Assessing the shortcomings of GRA’s directive on VAT invoices as the basis for expense deduction

A recent directive issued by the Ghana Revenue Authority (GRA) has stirred controversy within the business community regarding the implementation of the Commissioner-General’s invoice (VAT Invoice) as proof for allowable expense deduction under Section 9 of the Income Tax Act, 2015 (Act 896) as amended. Although, the intention behind this directive may appear to streamline tax compliance and enhance transparency, a closer scrutiny reveals potential deficiencies that could warrant a possible reconsideration.

As a tax practitioner, I deeply understand the pervasive issue of lax enforcement within our tax system. Efforts by tax authorities to strengthen enforcement mechanisms are not only encouraging but also deserving of widespread support and commendation. However, it is crucial to ensure that these efforts do not place undue burden solely on taxpayers through administrative guidelines.

The importance of robust enforcement of tax laws cannot be underrated, as it is crucial for maintaining fiscal integrity and ensuring fairness among all taxpayers. While initiatives aimed at enhancing enforcement are laudable, it should not result in the shifting of the enforcement burden on taxpayers.

The directive, which came into effect on April 1, 2024, mandates all registered persons to demand VAT invoices for goods and services in accordance with the VAT Act, 2013 (Act 870) as amended, and VAT Regulation, 2016 (L.I 2243). This requirement aims to facilitate expense deduction when determining a taxpayer’s chargeable income for income tax purposes under the Income Tax Act, 2015 (Act 896). However, a closer examination of the directive’s implications reveals areas of concern which the policy drafters as well as implementers must rethink to foster the effective rollout of the tax measure.

Possible lack of Legal Basis and Ambiguity

First and foremost, I am of the view that the directive lacks a clear legal basis. The reliance on the provisions in the VAT Act, 2013 (Act 870) as a basis for the call for the VAT invoice to be the premise for deduction of expenses for direct taxes creates a perceived ambiguity and could lead to legal challenges in our courts.

Under the Revenue Administration Act of 2016 (Act 915), the Commissioner-General (C-G) of the GRA is endowed with significant powers and discretion for administering and enforcing tax laws. However, it is imperative to recognize the bounds of this authority. Directives issued by the C-G must conform to existing laws and regulations to ensure their legality and legitimacy. Any deviation from established legal frameworks or introduction of new legislation without parliamentary approval raises valid concerns regarding the directive’s validity.

Furthermore, the directive overlooks critical provisions within the Income Tax Act 2015 (Act 896) concerning expense deduction. Section 8(2) restricts deductions for domestic or excluded expenses, while Section 9(1) stipulates stringent criteria for deducting legitimate business expenses. These conditions, emphasizing expenses that are Wholly, Exclusively, and Necessarily (WEN) incurred in the production of income, demonstrate the rigorous standards required for expense deduction.

Additionally, the Value Added Tax Act of 2013 (Act 870) governs VAT registration and invoicing requirements. While Section 41(1) mandates the issuance of VAT invoices for taxable transactions, the directive’s sole reliance on VAT invoices as proof for expense deduction disregards legitimate business expenses that may not always be accompanied by such documentation.

Moreover, the directive fails to address VAT registration requirements outlined in Sections 6 to 19 of Act 870. Persons engaged in taxable activities must register if within any consecutive twelve-month period, the revenue from taxable supplies exceed Two Hundred Thousand Ghana Cedis (Ghs200,000), or if there are reasonable expectations of surpassing this threshold within the subsequent twelve months.

Additionally, registration is mandated if, within any three-month period, taxable supplies exceed Fifty Thousand Ghana Cedis (Ghs50,000), with reasonable expectations of surpassing the Two Hundred Thousand Ghana Cedis (Ghs200,000) threshold over the following nine months. The C-G may consider the activities of related or cooperative parties in assessing these thresholds. Without proper VAT registration, businesses cannot charge VAT, rendering the directive ineffective in ensuring compliance with VAT regulations.

Small and medium-sized enterprises (SMEs) are particularly vulnerable under this directive. Many SMEs may struggle to obtain VAT invoices for all transactions, especially if their suppliers do not meet the threshold for VAT registration. The inability to verify suppliers’ VAT registration status may lead to the disallowance of legitimate deductions and an increase in tax liabilities for SMEs.

While the GRA’s directive on VAT invoices aims to enhance tax compliance, its deficiencies in legal basis, implementation clarity, and potential adverse impact on businesses necessitate urgent revision. A revised approach should consider the intricate interplay between tax laws, ensure fairness and equity for all taxpayers, and promote sustainable compliance practices within the business community.

Rethinking and Shaping the Policy narrative

Considering the identified deficiencies, it is imperative that the GRA evaluates its approach to promoting tax compliance and expense deduction verification relating to this directive. Instead of rigid mandates, a more effective strategy would involve the following:

• Introduce a New GRA Invoice Booklet: To tackle non-compliance among businesses and self-employed individuals taking into consideration those below the VAT registration threshold, I propose amending existing legislation to introduce a GRA invoice booklet for person who are below the VAT registration threshold and thus are not required to register for VAT to enable them to issue same. This amendment would mandate the issuance of these invoices (new GRA invoice and VAT invoice) for any business transaction. Enforcement measures should include disallowing expenses for Corporate Income Tax (CIT) purposes if a person fails to obtain and show as evidence these required invoices. Thorough tax compliance checks by the GRA should precede the issuance of GRA invoice booklets, with a fee charged for their issuance to generate revenue for the country. This measure not only encourages compliance but also facilitates the formalization of the informal sector, as businesses recognize the benefits of formalization in accessing customers who prioritize compliance.

• Develop a Simplified Tax Regime for Small Businesses: As informal businesses transition into the formal sector, there arises a necessity to craft a simplified tax regime specifically designed for small businesses. This entails establishing a reasonable threshold applicable to all businesses and individuals in business within this sector. Such an approach fosters inclusivity and widens the tax base by integrating informal businesses into the formal tax system. This not only streamlines tax compliance but also promotes economic growth by providing small businesses with a clear and manageable tax framework to operate within.
• Streamline Formalization Processes for Small Businesses: Propose and execute policies aimed at simplifying the formalization journey for self-employed individuals and small businesses. This involves the reduction of burdensome business compliance regulations and the introduction of incentives, such as tax benefits, for small-scale informal activities transitioning into the formal sector. By minimizing obstacles to formalization, a greater number of businesses can seamlessly join the formal economy, bolstering the tax base and enabling them to access the myriad opportunities available within the formal sector.
• Strengthen Tax Education and Support Services: Despite commendable efforts by the GRA to enhance tax education, there remains significant room for improvement, as evidenced by the lack of understanding among business owners. To address this gap, it is imperative to implement consistent tax education and assistance programs specifically tailored for the informal sector and small businesses. This can be achieved through diverse mediums such as media campaigns to increase awareness about tax obligations, benefits, and available incentives. Additionally, the establishment of support services like dedicated helplines or tax clinics will prove invaluable in addressing queries and providing guidance on compliance procedures. By fostering a culture of compliance and understanding among taxpayers, these initiatives contribute to overall tax compliance and revenue generation.
• Facilitate Consultation and Collaboration: Encourage collaboration among tax authorities, industry associations, and relevant stakeholders to facilitate the effective implementation of tax policies. Foster regular dialogue and consultations to address concerns, gather feedback, and refine tax measures based on the specific needs and challenges encountered. By actively involving stakeholders in both policy formulation and implementation processes, tax authorities can ensure that policies are not only practical and equitable but also conducive to compliance. This collaborative approach enhances transparency, fosters trust, and ultimately contributes to a more effective and sustainable tax system.

Towards a More Effective Tax Policy

While the GRA’s intent to enhance tax compliance and transparency is commendable, the directive lacks a clear legal basis and risks imposing undue burdens on taxpayers. The GRA can achieve its objectives of enhancing tax compliance and revenue generation while minimizing adverse impacts on businesses. It is crucial for the GRA to reevaluate its approach and consider the proposed policy revisions to ensure that tax policies are fair, transparent, and conducive to compliance. By adopting a more inclusive and collaborative approach, the GRA can build trust, foster compliance, and ultimately contribute to a more sustainable and equitable tax system in Ghana. In the spirit of constructive engagement, stakeholders must continue to engage in dialogue and collaboration to refine tax policies and ensure their effectiveness in achieving desired outcomes. Together, we can work towards a tax system that promotes economic growth, fosters business development, and advances the well-being of all citizens.

Taxpayers should finally keep in mind that communique of the GRA is just a directive and not new legislation, hence does not make it biding on taxpayers, however, on the C-G and its officers.

Emmanuel is a Tax Practitioner, Business Strategist and Policy Analyst. He is Certified Financial Modelling and Valuation Analyst, a Certified Environment, Social, Governance (ESG) specialist, both by the Corporate Finance Institute and holds a BSc in Accounting from University of Professional Studies, Accra.

The views expressed in this article are solely those of the author and do not necessarily reflect the opinions of any individual or entity associated with them.