VAT or Value Added Tax is 18 months away, with legislation to be passed by March; the private sector is now being consulted although some are not happy with the short time frame for their views to be heard on such a major initiative.
A presentation by consultant Eric Hutton, at a seminar hosted by the Ministry of Finance on Wednesday, gave an overview of how a typical VAT system works.
Hutton began by noting that most taxes have some kind of distortionary effect on the economy by altering the behaviour of businesses and people. This could be intentional as in the case of sin taxes on such items as alcohol and tobacco that by their use create an additional burden on the state. A tax exemption on computers could promote the development of an IT sector. However, a tax on goods and not services could skew businesses into the service sector at the expense of manufacturing. Ideally a tax should have minimal impact on the economy when filling its primary purpose of raising revenue.
A retail tax could achieve this by charging an amount when the final consumer pays. However, this can be hard to apply and Hutton noted that the retailer does not necessarily know the difference between a homeowner buying a hammer, a consumer purchase, and a carpenter buying one for his business, an investment. Systems are in place to help address these problems, but they are easily abused.
The VAT method on the other hand applies tax at every stage a good or service changes hands and as such is harder to avoid. He explained that a firm making a product pays VAT on the inputs. It then charges the same rate on its finished product to a wholesaler who then charges the same rate to a retailer who passes the same rate on to the consumer. What the manufacturer, wholesaler and retailer submit is a tax on the added value they put on a product or service. So if they paid tax on a hammer of $200 and collect tax on its sale of $500 they would submit tax of $300; the tax they collected on their sale less the tax they themselves were charged.
One effect of VAT is to stop cascading, the compounding of the same tax at different stages thus effectively increasing the final effective tax to the consumer.
As for how this would be paid to the Guyana Revenue Authority, Hutton said most systems require a monthly remittance that simply is the difference between the amount of tax they collected and how much they paid. Every registered person will be given a certificate indicating their name, taxpayer number, location of business/branch; and the effective date of registration.
That certificate will have to be placed in a conspicuous place at each location at which the registered person engages in taxable activity.
One of the issues still to be sorted out is the turnover threshold and whether small businesses such as a corner grocery shop would have to submit VAT contributions. It does not mean they will not pay VAT as they will be charged it by wholesalers when they purchase goods, so the revenue loss would not be substantial. As it is the administrative costs of monitoring every little business would outweigh the contributions, so a high annual turnover threshold is anticipated. However, it may mean a slight competitive advantage for smaller businesses over larger operations that are required to charge. As for the rate this is still under discussion although similar models in the Caribbean now have a rate of 15%. There would be exemptions including the public sector, financial services and residential rent. One of the criticisms of VAT is its regressive nature in that poor people spend a large proportion of their income whereas richer people can save and thus pay an effectively lower proportion of their income in VAT. To counter this, basic food items - rice or flour, vegetables etc - are often zero-rated. Items for export are also zero rated so as to keep them competitive. Hutton addresses the argument of regressivity by asking what the system is replacing.
Fiscally, the VAT has the potential to enhance revenue yield since there are in-built mechanisms to minimize the effects of smuggling, under-valuation of goods and services and the misuse of tax incentives.
The other issue is whether VAT is inflationary. Hutton said that some prices will go up, and some prices will go down. In the end, whether it is inflationary depends on how important the items for which prices will be going up are (services) versus the items for which prices will be going down (goods) in measuring inflation.
It should be noted that VAT legislation does not list the items included but rather those excluded and it is generally desirable to keep exclusions to a minimum. But VAT would eliminate C Tax and since some items attract quite high rates the price may not move up higher.
Implementation timetable
Finance Minister Saisnarine Kowlessar said the VAT would replace many taxes including the consumption, hotel, entertainment, purchase and telephone taxes as well as the travel voucher, bringing them under one standardised rate while being revenue neutral. He said a study was underway to assess the best turnover threshold and the rate. GRA Commissioner Khurshid Sattaur told the seminar draft legislation is ready and would be sent to Parliament by the end of January for enactment by March or early April. Regulations would be prepared a few months after that; registration would begin in first quarter of 2006 for collections to begin after the middle of the year. One key issue is ensuring that the GRA has the capacity to deal with administering the tax and it may be that a separate unit would need to be set up under the GRA for this purpose.
It was, he said, a tight deadline but the seminar was designed to find out from the private sector "what you want in that legislation." However, business representatives thought the consultation period of three weeks was too short to canvas views and submit proposals. This was the view of Guyana Manufacturers Association President Doreen de Caires, Georgetown Chamber President Eddie Boyer and ASCO CEO, Brian James who was more concerned with getting goods off the wharf in time for Christmas. Kowlessar responded by noting that it was the private sector which had originally proposed a VAT system and they must know the issues involved. Sattaur assured that any private sector proposal would be presented to the Cabinet and "there may be changes."