Page today concludes its three-part article on Value Added Tax, the bill
which the PNCR convinced the government should be taken to a select
committee for further consideration. It will be recalled that the Private
Sector Commission had asked for a delay citing inadequate consultation. VAT
is due to be introduced in July 2006 following the registration exercise
which will begin in May 2006.
piece begins by drawing from Professor Bird's paper presented at the First
Global International Tax Dialogue Conference on VAT held in Rome last month.
Professor Bird has for years been considered the world's foremost authority
on taxation in developing and transitional economies. His book, Readings on
Taxation in Developing Countries with Oliver Oldman and published by Johns
Hopkins is still one of the most widely read books by those interested in
the economics of development.
Bird notes that in developing and transitional economies (DTE), VAT is
invariably among the most important sources of government revenue, but that
this creates problems for those countries as they become dependent on VAT
and hence more vulnerable to potential problems.
often changed not on any rational basis, but entirely to meet revenue needs.
On the other hand, zero-rating and exemptions become the vehicle through
which some sectors win favour. Our legislation must therefore guard against
any politicization of the VAT.
the herd mentality which drives increasing numbers of countries to introduce
VAT, the tax does not always work well in many DTE, principally because some
are simply not ready for 'self-assessment.' If proof be needed, we show each
year how unprepared for self-assessment the country is. If we are not ready
for self-assessment for income and corporation tax purposes, can we be ready
for self-assessment for VAT and if not, as Professor Bird asks, can such a
country have a VAT at all? And, if it does (as many already do), is the best
VAT for it always the same as the 'model' implicitly set out as a standard
in most of the literature?'
debate in Parliament seemed to have assumed that there is such an animal as
a uniform, standardized VAT. That is not correct and VAT like other taxes is
subject to 'the NOSFA principle' - No One Size Fits All.' That the Bill is
imported from some unstated country is clear when the definition section (s
2) refers to 'memorandum, articles of association' - terms that are now
obsolete under the Companies Act, 1991.
Experience in DTE suggests that the oft-cited '18-24 months' needed for
successful VAT implementation vastly understates the nature and time-scale
of the task in many countries. According to Professor Bird, some countries
"that adopt a VAT must sometimes, for better or worse, take what may be
called the 'big bang' approach - a short lead time with the consequences
addressed later." Experience has shown that when this happens, it has seldom
worked out well, which is probably one reason he stresses for the need to
follow the 'normal' time schedule. When one hears of the eleventh-hour
consultation now taking place it is hard to escape the conclusion that the
government is allowing itself - once again - to be pushed in a direction and
at a pace which this environment cannot sustain.
VAT is a
particularly complex and costly tax to comply with and administer, and is
consequently ill-suited to developing countries. VAT revenues are higher -
all else being equal - in countries with higher literacy rates and hence
presumably with better administrative capacities.
presence of a substantial 'informal' sector, a tax like VAT that falls on
the formal sector acts to deter the growth and development of the economy as
a whole. Indeed, one recent study (Hines 2004) concludes that increasing
consumption taxes definitely fosters the expansion of the hidden economy as
more businesses go outside the formal structure.
turn to some other relevant issues taken from the Background Paper presented
at the same conference at which Prof Bird presented his paper.
advice has been for a single-rate VAT (other than a zero rate for exports
only). Rates vary from 5% in Singapore and Nigeria to 25% in Sweden with a
multitude of rates within this range across the world. In Barbados, Jamaica
and Trinidad & Tobago, the VAT rate is 15%, having started at 10 per cent.
yet to set the rate(s) which will apply. This should be a function of the
answers to the questions posed earlier in this brief presentation.
standard advice is also for a short list of exemptions, limited to basic
health, education, and financial services. Systematically documenting
worldwide practice in this area is difficult, but the proliferation of
exemptions in VATs in practice is an increasingly common concern.
Politicians have been all too willing to grant special treatment to their
friends which explains some of the anomalies in the present tax system. Are
we likely to see this pattern continue under VAT?
of the threshold at which registration for the VAT becomes compulsory is a
critical choice in the design and implementation of the VAT. Experience
suggests that many countries have tended to set the threshold too low,
putting themselves in considerable difficulty when their tax administration
is found to be insufficiently developed to administer a large VAT
population. Indeed, in both Ghana and Malta an initially low threshold was
one of the primary reasons for the failure of their first VAT.
appeal of a high threshold stems from the empirical regularity that a
relatively small proportion of firms typically accounts for a very large
proportion of potential VAT revenue. A high threshold thus economizes on
scarce administrative resourc-es at little cost in revenue.
we have had considerable difficulties with setting thresholds whether under
the Companies Act for purposes of the audit requirement or for purposes of
the presumptive tax under the 2003 Fiscal Amendment Act. We need to think
this one through.
tax systems and their administration are built on the principle of
'voluntary compliance,' meaning that taxpayers are expected to comply with
their basic tax obligations with only limited intervention by revenue
officials. Which Guyanese would put their hands on their chest and swear
that there is such a culture in Guyana?
countries, especially developing and in transition, audit performance is
reported to be a particularly poor aspect of VAT administration. With false
claims for refunds a major threat, an efficient audit system is absolutely
vital. Here again, our performance has been very weak as too many
(non-)taxpayers get away with millions because of the absence of basic
auditing skills in the Revenue Department.
with well- designed VATs that have been properly implemented are likely to
face fewer compliance problems in the longer-term.
Experience shows that it takes 18-24 months to implement a VAT effectively.
Key to success is a sound policy design (a single rate, few exemptions and
high threshold), simple laws and procedures, an appropriately structured and
resourced administration, and compliance strategies based on a balanced mix
of education and assistance programmes, and risk-based audit programmes.
that this is no simple piece of legislation is an understatement. It is
long, complex and confusing. One section has twenty-one subsections. Another
defines a supply of services as including anything done including
"refraining from or tolerating an activity"! Experience has shown that even
the simplest and least complex law soon becomes subject to myriad
amendments, with all its innocence soon lost. We need to avoid that danger.
Commissioner General has frighteningly wide powers including "issuing an
order in writing" and "at any time entering any house or premises described
in the order authorising the distress proceedings." Was this discussed with
the legal profession? We need to be mindful that insensitivity on the part
of the administrators has led to major problems in some countries.
my GMA presentation by asking a further couple of questions which I now
repeat. Can, or should we implement a 'full' VAT immediately or should we
grow into one over time? If the choice is really a 'bad' VAT adequately
administered or a 'good' VAT poorly administered, which is better? Or is
this a false choice? And what about a bad VAT badly administered?
confidence that the select committee will take an enlightened approach,
taking all concerns on board and not considering itself hidebound to any
unrealistic deadline. Let us give ourselves enough time and get it right.