Double whammy: VAT on Electricity, Amplifying hardships for citizens and businesses

Adding to the economic woes, Ghana’s industries have already experienced a setback, recording negative growth in 2023. This economic downturn, coupled with the introduction of Value Added Tax (VAT) on electricity, poses a severe threat to the productivity and competitiveness of businesses, particularly those heavily reliant on energy-intensive operations. Ghana’s economic landscape is undergoing a significant transformation with the implementation of two pivotal measures – the International Monetary Fund’s (IMF) conditionality mandating an upfront weighted-average electricity tariff adjustment of at least 29% and the introduction of Value Added Tax (VAT) on electricity.

The IMF’s stringent conditionality is designed to address the financial challenges within Ghana’s power sector, aiming to improve cost recovery and financial sustainability. This automatic adjustment seeks to align electricity tariffs more closely with the actual costs of production and distribution. Simultaneously, the government’s decision to introduce VAT on electricity, especially for residential customers exceeding specified consumption levels, is a strategic move to bolster revenue streams. However, the combined impact of these measures raises concerns about their collective burden on households and businesses already grappling with economic hardships, potentially exacerbating challenges in an environment marked by economic downturns and negative industry growth. The delicate balance between revenue priorities and the well-being of citizens and businesses remains a critical consideration in Ghana’s pursuit of economic stability and growth.

Implementation Details

Under the newly introduced VAT policy, residential customers consuming electricity above the maximum specified for block charges for lifeline units will bear the brunt of increased costs. This decision, as outlined in Sections 35 and 37 and the First Schedule (9) of the Value Added Tax (VAT) Act, 2013 (ACT 870), is part of the government’s efforts to bolster revenue streams.

Exemptions

However, for clarity, VAT remains exempt for “a supply to a dwelling of electricity up to a maximum consumption level specified for block charges for lifeline units,” as stipulated in Sections 35 and 37 and the First Schedule (9) of Act 870.

Collaboration Between Entities

The Electricity Company of Ghana (ECG) and the Northern Electricity Distribution Company (NEDCO) are instructed to collaborate with the Ghana Revenue Authority (GRA) to ensure the effective implementation of VAT for residential customers exceeding the specified consumption level, starting from 1st January 2024. GRA is further tasked with coordinating revenue transfers collected from the VAT implementation as part of its domestic VAT collections.

Policy Implications

1. Operational Costs and Competitiveness: The spike in electricity tariffs translates to increased operational costs for businesses, further compounding the challenges brought about by negative industry growth. Industries already grappling with contraction now face the added pressure of rising expenses. This scenario threatens the competitiveness of Ghanaian businesses both domestically and internationally, as they may struggle to keep pace with competitors enjoying more favorable operating conditions.
2. Prioritizing Revenue over Well-being: Critics argue that prioritizing revenue generation at the expense of citizens and businesses, particularly during challenging economic times, raises concerns about the government’s commitment to the welfare of its people. The move may contribute to widening inequality, exacerbating poverty levels, and fostering an environment where survival becomes increasingly precarious for both individuals and businesses. In this context, the broader debate surfaces about the government’s role as the allocator of resources. Critics contend that the government may not be the best and most efficient steward of resources. They point out that market forces, if allowed to operate without excessive intervention, could facilitate a more equitable and efficient distribution of resources. The introduction of VAT on electricity, coupled with the automatic tariff adjustment, underscores the potential consequences of relying on governmental mechanisms for resource allocation. Sceptics argue that these measures, driven by revenue objectives, may inadvertently intensify economic hardships, especially for vulnerable populations. Advocates for market-driven resource allocation posit that a less interventionist approach could yield better outcomes, ensuring that economic policies prioritize the well-being of citizens and businesses while fostering sustainable growth. Striking a balance between revenue priorities and the efficient distribution of resources remains a central challenge for this NPP governments, and the current measures in Ghana spotlight the implications of such decisions on the overall prosperity and social fabric of the nation.
3. Discouraging Investment and Job Creation: Higher energy costs act as a deterrent to investments in energy-intensive industries. In an environment where businesses are striving to stay afloat, the added financial burden of increased electricity tariffs may dissuade potential investors. This, in turn, stifles job creation, exacerbating unemployment rates and contributing to the broader economic downturn.
4. Hindrance to Economic Growth in Key Sectors: Energy-intensive industries play a pivotal role in Ghana’s economic landscape. The added strain on these sectors, stemming from increased operational costs and reduced competitiveness, has broader implications for economic growth. Hindered by rising electricity tariffs, industries may struggle to contribute meaningfully to the nation’s GDP, further perpetuating the negative growth trend witnessed in 2023.
5. Global Competitiveness Erosion: In the international arena, where competition is fierce, Ghanaian businesses face the risk of becoming less competitive due to increased operational costs. This could lead to a decline in exports and a loss of market share to countries with more affordable and sustainable operating conditions. The erosion of global competitiveness not only impacts individual businesses but has broader implications for the country’s economic standing on the world stage.
6. Potential Long-Term Consequences: The combination of negative industry growth and higher electricity costs creates a challenging environment with potential long-term consequences. Industries that are unable to weather this storm may face closures or downsizing, leading to a shrinking job market and reduced economic contributions from key sectors. The lingering effects of this downturn could impede Ghana’s overall economic recovery and development.

Conclusion:

Ghana’s industries, already grappling with negative growth, face an uphill battle with the introduction of VAT on electricity. The resulting increase in operational costs poses a serious threat to the competitiveness of businesses, both locally and globally. To navigate these challenging times, a holistic approach that considers the interconnectedness of economic factors is crucial. The government must carefully reassess its policies to strike a balance between revenue generation and fostering an environment conducive to sustainable growth and job creation.

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