THE NEW 17.5% VAT: IMPLICATIONS FOR THE FINANCIAL INDUSTRY

INTRODUCTION

The past 12 months have seen the introduction of various taxes on different economic activities including farm inputs, fishing gear, imports and even on condoms (jokingly named "sex tax" by the media).

During the reading of the government’s 2014 budget statement in November 2013, Finance Minister Seth Terkper announced an increase in the Value Added Tax (VAT) rate from 15% to 17.5%. The new VAT Act 2013, (Act 870) received Presidential Assent on 30^th December and it was subsequently gazetted the next day.

Mr Terkper also announced that the scope of the new increase was to be extended to some economic activities which were not covered previously. These new areas are sales of real estate, financial services, domestic aviation, haulage services, auctioneers, pharmaceuticals and operation of Spa businesses and gymnasia. 

The question to ask is why is the government roping in other hitherto services that were VAT exempt?

The government has seen its revenue sources fall drastically other the past few years. This is due mainly to the fall in the price of gold (the country’s top export earner) on the international market and cocoa, the increase in the government’s public sector wage bill and to some extent, the cut back on tapering in the United States. As a result, the government’s budget deficit has widened to 11.8% to the country’s Gross Domestic Product (GDP). The Finance Minister has assured to cut the budget deficit from 11.8% to 8.5% this year. 

As a result, taxation and specifically the new VAT rate of 17.5% is just one of those measures intended to raise revenue to close the fiscal deficit.

This article will be restricted to the effect of the new VAT regime on ‘Financial Services’ provision in the country. The circular from the Ghana Revenue Authority (GRA) giving the details of the tax explained that the Act extended coverage to “the supply of financial services that are rendered for a fee, commission or a similar charge”.

“Financial Services means provision of insurance; issue, transfer, receipt of, or dealing with money whether in domestic or foreign currency or any note or order of payment of money; provision of credit; or operation of a bank account or an account of a similar institution. Life insurance and reinsurance services are however exempt from the tax whether or not such services are rendered for a fee, commission or a similar charge”, the information further revealed.

EFFECTS

VAT is largely a consumer tax in that the final consumer is the one who will bear the increase. Some of the services from the financial institutions (universal banks, micro-credit institutions, insurance firms, forex bureaus, etc) that will be affected by VAT are cost of issuing cheque books, service charges on operating bank accounts, Automated Teller Machine (ATM) services, insurance premiums, foreign currency transactions and so on. 

Since the new VAT came into force, some banks have already introduced some measures to reflect this and their customers are bearing the brunt of these measures. Ecobank Ghana has increased its service charge on ATM cash withdrawals, ATM cash transactions which hitherto used to be free on Stanbic Bank now attract a quarterly fee and just last month, Ghana Commercial Bank (GCB) has increased the minimum balance on its Savings accounts from GHC5 to a surprising GHC50. 

Financial inclusion-or access to financial and banking services for citizens-is quite low in Ghana. Less than 30% of the Ghanaian population has a bank account, according to the International Monetary Fund (IMF). Thus the fear of the banking community is that a higher cost of keeping a bank account will discourage people from patronizing banking services and leading to a reduction in mobilizing savings.

As expected, bankers and other analysts are not happy with their services been captured by VAT. When the new tax rate was announced, bankers complained of not being consulted. The President of the Ghana Association of Bankers, Simon Donoo-Nartey said that the association will meet with the Ministry of Finance to deliberate on the issue.

One financial sub-sector that has expressed the strongest disapproval of charging VAT on their services is the insurance industry. If access to banking services is low, patronage of insurance policies is even lower. At present, insurance penetration in the country is less than two percent in a market with 43 insurance companies in both the life and non-life insurance sectors. In a country where many people use majority of their income on basic commodities, insurance products are seen as a luxury. Although the new VAT exempts life insurance and re-insurance policies, non-life insurance products especially motor insurance premiums will be hit. 

In an interview with the Business & Financial Times (B&FT) newspaper after the introduction of the new tax, Kwame Agbenyadzie, President of the Ghana Insurers Association (GIA) - the trade association of insurance and reinsurance companies- said the new tax will see not only an increase in insurance premiums but it will have a wider effect on the economy as a whole.

“The likely effect we will see is that if the VAT is implemented and charged on the premium, we’ll pass it on to the final consumer. Motor insurance, for instance, is compulsory and that is where a lot of people will be affected; because if motor insurance goes up it is likely that the transport unions will adjust transport fares accordingly to reflect the increment, and that will impact on the cost of transportation and food as well as other fast-moving goods”.

A lot of open markets have been burnt by fire last year and this year as well. Many of the traders in those markets were not insured. Many of these affected traders then have to appeal to government for financial bailout. The response of the government was to establish a GHC2 million fund to compensate traders nationwide for their loss. According to Agbenyadzie, an increase in insurance in premiums will not encourage uptake in insurance policies and this will have social consequences.

“Insurance has an elastic demand and we have very low insurance penetration rate in this country. We are now trying to get people to buy non-life insurance products because we believe that if people insure their own assets, in the event of any misfortune they can be compensated adequately instead of them appealing to government for help -- which would create a social burden for the state”.

On the wider implication for the financial sector, the new VAT will lead to lower tax revenue for the government, according to Toma Imihre, Editor of Accra-based Business Finder newspaper.

Mr Imihre said “if you increase corporate tax from let’s say 20% to 40% and the companies profit falls from 50 million to 5 million, do the math; government is making less money not more money.”

CONCLUSION

Taxes serve as a key source of revenue for governments. Extending VAT to financial services may actually end up in less money for the government rather, if the views of the stakeholders above are anything to go by.