VAT implementation…
Tourism industry wants “Zero-rated” status
By Melanie Allicock
Kaieteur News
January 10, 2007
The Tourism and Hospitality Association of Guyana (THAG) is recommending that Guyana 's tourism product be zero-rated for VAT to assist with the development of the country.
The body believes that if tourism were to be zero rated, it would allow for improved competitiveness in the global market as tourism-related entities would be able to reduce the cost of packaging Guyana as a destination.
The association notes that the fact that it would not have to charge VAT would leave the industry where it is today. The ability to recover VAT inputs would additionally help them to reduce costs and consequently make the industry more competitive internationally.
It would further enable the industry to increase the number of visitors to give local operators the ability to achieve the mass required to drop prices further, THAG believes.
While the industry appreciates that Government has to collect taxes to provide the infrastructure, social services etc., THAG points out that tourism holds great potential in generating non-tax revenues for the country.
A study by the IDB said that tourism was the third biggest industry in terms of foreign currency earning in 2002. This has been achieved even after the problems of the late 1990s and without any national marketing strategies.
Positive impact
THAG believes that an increased number of visitors will automatically have a positive impact on employment levels, local manufacturing and agriculture, and noted that tourism has been proven to be one of the greatest tools to help alleviate poverty in many countries similar to Guyana .
The introduction of VAT, the THAG stressed, can only hinder the growth of the industry and delay the benefits it can bring to the national economy.
The Association pointed out that tourism in Guyana is a fledgling industry that has encountered many problems over the last ten years from political unrest and natural disasters like flooding to other disasters like the Omai spill.
All of these factors have led to a dramatic drop in the arrival numbers from the peak of 1994 for a period of six years running. While the numbers started to increase after 2001, they have just about reached the same levels as 10 years ago. “In reality, we are just where we were 10 years ago, having gone through some very lean years.” the Association says.
One of the main problems Guyana encounters as a tourism destination, apart from the negative image it has overseas, is that it is perceived as being expensive when compared to countries offering a similar product, THAG noted, adding that this applies not only to the international market but indeed to domestic tourism as well.
“While we cannot deny that there is a lot of truth to this perception, this is largely due to the vast geographical terrain travel that comprises our tourism product and the high travel and transportation costs that must to spent to enjoy this wonderful product. In addition no operator to date in Guyana has achieved a critical mass level to make their businesses profitable.
“If we can successfully start to increase visitor arrival numbers and occupancy levels in interior resorts and to a lesser extent in Guyana generally, fixed costs per visitor will decrease allowing operators to reduce prices,” The Association stated
“It is against this background that the Tourism Association of Guyana from as early as August 31, 2005 when members of THAG attended a presentation on the Draft VAT regulations as organised by the VAT Implementation Unit, started to raise our concerns regarding the sudden implementation of a Value Added Tax and its potential negative effects on this specialized industry.
Currently the Accommodation sector in Guyana comprises just two large hotels with in excess of 100 rooms. The majority of the industry has been built on smaller locally owned hotels as is the norm in several of our sister Caribbean islands.
As an organisation, THAG has expressed several concerns as it relates to these small hotels which over the years were not able to benefit from the current Tourism Duty Free regime as they fell below the 15 room benchmark to benefit from the regime.”
The organisation pointed out that many of these hotels have had to invest hundreds of thousands of US dollars and pay duty and taxes on all of their inputs. While it is true that they had an advantage in that they were not required to charge the ten percent (10%) accommodation tax and remit the same to the Guyana Revenue Authority, and that this may have given them an advantage in terms of pricing, for many the benefit of this has not materialised as the unstable security environment has resulted in low occupancy rates.
Now with the introduction of the Value Added Tax (VAT) on the basis intended, THAG notes that this means that all hotels will not be paying the same level of taxes and that the majority of the players in the industry will have been penalised as they will now be in the same position as the larger properties who have benefited from tax incentives. The organisation laments the fact that no plan seems to be in place to deal with this inequity within the VAT legislation.
The Association noted that while government is encouraging investments in the tourism industry, especially for Cricket World Cup 2007 and beyond, the introduction of VAT will have a dramatic impact on the ability of persons to continue with such investments. It added that the necessary payments of VAT will be part of any project cost during the development stage but a timely refund timeframe is essential to allow persons to complete their projects. “While a project is under development, there is no income coming in to offset VAT paid and hence persons will be in a position where they could be owed substantial amounts in VAT refunds from the GRA as the development proceeds,” THAG pointed out.
Standstill
“With the current planned timeframe for refunds as we understand it, many development and expansion projects in the Tourism sector could easily come to a standstill very near the end of the project as businesses experience cash flow problems while they wait for refunds to complete works.”
As a result, the body suggests that the refund procedures be speeded up dramatically to a stage that monthly refunds of overpayments can be made .
With the problems now being experienced by the sugar industry through the removal of the preferential trade agreements and prices, THAG said it recognises the huge potential tourism has to becoming the main vehicle for the development of the Guyanese economy. In many countries, tourism has proven to be one of the greatest tools used in the diversification of traditional economies into non-traditional areas and with aggressive retraining policies the association is convinced that tourism can contribute to the reduction of unemployment levels and the alleviation of poverty in Guyana .
It added that many countries that have VAT in operation have put special conditions in place for the tourism industry as they realise that given the global competition, pricing is critical.
Export industry
Touching on other reasons why it believes that tourism should be zero-rated, the Association noted that internationally, tourism is classified as an export industry. It is adamant that while the market may come to Guyana to experience the product, it is an export in the truest sense of the word.
Under the new VAT laws of Guyana , all companies that export their goods are zero rated in order to keep them competitive in the international market. By default, the Association believes that tourism should be classified the same as industries exporting physical goods from Guyana .
According to THAG, there are currently three operators that are quoting for itineraries to Guyana for 2008. Now that VAT has been suddenly applied to these prices, the local operators will have to bear this increase as it cannot be passed on to the international wholesaler/operators. Given the fragile state of the industry, most if not all local operators will not be able to do so and this could lead to Guyana being dropped by the international travel trade as a destination.
Currently, the country is facing this situation in relation to accommodation rates quoted for Cricket World Cup in 2007, well over a year ago, which it seems would now attract the 16% VAT.
Some hotels have already notified the international booking agent only to be told that accommodation packages have been already sold and that it would be impossible to raise these prices by 16%. This critical situation remains unresolved. According to the Association, this situation was anticipated by members of THAG and was therefore carefully outlined in correspondence to the VAT Implementation Unit and to the Guyana Revenue Authority earlier last year. This was also mentioned in their presentation to the Select Committee in Parliament on January 13, 2006. To date the organisation laments that it received no correspondence or feedback.
Additionally, the body noted that many of the resorts in Guyana are heavily dependent on the local market for survival and for many years there have been complaints that tourism is too expensive for Guyanese and that they cannot experience the wonders that their own country has to offer.
They expressed concern that the introduction of VAT to the tourism industry will only make this situation worse. The Private Sector Commission had shown in several publications that they believe the cost of living for all will increase with the introduction of VAT and that this will dramatically reduce the limited disposable income that is currently available for expenditure on local tourism. If this is combined with the introduction of VAT on tourism services, THAG believes that the local market will disappear totally, and by default, many of the resorts who depend heavily on this market.
The hospitality Association believes further that if tourism is zero rated, it means that operators will in fact be able to reduce their costs by being able to claim the VAT paid on inputs back. This will assist the industry in being able to reduce costs to locals and international travellers and by default should increase the numbers of persons experiencing the Guyana tourism product. When numbers start to increase, the product can be made more prices competitive in the international market, THAG stated.
Major concern
The Association said two of the major tour operators in Guyana just returned from Latin American Travel Mart in Panama where a major concern was raised by the international companies as to the dramatic increases in the cost of packages to Guyana .
It was explained to them that while prices had increased primarily due to the cost of internal transportation which has resulted from the increases of fuel costs, they were also told that all prices had increased by 16% due to the implementation of VAT from January 1, 2007. One company, Bales Worldwide, who has been sending visitors to Guyana for a number of years, reportedly had the following comment:
“I am very concerned about the possibility of a large increase on VAT in Guyana and fear that it would have a serious impact on travel there. Nowadays, clients have a choice of visiting countries and we know from our years of experience, that if a destination becomes too expensive, clients will avoid traveling to that country. Following increases in costs for 2007, Guyana could well price itself out of the market and become completely unattractive to potential clients, if the VAT increases prices.”
Within the Caribbean , special concessions in the operation of VAT have been applied to the tourism industry by many countries.
In Barbados , the normal VAT rate is 15% but special consideration has been given to accommodation providers where they only have to charge 7.5%.
In neighbouring Trinidad , the 10% accommodation tax was never replaced with the introduction of VAT but VAT is applied to all other hotel charges. Local tour operators do not have to charge VAT on the sales overseas and are allowed to claim the VAT back on their local inputs, i.e. they are zero rated.
Dominica introduced VAT in March 2006 at a general rate of 15% but hotel accommodation was given special consideration with a rate of 10%, meanwhile, in the Bahamas , VAT is 6% but for tourism it is only 2.4% during the high season and 1.8% in the low season.
The generalized VAT in Jamaica is 15% but the tourism sector only pays 5.9%. While operators must charge 5.9% on their sales, they can reclaim the VAT at 15% charged by their suppliers.
The Tourism and Hospitality Association, at a minimum, it believes that VAT should not be applied to tourism services for at least a five-year period to give time for the many initiatives now being taken to market Guyana to take effect.
It also believes that now that VAT is introduced for tourism, Government should give the industry a two-year advance notice period. This will at least ensure that local operators will be able to quote actual prices to the international travel trade.
If government were to agree to the zero rating of tourism for VAT purposes, THAG says special attention needs to be paid to the VAT refund periods. The suggested period of six months will put industry players in serious cash flow problems. As the industry develops, the payment policies of the international travel trade will become more and more of an issue for local players. Many of the larger international tour operators are taking longer and longer to settle accounts with local operators, THAG said adding that having to wait up to three months to receive payment for services provided and six months for VAT refunds will put serious financial strains on local industries.
The organisation continues to hope that these issues will be addressed urgently in the best interest of the further expansion and development of Guyana 's tourism industry for the benefit of all Guyanese.
The Tourism and Hospitality Association of Guyana is a private sector umbrella organization of over 56 tourism related entities including hotels, resorts, restaurants, tour operators, travel agents, environmental, marketing and transportation services in Guyana . THAG is a member of the Private Sector Commission