Business Page –  VAT compromise give hope

Sunday, April 17th, 2005

Introduction:

Despite rejecting a call by the Private Sector Commission of Guyana (PSC) for a suspension of the passage of Bill # 3 of 2005, the Value Added Tax Bill, to allow for consultations by the Government with stakeholders generally and the PSC in particular, the National Assembly arrived at a compromise which was unanimously approved at its second reading. The National Assembly agreed to take the Bill to Select Committee during whose deliberation the PSC and other bodies would be permitted to make its case for such changes to the Bill as they consider appropriate. The deliberations of the National Assembly are usually discussed with cynicism but on this most fundamental piece of tax legislation, the members rose to the occasion with a debate that was quite informative and, taken as a whole, reasonably balanced. There were a few incorrect statements due perhaps to a lack of understanding; omission of others such as any reference to the fact that there is no such thing as a uniform VAT system or to the fact that the largest economy in the world (USA) does not have a VAT and the second largest (Japan) has a VAT that is considered quite unique; the impact of the introduction of VAT on the cost of living and the lack of emphasis on the complexities of the tax and the substantial opportunities for fraud such as a trader charging VAT on fake invoices which are not recorded or accounted for to the authorities or making improper claims for refunds.

Two issues I believe were not adequately addressed are the ability of the Guyana Revenue Authority to administer the VAT given its existing responsibilities and the human resource constraints facing every entity in Guyana and the failure of the Bill to zero rate basic food items as is done in all the CARICOM countries which have VAT.

Today's Business Page once again looks at the subject having re-published late last year a three part article first published in 1993. The basis of today's article which continues next week is a presentation made by the writer at a Luncheon Presentation sponsored by the Guyana Manufacturing and Services Association Limited (GMA) on last Tuesday April 12.

Value Added Tax and tax reform:

I had expressed pessimism about any compromise from the majority party since there is a long outstanding commitment given by the Government of Guyana to the IMF for the introduction of VAT by July 2006. In the document dated July 7, 2004 in which the commitment is given, the introduction of VAT is stated 'to advance tax reform consistent with VAT implementation by 2006'. In truth, VAT has been on and off the agenda for over twelve years although the current administration appears to have argued against it in 1993 in response to a call by Professor Clive Thomas for the Government to give it consideration. To that extent, I consider that the private sector must accept part responsibility for the obvious lack of information, preparation and discussion on what is considered the most innovative tax system to have been introduced anywhere in the world over the past century. VAT now operates in about 140 countries with the majority having introduced the tax over the past quarter of a century.

The trouble with tax changes even when they are no more than tinkering is to shroud them in the cloak of tax reform. Really meaningful and serious tax reform requires the simultaneous review of all existing taxes, with all the stakeholders. In particular, the introduction of VAT - an expenditure tax - should be accompanied by a reduction of taxes on income. Whether such issues can be raised in the Committee stage of the Bill is an open question but if the atmosphere of compromise persists, there is no reason why the parties cannot agree to include this as it deals with the tax modeling that is necessary to determine the rate of the VAT which is still to be decided.

Before I move into the substantive issue and particularly since the tax we are told is being introduced to advance tax reform, let me mention a few areas where the cries for reform have been all but ignored.

Tax Reform Issues:

- Differential tax rates - commercial v non- commercial company

- un-incorporated vs. incorporated business

- Tax Evasion (estimate by the Commissioner General of billions lost through evasion).

- Company Group relief

- The turnover tax

- Income tax threshold far too low and should be radically increased

- Corporation tax should be more in line with personal taxes

- The imposition of a withholding tax on those multi-million dollar contracts whose contribution to the State seems negligible.

- A statutory review of the decision in the Bata Shoe Company Case

- The penal duties on incorporation of companies.

- Apparently unreasonable and unjustifiable remissions and exemptions.

It is a fair chance that the country loses as much again via tax holidays, which are closely guarded secrets, and exemptions for some type of businesses. In other words, we probably remit or forgive as much as three times the annual taxes paid by companies.

Apart from considerations of equity such generosity with funds otherwise due to the state seems to make no economic sense particularly in the context of the weak performance of the economy over the same period as the real GDP growth shows.The question which arises is are these free lunches since they do not contribute to economic growth as the following figures show?

Year Amount Real GDP Growth:

G$B.

2003 15.771 (0.6)

2002 15.486 1.4%

2001 16.331 2.3%

2000 13.200 (1.4)

1999 7.537 3.0%

There must also be some concern that personal taxes now contribute as much to the coffers of the state as companies do. When we consider the meagre - some would say mean - allowance for individuals, the lack of equity in the personal tax system is further exposed.

If the IMF, as drivers of our economic and fiscal policies, was serious about tax reform including such basic concepts as efficiency, equity, transparency and certainty, then it should be rooting for those concerns to be addressed rather than for the introduction of another tax for which the country is by all accounts hardly prepared. The IMF cannot be unaware that the last major piece of 'tax reform' it proposed and embodied in the Fiscal Enactment Amendment Act #15 of 2003 is still to be properly implemented. I should mention as well that the flip side of the tax reform debate is expenditure management - a topic that demands equally serious attention.

The world going Vat - but not the USA:

VAT operates in 136 out of 186 countries although only nine out of the 27 countries with a population of less than one million have the tax. One of the first countries outside of Europe to have introduced it was our giant neighbour Brazil back in the sixties while Caricom neighbours Trinidad, Barbados and Jamaica have been more recent converts. VAT exists in every country in Europe and in Canada but significantly not in the USA.

Interestingly, only five countries have ever removed an existing VAT and of these, three have reintroduced the tax. Two Caricom countries, Grenada (introduced 1986, dismantled shortly thereafter) and Belize (introduced 1996, removed 1999) have held out. The numbers do not necessarily reflect the efficacy of VAT since the tax is also largely driven by the IMF which believes in its inherent virtues, the principal of which is that it assists in the better allocation of resources. That argument may indeed hold true for the private sector but is it equally applicable to governments? In other words, do governments take such factors into account when deciding on their expenditure priorities?

To be continued

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