B&FT's position on financial services VAT

Last week the Ghana Revenue Authority (GRA) published a long list of fee-based financial services that will attract VAT from July 1st. After perusing the list, this Paper’s opposition to the financial-services VAT has been rekindled.

There’s everything wrong with the tax, we think. First of all, it has the propensity to defeat policies and initiatives to promote financial inclusion. According to the World Bank’s Global Financial Inclusion Database (Global Findex), seven out of 10 Ghanaian adults do not have a bank account, and cost is one of the main barriers that they cite for not maintaining one.

This tax, which “punishes” people for doing business with a bank, is obviously a step backward for the financial inclusion agenda, which -- lest we forget -- is an important policy goal that seeks to ensure payment security for especially poor people, improve access to finance, and grow our national savings to support domestic investment.

Hardly any service provided by the banking industry escapes the 32-item list issued by the GRA, and the exhaustiveness of the list shows that the government simply wants to raise money and has no intention of even using the tax to achieve other public policy goals.

We say this because the evidence suggests that banking in this country is more a brick-and-mortar affair than in other places. Seventy-two percent of customers, for instance, withdraw cash from the teller in the bank instead of an ATM or transferring the money remotely to meet their financial obligations.

By taxing the use of ATMs and fledgling banking channels such as mobile and Internet banking, the government shows a lack of regard for the fact that public and tax policy should be used to boost banking efficiency and the general efficiency of the economy.

At a time when banks are striving to be efficient by investing in and promoting these channels, this tax could potentially reverse the minimal progress that has been made.

To further show why this tax is unacceptable, we ask the fundamental question of why financial services tend to be VAT-exempted. We believe it is because banking and finance are simply means to arrange funds for consumption activities, upon which VAT is then charged.

When a person issues a payment order through his bank, for instance, the recipient will ultimately use the funds to purchase goods and services, upon which VAT is then levied. That is why ordinarily VAT would not be charged on the payment order. But this tax clearly jettisons that principle.

It is also inappropriate that banks and other financial services providers were not consulted before the tax was enacted. We think this is why its initial implementation in April was characterised by absurd confusion, with the authorities portraying themselves to be uncertain of what services they really wanted to tax.

We also think that in a time of hardship for many Ghanaians, this tax is uncalled for. After banks hiked their fees and amid high lending rates, this VAT will further raise the cost of using banking services, including the cost of loans since all the associated fees of borrowing are going to be taxed.

The government may use the hefty fiscal deficit to make a case for the tax, but that worries us more because it is not fair or acceptable for politicians to pursue policies that ruin macroeconomic stability and the public finances -- and then inflict cost-of-living pain on citizens in order to correct the wrong that they have done. It is simply unacceptable!