Value Added Tax Administration in the Construction Industry in Ghana

Value Added Tax Administration In The Construction Industry In Ghana Dadson Awunyo-Vitor Department of Agricultural Economics and Agribusiness, Kwame Nkru- mah University of Science and Technology, Ghana Address for correspondence:- [email protected] Journal of Finance and Management in Public Services. Volume 14. Number 2 Abstract The objective of the study is to assess the level of awareness of contractors and consultants within the construction industry about Value Added Tax (VAT) and challenges of its administration or implementations within the industry. Data was collected from 52 contractors and 8 consultants in Brong Ahafo Region of Ghana using questionnaires. Descriptive statis- tics were used to analyse the data. The study revealed that a large proportion (75%) of the respondents were aware of the need to register and charge Value Added Tax as a result of sensitisation workshops organised by Ghana Revenue Authority in the region. The consultants perceive the implementation of the Value Added Tax as important in national development, however, they see the registration process as cumbersome. Contractors also had a good perception about Value Added Tax implementation within the construction industry but believed that they need more education about the modalities of registration and payment. The study further revealed that the state lost GH¢ 8,053,407.52 ($5,033,379.70) in the 2012 fiscal year due to non-compliance with Value Added Tax by contractors and consultants in the region. In order to improve the implementation of Value Added Tax within the construction industry Ghana Revenue Authority must intensify education of contractors on modalities of registration and payment. In addition issuance of the tax identification number should be decentralised in order to facilitate registration and eliminate unnecessary bureaucracy. The Registrar Generals’ Department should also encourage contractors to register for Value Added Tax upon registration of their company. Sanctions for non-registration and compliance of Value Added Tax should be actively enforced. Key words: Value Added Tax, Construction Industry, Brong Ahafo, Ghana Revenue Authority Introduction The generation of income through tax is essential for every nation’s development. Tax revenue provides funds to support government business in all nations. Silvani and Baer (1997) noted that most African states are always in deficit with respect to their budget because about 60% of potential tax in these countries goes untapped. As a result, most of the countries in Africa have to depend on donor funds to support their budget (World Bank, 2005). However, with dwindling donor funds there is the need for an effective tax administration system. According to Hadler (2000) African countries can increase their tax revenue by 30% through efficient tax administrative systems. Therefore, most African states, including Ghana, are making considerable effort to expand the tax net and also improve tax administration systems. An example in 1998 was the introduction of Value Added Tax in order to expand the tax net and improve tax revenue to support the business of government. Value Added Tax was established by VAT Act which replaced the sales tax legislation that was deemed to be too narrow in generating the needed revenue. The contribution of VAT to government revenue over the years has seen a steady increase from 5% to 18%. The introduction of VAT was a very controversial issue. The tax was introduced in 1995 but had to be repealed because of implementation challenges. These challenges included inadequate education of the public about VAT system [Osei, (2000)]. VAT rate of 17.5% was deemed too high because the sales tax rate which VAT replaced was 15% [Gray et al., (2001)]. After the draft act was tabled, Parliament set the bill aside and requested that VAT management team engage in a national education campaign to sensitise the population to the objective of the tax. This is because the education which took place between May and November 1994 was virtually ineffective because it lacked precision and the legal backing to Journal of Finance and Management in Public Services. Volume 14. Number 2 prompt any serious interest among the general public. This has resulted in a delay in adop- tion of VAT legislation and regulation by parliament which adversely affected the prepara- tion for the introduction of VAT. In addition the lack of precision on VAT rate did not give business enough time to evaluate the effect of the new tax on the prices of their goods and services Also, the Ministry of Finance and Economic planning was not able to stick to the anticipated goods and services which would attract VAT. Furthermore, tax payers argued that the tax applied to a wider range of products and services compared to repealed sales tax. The above issues lead to civil unrest; consequently the Parliament passed two bills to stop the implementation of VAT in June 1995 (World Bank, 2001; Osei, 2000). The sales tax was reintroduced with the same rate, scope, and coverage as before. The government reintroduced VAT at the end of 1998 as part of the Public Financial Man- agement Reform Program, and with technical assistance from the U.K. Department for International Development. This time VAT rate was lowered from 15% as indicated in the bill to 10% after extensive consultations between Parliament and the executive branch. Though the lower rate made revenue lower it increased public acceptance of the tax. Even with the lower rate, revenue from VAT exceeded the targets set for the initial phase of its operation. It also generated 20% more revenue than the sales tax it replaced. The government’s macroeconomic framework which aims to reduce trade taxes and gradually replace them with broad based taxes such as VAT had seen increases in the role of VAT in the revenue system over the years - less than two years after VAT was reintroduced, its rate was raised to 12.5%. The government further broadened the tax base by cutting the registration threshold from 200 million to 100 million cedi.The flat rate scheme was also introduced to encourage small and medium scale enterprises (SMEs) to register and charge VAT on their goods and services. This scheme is open to only retailers and SMEs whose average annual turnover is below GH¢120,000. This scheme attracts a 3% flat rate on goods and services. Since its inception the laws governing VAT placed an emphasis on goods and services and not on construction; meanwhile those in the construction industry are capable of receiving huge sums of monies as profit from central government, being the main client, upon com- pletion of their projects. However, those businesses who supply goods and services (such as petty traders, retailers, other contractors) to government institutions and consultants are being asked to pay their VAT returns to the Domestic Tax Revenue Division of the Ghana Revenue Authority by the middle of every month based on their revenue generation. In order to broaden the tax base, reduce deficits and reduce over reliance on donor funds, the national budget requires an improvement in revenue generation through taxation. This calls for the expansion of the tax net and an efficient and effective tax administration system; consequently tax reforms are needed to achieve the above goals. Hence additional businesses have been included in the schedule to attract VAT, and one such business type is works contracts. This came into being as a result of the enactment of VAT Amendment Act 2002 (Act 629), section 16(c) of Schedule 1 of VAT Act 1998(Act 546). In view of the above law [VAT Amend- ment Act 2002 (Act 629),] with effect from 1st January, 2012 works contracts are to attract Value Added Tax (VAT) and the National Health Insurance Levy (NHIL), pursuant to VAT Amendment Act, 2002 (Act 629). Therefore all contractors are to be registered to enable Journal of Finance and Management in Public Services. Volume 14. Number 2 them to submit returns to the Domestic Tax Revenue Division of the Ghana Revenue Au- thority. This means that Client/Users are to pay VAT and NHIL on works since the value has been added to the material, equipment and labour inputs which constitute the components from which the work is obtained as a finished product. Under this amendment, items which attract Value Added Tax in the construction industry include demolition, maintenance work on building and roads as well as all costs associated with the construction of both roads and buildings. Examples of other taxable items within the construction industry include: installation of electrical fixtures; air-conditioners; communication equipment; sprinklers; safety equipment; aluminum glazing; provision of landscaping services; main works and roofing etc. Though the construction industry is very wide and made up of many parties, the parties can be grouped into three broad groups: contractors (building contractors, road contractors and sub-contractors), consultants, and clients. The introduction of VAT in the construction industry is one of the reforms which aimed at expanding the tax net and improving government revenue. However, the implementation not yielded the desired results as most of the contractors and consultants within the industry are not registered for VAT (Sowa (2010). Hence there is the need to understand the implementation challenges of the tax in the construction industry in order to formulate poli- cies to improve the registration and VAT payment by the actors within the industry. Thus this study aimed at evaluating the implementation of Value Added Tax on the construction industry in Ghana using the Brong Ahafo Region as a case study. Brong Ahafo Region was selected because of access to data and information.

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