Understanding Ghana’s New VAT Regime: What the 20% VAT Really Means

Value Added Tax (VAT) has been part of Ghana’s tax system for over two decades. It is one of the country’s most important revenue sources, funding public services such as roads, education, healthcare, and sanitation. Yet VAT has also been one of the most misunderstood taxes, especially among consumers and small businesses.

With the passage of the Value Added Tax Act, 2025 (Act 1151), which takes effect on January 1, 2026, public debate has intensified. Many customers are alarmed by invoices now showing a combined 20% tax, compared to the 4% (3% VAT flat rate + 1% COVID-19 levy) they were used to seeing.

To many Ghanaians, this looks like a sharp tax increase—five times higher than before.

But is it really a tax increase? Or is it a change in how tax is calculated and shown?

This article explains, in clear and practical terms, how Ghana’s new VAT system works, why the reform was introduced, and why the perceived increase in VAT does not necessarily mean a higher real tax burden.

1. Overview of the New VAT Act, 2025 (Act 1151)

The new VAT law represents a major structural reform rather than a rate increase. Its key features include:

Abolition of the VAT Flat Rate Scheme (VFRS)

The long-standing VAT Flat Rate Scheme, under which traders charged a flat percentage on sales without claiming input VAT, has been abolished.

Abolition of the 1% COVID-19 Health Recovery Levy

The temporary levy introduced during the pandemic has been fully removed.

VAT Rate Remains at 15%

The standard VAT rate itself has not increased.

NHIL and GETFund Levies Remain

• National Health Insurance Levy (NHIL): 2.5%
• GETFund Levy: 2.5%

These levies continue to apply, as they did before.

Recoupling of VAT, NHIL, and GETFund

Under the old flat rate system, VAT was separated from NHIL and GETFund for many traders. Act 1151 reunifies them into a single VAT credit system.

Input Tax Credits Extended

Registered businesses can now claim input tax credits on:

• VAT (15%)
• NHIL (2.5%)
• GETFund (2.5%)

This is a major change.

Higher VAT Registration Threshold

The compulsory VAT registration threshold has increased from GH₵200,000 to GH₵750,000 in annual turnover, removing many small businesses from the VAT net.

2. How the Old VAT Flat Rate Scheme Worked

Under the VAT Flat Rate Scheme:

• Traders selling goods charged 3% VAT
• Sales of immovable property were charged 5%
• An additional 1% COVID-19 levy applied
• Total visible tax on most goods: 4%

However, there was a critical limitation.

No Input VAT Recovery

Traders under the flat rate scheme could not claim VAT on their purchases—fuel, rent, electricity, packaging, transport, or imported inputs.

This meant:

• VAT paid at earlier stages became a cost
• That cost was built into prices
• VAT was effectively charged on top of VAT

This is known as tax cascading.

Why the “4%” Was Misleading

Although customers saw only 4% on invoices, prices already included hidden taxes embedded in the base price. The real tax burden was higher than it appeared, but it was invisible.

3. How the New Unified VAT System Works

Under Act 1151, VAT operates as a proper value-added tax system.

The 20% Invoice Rate Explained

Invoices now show:

• VAT: 15%
• NHIL: 2.5%
• GETFund: 2.5%

Total shown: 20%

This is not a new tax. These components existed before, but they are now visible and creditable.

Input Tax Credit Mechanism

Businesses deduct taxes paid on inputs from taxes charged on sales. They remit only the net amount to GRA.

Only Value Added Is Taxed

Each business is taxed only on the value it adds—not on its total sales.

Cascading Is Eliminated

Because input taxes are recoverable, tax no longer piles up through the supply chain.

Visible Rate vs Effective Burden

The visible rate (20%) is higher, but the effective tax burden on final prices is often lower or unchanged once the system stabilizes.

4. Did Taxes Increase or Decrease?

The Honest Answer

• On paper: Yes, the visible rate rose from 4% to 20%.
• In economic reality: For most transactions, the real tax burden has not increased, and in many cases will decline over time.

A Simple Illustration

Old Flat Rate System

• Cost of goods (with hidden taxes): GH₵100
• Flat VAT (3%): GH₵3
• COVID levy (1%): GH₵1
• Final price: GH₵104

But that GH₵100 already included unrecoverable VAT paid earlier.

New VAT System

• Cost of goods (without hidden taxes): GH₵85
• VAT + NHIL + GETFund (20%): GH₵17
• Final price: GH₵102

Although the tax rate looks higher, the final price can be lower because cascading has been removed.

5. Who Benefits and Who May Feel the Impact

VAT-Registered Businesses

• Benefit from full input tax recovery
• Improved cash flow transparency
• Reduced embedded tax costs

Consumers

• Short-term price confusion
• Long-term price stability and fairness
• More transparent tax system

Small and Micro Enterprises

• Many are now below the registration threshold
• Reduced compliance burden
• Ability to price competitively

Previously Non-Compliant Businesses

• Increased pressure to register
• Fairer competition as tax avoidance declines

6. Short-Term Perception vs Long-Term Reality

Why Prices May Feel Higher

• Businesses adjusting margins
• Initial compliance costs
• Poor understanding of input credits
• Opportunistic price increases wrongly blamed on VAT

Why Education Matters

Without clear public education, visible taxes feel heavier—even when the economy benefits.

Transparency can feel painful at first, but it is essential for trust and efficiency.

Conclusion

Ghana’s VAT reform under Act 1151 is not a tax grab. It is a structural shift from a hidden, cascading, inefficient tax system to a transparent, creditable, and economically sound VAT regime.

The headline 20% VAT is not new taxation—it is clearer taxation.

For most consumers and businesses, the reform does not increase the real tax burden. Instead, it promotes fairness, neutrality, and long-term economic efficiency.

As the system settles, prices are expected to reflect true economic costs rather than hidden taxes.

Taxpayers and businesses are encouraged to seek guidance from the Ghana Revenue Authority (GRA) and professional advisers to fully understand and benefit from the new system.

Understanding the reform is the first step toward making it work—for everyone.