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The previously suspended 15 per cent value-added tax (VAT) on electricity could be reinstated as inflation continues to decrease.
The Ghana Statistical Service (GSS) announced last week that annual inflation had dropped to a 28-month low of 20.9 per cent in July—the slowest rate since March 2022—down from 22.8 per cent in June this year.
In its July 2024 Country Staff Report, the International Monetary Fund (IMF) acknowledged the readiness of local authorities to reintroduce the tax once inflation subsides.
“On the revenue side, implementation of VAT on residential electricity (expected yield 0.17 per cent of GDP) was suspended due to strong social resistance. The authorities are committed to implementing this measure when the inflation dynamics are more conducive,” the IMF said on page 10 of the report.
The VAT on residential electricity was originally introduced as a revenue-generating measure under the IMF-backed COVID-19 recovery program.
In a letter dated January 1, 2024, and signed by former Finance Minister Ken Ofori-Atta, the Ministry of Finance instructed the Electricity Company of Ghana (ECG) and Northern Electricity Distribution Company (NEDCo) to apply the VAT to residential customers exceeding a specified consumption threshold.
However, after significant public backlash led by organized labour, the government suspended the contentious tax in early February 2024 to allow for further discussions with stakeholders. The suspension followed strong opposition from the Trades Union Congress (TUC) and the general public.
To address the anticipated GH¢1.8 billion revenue shortfall resulting from the suspension of electricity VAT, the government announced plans to tax the foreign incomes of resident Ghanaians, among other measures.
During an economic update in April 2024, Finance Minister Dr Mohammed Amin Adam stated that the government had to explore alternative revenue sources after dropping the VAT on electricity.
“And so we had to look at alternative measures to generate more revenue to fill in that gap,” Dr. Adam said. “As for those alternative measures, some were announced in the Budget Statement of 2023 and also 2024 but were not effectively implemented. And so, now, we are determined to effectively implement these measures to generate the desired revenue and fill the gap created as a result of suspending the VAT.”
Dr Adam noted that the government’s decision to suspend the VAT on electricity had significant implications for the country’s fiscal framework. The new tax on foreign incomes is a measure aimed at ensuring that Ghana meets its key fiscal targets under the IMF program.
“Now, what this means is that when we decide a government which borders on our fiscal framework, there are consequences,” Dr Adam said. “And the consequences could persist unless we are proactive enough to find ways to fill the gap and avoid those consequences. One of the consequences could be that you miss out on the fiscal target, and the IMF programme then suffers.”
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