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.
