Smooth Migration: From VFRS to VSRS



Introduction


Welcome to the VSRS! We are here to help you successfully implement changes in tax laws. As you may already be aware, the Parliament of Ghana passed some laws recently to amend existing tax laws. One of those amendments affects the existing Value Added Tax (VAT) Law. The amendments are also to take effect from January 01, 2022.


Abbreviations


CHRL- Covid-19 Health Recovery Levy

NHIL- National Health Insurance Levy

GETFL- GET Fund Levy

VSRS- VAT Standard Rate Scheme

VFRS- VAT Flat Rate Scheme


Before Amendment of VAT Law


Before the amendment of the VAT Law, all retailers and wholesalers with an annual revenue of GHs 200,000 or more were eligible to register and operate under the VFRS. Under this scheme, the retailer or wholesaler is required to charge 3% VAT and 1% Covid Health Recovery Levy on the gross value of taxable sales.

Also, under the VFRS, when a retailer or wholesaler buys from a supplier and pays VAT, the VAT paid cannot be recovered or deducted from the VAT charged on sales. It becomes a cost to the business.

The normal VAT principle is that the VAT paid on purchases (Input VAT) can be deducted from the VAT charged on sales (Output VAT) to your customers. But, as you would observe, the VFRS goes against this principle.


After Amendment of VAT Law


Retailers and wholesalers who make a revenue of more than GHs 500, 000.00 in a year are required to operate under the VSRS. Also, retailers and wholesalers with an annual revenue of GHs 200,000.00 but not exceeding GHs 500,000.00 are to continue to operate under the VFRS.


Effect of Amendment


We understand that having operated under the VFRS for sometime now, you may find it difficult to understand how the VSRS operates. So, we have provided practical examples below to help you understand how the VSRS works.


Example 1 - Sales Side (Output VAT)


Assume that in the month of January XYZ enterprise sold goods of GHs 200.00 to a customer. The VAT and other levies will be computed as shown in table 1 & 2.


Table 1 - Before the amendment (VFRS)

Description

Amount (GHs)

Sales (A)

200.00

CHRL (B) =1%*A

2.00

Amount Including Levy (C)=A + B

202.00

VAT (D)=3%*A

6.00

Amount Including VAT (E)= (C+D)

208.00

Table 2 - After the amendment (VSRS)

Description

Amount (GHs)

Sales (A)

200.00

CHRL (B)=1%*A

2.00

NHIL (C)= 2.5%*A

5.00

GETFL (D)=2.5%*A

5.00

Amount Including Levies (E)= A+B+C+D

212.00

VAT (F)= 12.5%* E

26.50

Amount including VAT (G)= E + F

238.50

Example 2- Purchases side (Input VAT from a VSRS supplier)


Assume that KESMIC Consultancy is the Tax Consultant of XYZ Enterprise. XYZ Enterprise pays KESMIC GHs 100.00 each month for consultancy services. Also note that KESMIC, as a service provider, operates under the VAT Standard Rate Scheme. The recent VAT amendment does not affect KESMIC. In this instance, the VAT and other levies on purchases will be computed as shown in table 3 & 4.


Table 3 - Before the amendment (Standard Rate)

Description (GHs)

Amount (GHs)

Sales (A)

100.00

CHRL (B)=1%*A

1.00

NHIL (C)= 2.5%*A

2.50

GETFL (D)=2.5%*A

2.50

Amount Including Levies (E)= A+B+C+D

106.00

VAT (F)= 12.5%* E

13.25

Amount including VAT (G)= E + F

119.25

Table 4 - After the amendment (Standard Rate)

Description (GHs)

Amount (GHs)

Sales (A)

100.00

CHRL (B)= 1%*A

1.00

NHIL (C)= 2.5%*A

2.50

GETFL (D)= 2.5%*A

2.50

Amount Including Levies (E)= A+B+C+D

106.00

VAT (F)= 12.5%* E

13.25

Amount including VAT (G)= E + F

119.25

Example 3- Purchase side (Input VAT from a VFRS Supplier)


Assume that on monthly basis, Richman Ventures, a wholesaler, supplies goods worth GHs 30.00 to XYZ Enterprise. Richman Ventures’ sales over the past five years has remained within the range of GHs 200,000.00 to 350,000.00. Richman Ventures continues to operate under the VAT Flat Rate Scheme as the recent amendment to the VAT Laws does not affect Richman Ventures. The VAT and levies will therefore be computed as shown in table 5 & 6 below:


Table 5 - Before the amendment (VFRS)

Description

Amount (GHs)

Sales (A)

30.00

CHRL (B) =1%*A

0.30

Amount Including Levy (C)=A + B

30.30

VAT (D)=3%*A

0.90

Amount Including VAT (E)= (C+D)

31.20

Table 6 - After the amendment (VSRS)

Description

Amount (GHs)

Sales (A)

30.00

CHRL (B) =1%*A

0.30

Amount Including Levy (C)=A + B

30.30

VAT (D)=3%*A

0.90

Amount Including VAT (E)= (C+D)

31.20

VAT to be paid by XYZ for the period is calculated as follows:


Table 7 - Before the amendment (VFRS)

Description

Amount (GHs)

Output VAT (A)

6.00

Input VAT (Flat Rate)- (B)

nil

Input VAT (standard Rate)- (C)

nil

VAT payable/Overpayment (D)= (A+B+C)

6.00

Table 8 - After the amendment (VFRS)

Description

Amount (GHs)

Output VAT (A)

26.50

Input VAT (Flat Rate)- (B)

(0.90)

Input VAT (standard Rate)- (C)

(13.25)

VAT payable/Overpayment (D)= (A+B+C)

12.35

Notes


● Refer to table 1 & 2 for output VAT and refer to tables 3, 4, 5 and 6 for input VAT. Also, remember we said before the amendment, one could not recover any input VAT paid on purchases. That is why you see nill for input VAT in table 7.


● After the amendment, XYZ Enterprise can now recover any input VAT paid on purchases. That is why you see (0.90) and (13.25) in table 8.


● When your output VAT is greater than your input VAT, the difference is the VAT you have to pay the GRA for the period. When your input VAT is greater than your output VAT, the difference represents an input VAT credit or overpayment which you can carry forward to the next month to reduce the VAT (If any) you have to pay to the GRA.


Analysis


● Although the VSRS allows you to deduct or recover the VAT paid on purchases from the VAT charged on sales, we can see from table 7 & 8, that the net impact is that XYZ enterprise will pay more VAT to the Ghana Revenue Authority as it migrates from the VAT Flat Rate Scheme (VFRS) to the VAT Standard Rate Scheme (VSRS). Also, under the VSRS, the total levies paid (not VAT) on all purchases or supplies cannot be recovered. From tables 3,4,5 and 6, a total levy (add all levies in tables 2,3,4,5 and 6) of GHs 6.30 cannot be recovered when operating under the VSRS.


● However, if you make the analysis from a cost perspective, you will realize that all the taxes paid which amounts to GHs 20.45 (i.e. taxes paid to KESMIC and Richman Ventures-VAT plus levies) for purchases cannot be recovered if operating under the VFRS. In such case, there is a higher possibility that XYZ Enterprise will want to include all the taxes paid in pricing its products. This will make the cost of its products very expensive. The the taxes paid under the VFRS however, qualifies as costs/expense deductions when ascertaining income tax, thus reducing tax payable by XYZ when filing its Annual Personal Income Tax Returns or Company Income Tax Returns at year-end.




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