VAT Service has a formalized system of debt management practices but in spite of this, some VAT debtors do not honour their tax debt obligation leading to accumulation and denying the government the needed revenue for development. Specifically, there are problems with debt management practices of firms in Tamale Metropolis.

The underlying factors for nonpayment of tax debt are the laxity on the part of VAT officials in applying sanctions for nonpayment of tax. Measures to improve debt management practices and to minimize nonpayment of debt have been outlined as recommendations.

5.3 Recommendations

The analysis of the factors culminating in VAT debt accumulation has led to the fashioning out of the following recommendations aimed at strengthening debt management practices and to minimize high incidence of nonpayment of VAT debts.

5.3.1 Tax Education

There should be vigorous tax education to explain the VAT laws so that, registered clients will understand and will not fall foul of the law. The tax education should focus on; proper records keeping; laws governing debt management practices; the need to make provisions for future tax liabilities and proper debt management practices. This will go a long way to reduce unfavourable tax audits which lead to huge assessments being slapped on clients.

5.3.2 Rescheduling of Debts

If the VAT debtor cannot pay in full immediately, sometimes rescheduling of debts should be considered. Installment payments give the taxpayer the flexibility to honour his or her tax obligations. If debts are paid on an agreed installment basis, most of VAT debtors will honour their tax obligations.

5.3.3 Application of Sanctions

The VAT officials should be up and doing with the application of the VAT law regarding debts collection. There should be strict application of the VAT Act to deter people from accumulating debts. Distress actions such as seal off and civil recovery should be melted out against non compliant clients to force them to honour their debts obligations. The Service can also explore the risk and benefits of obtaining power to recover tax debts from taxpayers‘ salaries or bank accounts without court order. This will facilitate prompt payment of debts.

5.3.4 Outsourcing of Tax Debt

If the VAT officials are too lenient with their debt collection approach, outsourcing could be considered so that, the VAT officials could concentrate on their core function of tax auditing. The Debt collection department could be outsourced to a private debt collector who can be very vigorous in his or her debt collection activities and can apply the law to the letter.

5.3.5 Information System and Support Unit (ISSU)

The software for managing debts should be brought to the office in Tamale so that, VAT officials can have access to that information. The Service should also provide information on their websites and in printed guidelines on how to find details of payment help lines and interest charges on their debts and the obligations on taxpayers to submit a tax return, even if they have no tax to pay.

The Service can also explore ways of making tax payment easier and quicker. There can be an automatic payment where the taxpayer can easily pay the tax without necessarily coming to the tax office.

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Appendix i

KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

(INSTITUTE OF DISTANCE LEARNING)

ASSESSMENT OF VALUE ADDED TAX DEBT MANAGEMENT IN TAMALE

METROPOLIS

This research is being conducted in partial fulfillment of the requirement for the award of Commonwealth Executive Masters of Business Administration (CEMBA).

Respondents are assured of confidentiality and anonymity of the information they provide. You are further assured that any information you provide is purely for academic purposes.

Introduction Please tick or provide the appropriate answer where applicable.

Section A 1. Sex a) Male

b) Female

2. How long have you been registered with the VAT Service? a) 1 – 3 years b) 4 – 6 years c) 7 – 9 years

d) 10 years and above

3. Educational background a) SSS b) HND / Diploma c) First Degree

d) Others (Specify)……………………

4. Age group: a) 20 -29 years b) 30-39 years c) 40-49 years

d) 50-59 years e) 60 years and above

5. Marital status: a) Married b) Widowed c) Divorced d) Single

SECTION B Various Ways Debts Are Accumulated by Firms 6. What type of business do you operate?

a) Retailing b) Wholesaling c) Service Providers d) Others (Specify)…………………. 7. How long have you owed VAT Service? a) 1 – 6 months b) 7 – 12 months c) 13 – 18 months

d) Above 18 months

8. What brought about your tax debt? a) Assessment b) Returns without Payment c) Penalties

d) Others (Specify)………………………………………………………… 9. Why do traders allow tax debt to accumulate? a) Poor records keeping b) Unfavourable tax audit c) Poor sales d) Lack of understanding of the tax e) Difficulty in accessing the tax office f) Traders are not constantly reminded of their debt by VAT officers g) Accrual of fees, penalties, interest on balance due h) Inability to recover debts due to lengthy litigation i) Bad spending habits j) Others (Specify)…………………………………………. 10. Which of the reasons stated in (9) is more prominent in debt accumulation? …………………………………………………………………………………………….

11. Are there any sanctions for nonpayment of tax debt? Yes No 12. If yes, what are they? a) Interest on overdue debts b) Seal Off c) Garnishment d) Civil Recovery e) Others (Specify) 13. Which of these sanctions in (11) is very effective? a) Interest on overdue debts b) Seal Off c) Garnishment d) Civil Recovery e) Others (Specify)……………………………………………………………… 14. What further measures should be taken to enforce payment? ……………………………………………………………………………………………

Section C Assessment of Debt Management Practices in Relation to Tax Obligations by Registered Businesses

15. Please, show the extent to which you keep the following records by ticking the appropriate box. Excellent Very good good poor No records Records on the business activities in general Records of VAT collections Records of debt in general Records of tax debt

16. Please, show the extent to which you agree with the following statements by ticking the appropriate box. Strongly Agree Disagree Strongly Not agree Disagree Sure VAT officers are too lenient with VAT debtors Sanctions applied for nonpayment of debt are not deterrent enough. VAT officers do not constantly remind traders of their liabilities with letters. VAT Officers do not constantly visit debtors to remind them of their debt. Debts are not rescheduled for traders to pay. Rescheduled debts are not flexible enough for registered clients

17. Do you have a strict schedule for payment of your tax debt? Yes No 18. If yes, what proportion of debt is paid within a month? a) 100% b) 50% c) 30% d) Others (Specify)…………………………………………………………………………. 19. If there is no strict schedule of payment of tax debt, how do you intend to pay the debt? a) As and when VAT officials come around to collect debt b) As and when sales improve c) As and when returns are submitted d) Others (Specify) …………………………………………………………………………

20. Do you make provision for your future tax liabilities? Yes No 21. If yes, how is it done? …………………………………………………………………………………………

Section D Effects of Debt on Business Operations

22. Please, show the extent to which you agree with the following statements by ticking the appropriate box. Strongly Agree Disagree Strongly Not Agree Disagree Sure Tax debt affect my business cash flows Tax debt affect my business profitability Tax debt is paid as a means of fulfilling social responsibility Tax debt is paid as a means of helping to develop the nation Payment of tax facilitate businesses

Section E Measures for Proper Debt Management 23. Please, show the extent to which you agree with the following statements by ticking the appropriate boxes. Strongly Agree Disagree Strongly Not Agree Disagree Sure One on one education by VAT officials will improve debt management practices Seminars will help improve debt management practices Radio discussions will help improve debt management practices

Magazines, newsletters, brochures etc. will help improve debt management practices.

24. Suggest ways for proper debt management. …………………………………………………………………………………………… …………………………………………………………………………………………… …………………………………………………………………………………………… Thank you very much for your responses

Appendix ii

KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

(INSTITUTE OF DISTANCE LEARNING)

ASSESSMENT OF VALUE ADDED TAX DEBT MANAGEMENT IN TAMALE

METROPOLIS

INTERVIEW GUIDE FOR ENFORCEMENT AND DEBT MANAGEMENT OFFICERS

1. How long have you been in your present position? ……………………………………….

2. What are the reasons for nonpayment of debts leading to debt accumulation by registered firms of your outfit? …………………………………………………………………………………………… …………………………………………………………………………………………… 3. How often do VAT officials visit registered VAT debtors personally for debt collection? a) Very often b) Occasionally c) Do not visit VAT debtors

4. How often are letters issued to remind traders of their debts? a) Very often b) Occasionally c) Do not visit traders

5. What are the effects of nonpayment of debts on revenue mobilization of the Service? …………………………………………………………………………………………… ……………………………………………………………………………………………

6. What procedures are used in retrieving debts from registered businesses? …………………………………………………………………………………………… …………………………………………………………………………………………… 7. Are the laws on debt management enforced to the latter? …………………………………………………………………………………………

8. How is documented manual or policy framework for debt management of VAT Service implemented? ……………………………………………………………………………………………

9. Do VAT Service officials reschedule debt for traders to pay? ……………………………………………………………………………………………

10. How are non compliant debtors treated? ……………………………………………………………………………………………

11. What is the most effective sanction for retrieval of debt from noncompliant client? ……………………………………………………………………………………………

12. What is the medium (media) of communication with VAT debtors? …………………………………………………………………………………………… …………………………………………………………………………………………… 13. Is there a risk profile for each trader to prioritize and tailor debt collection action and negotiate payment? ………………………………………………………………………………………… 14. Is there software for managing tax debt? …………………………………………………………………………………………

15. Is there a procedure for registered clients to find out the interests they are paying on their overdue debts?...... …………………………………………………………………………………………….

16. Do you find debt management practices in VAT Service satisfactory? Give reasons for your answer. …………………………………………………………………………………………… …………………………………………………………………………………………… 17. Suggest ways to improve debt management practices in VAT Service. …………………………………………………………………………………………… ……………………………………………………………………………………………

Thank you very much for your responses.