The impact of the value-added tax on prices in Ghana

The objective of this study was to assess the impact of the value-added tax (VAT) on the prices of goods and services in Ghana after its introduction in December 1998. The data used were the consumer price indices and also retail prices of selected commodities monitored before and after the VAT in Ghana. The consumer price indices (CPIs) were collected from the statistical service, Accra. The CPI’s were collected for six months, three months on each side of the date that the VAT was introduced in Ghana. The percentage changes in the CPI for each of these periods were calculated. The two percentage changes were compared. This gave us an opportunity to determine the magnitude in the shift of the consumer price index after the VAT. Even though the percentage calculated gave us an idea of the extent to which the CPI has shifted from the previous quarter, it did not reveal whether this shift was significant. A regression analysis was therefore used to achieve this objective, using the same number of CPI’s. The t-test was used to test whether the coefficient of the VAT variable in the resulting equation was statistically different from 0 at the 5 percent alpha level. The results of the regression analysis, using six CPI’s, only indicated a one-shot (temporary) shift in the CPI; it did not indicate whether the shift was accelerated and therefore led, to inflation. Therefore, to determine whether the shift was one-shot or accelerated, the number of CPI’s were collected for 24 months (2 years), 12 months on each side of the date of the VAT. A regression analysis was conducted as above, and the coefficient of the VAT variable tested whether or not, it was significantly different from 0. Finally, the results of the regression analysis using the six CPI’s established the significance or otherwise of the shift of the CPI after the introduction of the VAT. The results did not indicate the proportion of the 6.6 percent increase in the CPI that was attributable to the VAT. To estimate this, a regression analysis of the prices of selected commodities was conducted. Secondary data on the selected prices was collected from the VAT Secretariat, Accra. The prices were compiled in a price sensitivity study that was conducted before and after the introduction of the VAT. The regression equation obtained from the data was used to estimate the mean price of a commodity after the VAT, given its before-VAT price. This enabled us to calculate the percentage change in prices attributable to the VAT. The results presented in chapter IV revealed that, the consumer price increase within three months of the implementation of the VAT in Ghana was 6.6 percent. This was higher than the - 0.4 percent change in the previous quarter. However regression analysis of the data showed that, this shift in the CPI during the period was not significant at the 5 percent level. This implies that the effect of VAT on the CPI was minor. Again, the data was tested for acceleration in the shift in the CPI. The results showed that this was not significant, even at 1 percent level. This implies that the effect of VAT did not lead to any long-term shift in the CPI, which meant that the VAT did not lead to inflation. The regression result of the prices of the selected commodities also gave a price increase of 1.7 per cent. This showed that about 1.7 percent out of the 6.6 percent rise in the CPI in the period could be attributed to the VAT.

Source: KNUST