Understanding the hidden burden of administrative VAT registration

By: Confidence AKPLOME

Public discussion on Ghana’s tax system tends to concentrate on the major changes that appear in budget statements and policy proposals. Proposed tax reforms and new revenue measures dominate the headlines. Yet, the everyday administrative practices within the tax system that often exert equal or greater influence on how businesses experience taxation never gets discussed. These practices shape compliance behaviour, determine operational costs and influence whether entrepreneurs see the state as a partner or as an adversary. A recent conversation with colleagues brought to my attention one of such issue. It concerns the way some SMEs are registered for VAT during the tax file creation, even when they fall below the lawful threshold.

Why VAT thresholds matter

VAT thresholds are designed as a protective layer for micro and small enterprises. The current threshold requires registration when turnover reaches or is expected to reach GHS 200,000 in the next 12 months. The proposed increase to GHS 750,000 attempts to recognise the pressures smaller firms face. Thresholds limit the administrative load that VAT introduces on businesses. It helps businesses with low turnovers and margins avoid the cash flow disruptions that come with filing obligations and withholding regimes. Also, it prevents small firms from taking on pricing disadvantages in markets where consumers are extremely sensitive to even slight changes in cost.

When a firm deliberately grows to the level where compulsory VAT registration is required, it signals an increase in their capacity and stability. The threshold, therefore, functions as a policy instrument that supports early expansion. It encourages formalisation in a way that aligns with the financial realities of micro businesses.

Where administrative practice seems to drift

Reports from small business owners and firsthand experiences from dealing with tax officials indicate that, during the opening of a tax file, VAT registration most times occurs irrespective of your projected turnover levels. For a new entrepreneur, whose revenue is well below the threshold, this can be both unexpected and unsettling. SMEs approach the tax office with the intention of meeting their basic tax obligations. Their aim is to regularise operations, obtain a TIN or satisfy requirements that open opportunities for contract deals and financing opportunities. Instead, they walk away with a VAT obligation that by law is unrequired given their projected turnover level.

This practice creates a subtle divergence between policy intention and administrative execution. In an environment where compliance is already challenging for small firms, such administrative decisions add layers of uncertainty. Entrepreneurs are suddenly faced with obligations that increase operational complexity at the earliest stage of their business journey.

The quiet tax incidence on small businesses

The immediate question many raise is what to do next after they have been unduly registered despite falling below the required threshold. Should they begin charging VAT immediately? Should they adjust prices? Should they absorb the cost? Most small business owners do not have clear guidance. They fear hefty penalties should they get it wrong. They do not always know that they can request a correction to the registration. They are unsure who to ask for help. As a result, they reluctantly comply and bear the tax incidence themselves since shifting it to the final consumer, which should be the way to go, will risk hiking their prices and making them uncompetitive.

This is where the economic burden becomes visible. Small firms often operate with margins that can be as thin as 5% – 10%. Absorbing VAT at such margins is a major inconvenience. It erodes profitability, limits reinvestment, slows expansion and reduces resilience. Charging VAT is equally challenging because consumers can be highly price sensitive. A minor increase in price may result in lost customers or reduced competitiveness. The business, therefore, finds itself caught in a tricky situation.

The Larger Systemic Implications

Isolated administrative decisions may appear trivial. However, when multiplied across thousands of small firms, the cumulative effect becomes significant. Ghana’s small business ecosystem forms a critical part of employment creation and livelihood support. When unintended obligations erode their margins, the economy loses potential reinvestment that could have supported growth. Businesses that were on the path to formality may reconsider their engagement with the tax system. Entrepreneurs may conclude that compliance is more punitive than remaining informal.

A modern tax administration must deliver both fairness and clarity. Fairness ensures that policy is implemented as intended. Clarity ensures that taxpayers understand their obligations and their rights. When these two elements weaken, confidence in the system declines. Compliance becomes more transactional than collaborative. This is not only a revenue risk but also a developmental risk because it reduces trust in state institutions.

The Way Forward

Addressing this issue does not require a major reform. It requires consistency, communication, and a commitment to aligning administrative practice with statutory intent.

• Frontline officers should operate with clearer guidance on VAT thresholds.
• Taxpayers should be informed at the point of registration about the basis for any VAT enrolment.
• Businesses should have access to simple and transparent processes to correct unintended registrations.

These processes should not be treated as obscure internal procedures but as part of the taxpayer’s right to fair administration. Strengthening these areas will reduce the unintended burden on small businesses. It will also reinforce the credibility of the tax system at a time when Ghana is engaged in larger fiscal reforms. A system that protects small firms at their earliest and most vulnerable stages encourages formalisation, improves compliance, and supports long-term economic growth.

The conversation around taxation should move beyond policy focus and examine how administrative routines shape real outcomes for businesses. If we as a country is committed to supporting the small business ecosystem, then practices that quietly impose unintended costs deserve immediate attention and correction.

The author is a finance professional with a growing focus on tax policy, corporate finance, and financial risk management. He is an ACCA-qualified accountant and an FMVA-certified analyst with experience supporting early-stage and growth-oriented businesses in operational finance, compliance planning, and product development. Confidence writes on fiscal reforms, business resilience and financing structures that support sustainable economic growth. He is building a strong voice in modern finance leadership in Ghana and aims to contribute to the country’s evolving policy and business landscape.

The post Understanding the hidden burden of administrative VAT registration appeared first on The Business & Financial Times.

Read Full Story