Taxable capacity and effort of Ghana's value-added tax

Abstract

Value-added tax (VAT) has not only brought dynamism in Ghana’s revenue mobilisation landscape but also occupies a centre stage in the country’s fiscal consolidation efforts. Interestingly, the VAT regime has undergone a number of discretionary reforms in a bid to generate as much revenue as possible for its fiscal mandate. However, the trends show that VAT’s contribution to total tax revenue has consistently remained below 30 percent over the past one and a half decades. Could it be that the scope for further VAT revenue expansion is reaching its limit? This study uses the regression approach to estimate and examine the taxable capacity and collection efforts of Ghana’s VAT. The paper discovers that the VAT regime is characterised by both periods of underexploited and overexploited taxable capacities. However, on the whole, there appears to be little scope for further revenue expansion, given the existing base. The study, therefore, argues that the recent over concentration on VAT may endanger the country’s quest for fiscal adequacy. Consequently, an appropriate tax mix is highly recommended.

JEL classification: H20; H25; E62; 017.

Keywords: Tax effort; Tax capacity; VAT; Tax collection; Shadow economy