Analysis of value added tax effect on firms’ cash flow in various sectors of the emerging economies

Abstract

Inadequate cash flow constitutes the major reason for most corporate failures. However, absence of empirical evidence on value added tax (VAT) effect on corporate cash flow in different industries means that cash flow implications are often ignored by VAT policy makers. This study examines the relationship between VAT and firms’ cash flow in various sectors of the economy within the context of an emerging economy. The study employs factor analysis to determine if there is a statistically significant difference in cash flow effect of VAT on firms among the different industry groupings in Ghana. The study used data on firms registered with the Large Tax Payer Unit (LTU) of the Ghana Revenue Authority (GRA) to conduct the analysis. It was established that VAT effect on firms’ cash flow differs significantly between industry groupings, depending on the particular factor influencing the amount of VAT remittance to revenue agencies. The findings also show that governments’ decisions on the efficiency and neutrality of the VAT scheme must not only be influenced by its ability to transfer the tax burden from corporate bodies to final consumers, but also its effect on firms’ cash flow in various industries. The findings have important policy implications for policy makers in evaluating the efficiency and neutrality of different tax schemes.