Impact of Value-Added Tax on food prices in Ghana 1998-1999

When government undertook tax reforms in 1998, it exempted the food sector from the value-added tax. This was with the view to avoiding or at least, minimising any inflationary effects of the tax on this sub-sector. However, as all the sectors of the economy are interrelated, there is no reason to assume that the foods sub-sector can be completely insulated from the impact of VAT on prices. This study established that VAT had no inflationary impact on food prices over the period January 1998 to December 1999. The study, however, found out that food prices increased within the first three months after the introduction of VAT. Two broad approaches were used in this study to assess the impact of VAT on food prices. In the first approach, the study compared the rate of change of the consumer price index numbers for food immediately before the implementation of VAT with the rate of change of the price index numbers for food immediately after its implementation In this way any differences in the rate of change for the two periods were observed, and it was found out that, the rate of change was higher before the implementation than after the implementation. This raises the issue that the introduction of VAT may have slowed down price increases in the food sub sector. In the second approach, the study adopted the strong monetarist’s version of inflation with money supply as the dominant independent variable. VAT is introduced as a dummy variable into the model to assess its possible impact on food prices, using the Least Square Regression criterion. Equating VAT to zero implies VAT is not operating in the economy and equating VAT to one implies VAT is operating in the economy. The regression results showed a once- and- for- all increase (shift) in the prices food by 17.1 percent. The results also showed that after the implementation of VAT a percent increase in money supply caused 0.2 12 percent acceleration in food price rise in the short term. The acceleration is lower than that prior to the introduction of VAT, which was 4.214 percent as with the first approach, it can be said that the introduction of VAT may have slowed down the effects of money supply on food prices. The regression result further showed that for the long term, that is 24 months (Jan. 1998 - Dec. 1999), VAT did not have any significant impact on food prices. Within the short term of the study (OCT. 1998 to MARCH 1999), the following were observed. There was a direct relation between money supply growth and food price increases. There was also a direct relation between VAT rates and food prices It was observed that the increase of 17.1 percent in food prices declined gradually to about 2.0 percent by the end of the third month (March) after the implementation of VAT. On the basis of the findings and analysis, the following recommendations have been: First of all, since in the short term, the VAT resulted in a substantial increase in the prices in the food sub-sector, lower rates should be first introduced to avoid such initial shocks. The rates can be increased gradually until the desired level is attained. Since money supply as observed, has direct relation with general price increases in the food sub-sector, tight monetary policies should be introduced along with VAT to control money supply growth. Such monetary policies, involve the use of instruments such as open-market operations, the discount window and the reserve ratio.

Source: KNUST