MY COLUMN - This VAT may really be a burden

MY COLUMN – This VAT may really be a burden

Jul 20, 2008 Features / Columnists, My Column

VAT became a household name last year. It was also the source of a multitude of criticisms, being blamed for the inexorable rise in the cost of living. The political opposition and the trade unions argued that it was making the hardworking people poorer.

The government countered with an argument that the tax was indeed a blessing in disguise since it brought into the tax net, people who would normally have refrained from paying any tax at all.

And indeed this might have been true because people like the taxi and minibus drivers, the rice farmers and a host of private people simply did not pay taxes on their earnings.

They, however, enjoyed everything that was provided from the earnings of the burdened public servants who happened to be in a situation where they simply could not escape paying taxes.

VAT—the value added tax—was a necessity and is something that exists in every country. It is a situation where people pay on their purchases and thus guarantee that the state gets its fair share of taxes.

Of course there are loopholes but every system has these loopholes and it is only a matter of time with policing efforts that those who manage to dodge get caught.

The initial statement was that the government was foregoing earnings from eight taxes and was introducing VAT without a clue whether this new introduction would compensate. The other promise was that with VAT many things would be cheaper.

So there were dual benefits to the society—things were going to be cheaper for the greater part, and the tax net was being broadened.

Today, some 18 months after the VAT introduction, some figures are emerging to suggest that the rate was higher than it should be and that the coffers are accruing a windfall. I had a look at some statistics and I was surprised. I saw that from 1992 to 2006 the increase in tax collection every year was no more than $6 billion.

A lot of this increase might have had to do with the devaluation in the local currency. Importers were paying more for the goods and this translated into higher taxes because the tax is computed on the landed cost of the goods. So while the volume of importers might have remained constant the tax collection rose.

Between 1996 and 1997, the year when an election was held and when governments are wont to offer concessions, the difference in tax collection was about one billion dollars. It was even less between 1997 and 1998. Those were the years of the post-elections violence, so importers might have curbed their buying.

The trend of gradual increases continued until 2006. And there was an interesting increase in income tax collection. There was an arbitration in 1999 that saw public servants receiving a whopping increase in salaries. Over two years — 1999 and 2000 — they were to receive a 50 per cent increase.

The income tax collection grew by some three billion dollars and this could be understood. The more a public servant earns the more he pays in taxes.

However, it was the introduction of VAT that saw the greatest jump in tax collections. In 2006 the collection was $60.2 billion, some $5 billion more than in the previous year. In 2007, the difference in collection was a whopping $20 billion and this was testimony to the impact VAT had on the coffers.

Of course the government used the money to do a lot of things, one of which was to keep the price of electricity down. Analysts say that people, had they not been saddled with a 16 per cent VAT, would have been able to cope with any increases in electricity costs.

I am no economist so I cannot pronounce on that. What I do know is that VAT provided a windfall and seems to support the contention that the tax was too high.

One accountant says that conservatively the tax should have been about 12 per cent. The politicians say that it should have been eight per cent.

But there is something more. Businesses that have a turnover of more than $10 million per annum should be VAT registered. This would allow them to recover the VAT they pay on their imports by passing on the charges to the consumer.

I notice that some businesses actually forego collecting the VAT from their customers and they decline to issue a receipt to the consumer so that this refusal is not spotted by the Guyana Revenue Authority.

If I pay VAT, why would I not seek to recover my money? Obviously something is wrong. It is either the businessman got a deal with the help of Customs officers or the goods were smuggled.
But that is for the GRA.