How VAT works

This post is by special request.

In the budget statement, Finance Minister Ken Ofori-Atta, announced that the VAT on traders has been reduced to a flat rate of 3%. Let me explain what that means in effect.

In the old system, traders who qualify to register for VAT, charge 17.5% on all sales they make. To qualify, a trader needs to be making annual sales of at least GH¢120,000. They are then supposed to submit monthly VAT returns to the GRA by the end of the next month i.e. a 30 day grace period.

In the VAT returns, they are supposed to state how much VAT taxable sales they made and calculate 17.5% of that (this is known as Output VAT). They are also supposed to state how much VAT taxable purchases they made from their suppliers and also calculate 17.5% of that (this is known as Input VAT).

They then deduct the VAT they paid on purchases from the VAT they charged on sales and pay the difference to the GRA. However, if it turns out that they paid more VAT on purchases than they charged on sales, then the difference is supposed to be refunded to them but is usually treated as an advance payment to GRA for the next month.

With the flat rate of 3% being introduced, it means that traders no longer need to make any calculation of input VAT since they will not be refunded for it. Rather, they charge 3% on all VAT taxable sales they make and pay it to GRA.

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Jerome Kuseh

Financial Analyst | Accountant | Private Investor
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