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How Real Estate VAT Could Affect Ghana’s Economy TODAY

New tax has both positive and negative implications

Ghana’s capital, Accra, is one of Africa’s leading real estate investment destinations. Today, Ghana’s real estate industry is set to be included in the list of sectors subject to value added tax (VAT).

VAT is a type of consumption tax that is placed on a product whenever value is added at each stage of production and at final consumption. Liable VAT entities collect the money on behalf of the government. In Ghana, the flat VAT rate charged is 17.5%. For real estate, however, VAT has been pegged at five%.

Property expert Lamudi Ghana investigated the likely implications of the VAT for the sector and the country’s economy:

Increased Revenue

The introduction of VAT on real estate will raise more revenue for the government. With a growing domestic debt, the revenue generated from this tax will offer some respite for the government. In addition to slowing down the debt rate, the government should be able to channel funds set aside for real estate into other sectors of the economy.

Individual Homes not Affected

The VAT on real estate only affects commercial and residential properties developed by real estate developers. Individuals looking to build their own homes are exempt from this tax. This means that individuals can continue to build freely without the additional tax component.

A 5% Cushion

Even though the law states that every entity liable for VAT should pay 17.5% on the value addition, real estate developers were able to negotiate a fair deal for the industry. The government, in consultation with stakeholders, decided on a five% VAT that could ease the tax burden on developers and consumers to some extent.

Affordable Housing Investment

A real estate VAT could boost investment in affordable properties in Ghana. With a widening housing gap annually, the government could reinvest the generated revenue into the real estate industry. Data from the Ghana Statistical Service shows that over 60% of households living in urban areas do not own a home. A survey conducted by Lamudi also shows that households want to own a home, but at a more economical price. Using the real estate VAT revenue, the government could embark on key projects such as land banking to reduce land costs and enter into economic partnerships with private developers to construct affordable housing.

The positive effects of this VAT could bode well for the Ghanaian economy. However, there are a few negative implications that should considered. Below is a list of some of potential scenarios:

Reduction in Sales

Research shows that newly introduced taxes discourages consumer spending. The result is a likely reduction in real estate expenditure by house-hunters in the short term. Developers are likely to be affected, with a reduction in sales revenue a likely scenario.

Lower Tax Revenue

Taxes are intended to generate revenue for governments. A tax on price inelastic products such as salt or sugar is unlikely to lead to lower revenue. However, real estate is price elastic and demand could be affected by an increase in price. As such, projected revenue could fall and the government’s coffers could suffer as a result.

Stunted Real Estate Growth

Real estate has become a key driver for many countries around the world. In Africa, countries such as Kenya and Ethiopia have seen a surge in real estate investment which has helped boost their economies. Ghana has made positive gains in real estate growth for the most part of the last seven years. Unfortunately, an added tax component could lead to slower growth for the industry. According to the Ghana Statistical Service, real estate, professional, administrative and support service activities recorded a negative growth of 1.5% in 2014. The introduction of VAT on real estate is likely to further burden real estate developers, culminating in a slower growth rate.

Higher Mortgage Rates

The mortgage sector is another sensitive aspect of the real estate industry. Rates are determined by inflation rates, foreign exchange and property prices. A VAT on real estate would mean an increase in property prices. The other challenge is the fact that some house-hunters are likely to be excluded from mortgages when the new tax comes into force. For instance, the current value of a two-bedroom house is $200,000. A house-hunter looking to buy this property meets this requirement, with a maximum mortgage eligibility of $200,000. The introduction of VAT would increase the price of the house to $210,000, excluding this house-hunter from qualifying for a mortgage.

VAT can be a means of rescuing the real estate sector. However, this has to be done in a manner that does not affect the industry negatively.


About Combing for Curls

Ghanaian-Nigerian Accra-based natural hair blogger and vlogger. Creator/curator of African culture and political content.


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