VAT NEEDS TO BE REVIEWED NOT NECESSARILY REDUCED

Oct 25, 2010 Features / Columnists, Peeping Tom

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The introduction of the Value- Added Tax (VAT) three years ago, led to a steep rise in the cost of living as reflected in increases in prices. These increases were attributed directly to the tax, leading many undiscerning minds to conclude that the causes of the increases were due to the introduction of the tax.
This perception of the tax causing prices to spiral was aggravated since at the said time that the VAT was introduced, there was a markable increase in the acquisition costs of a number of imported products such as milk and wheat. Prices therefore increased because of the increased import costs, but in the mind of the public the villain was mainly the Value- Added Tax.
It is perhaps useful at this stage for there to be a reassessment of the impact of the tax on Guyanese consumers and to determine just who benefits from this tax since it is clear that the public in general feels that VAT is an oppressive tax.
There is no doubt that the government remains awash with funds because of VAT. And with an election year looming, there is not likely to be any reduction in the tax even though its returns are bringing in far more money than the government may have anticipated. The government will go on a spending spree next year and therefore needs every cent to be collected, thus the resistance towards any review of VAT at this time.
The poor image that the tax has attracted is however not so much its rate as has been the manner in which it has been applied by the business community. It is this community which has reaped the benefits of VAT and which will continue to make a harvest of the situation so long as tax administration structures remain weak and so long as there exists incentives to avoid remitting the correct taxes to the authorities or finding ways to cream off some of these taxes which they have collected from consumers.
VAT is not an expense to businesses, but it has been in many instances treated as such. When an importer pays VAT on imports, it does not represent a cost since that importer is eligible to reclaim a credit on the VAT paid. As such, the importer is not required to increase the selling price of the product to the extent of the VAT since this tax does not constitute a cost to him. The VAT he pays will be written off when he submits his returns along with the VAT paid by the consumer, which includes the import VAT plus the VAT on his markup.
Many businesses have creative accounting for tax purposes, they could not, and probably many still cannot, adjust their books to deal with a tax which was no longer a cost to them. As such, they simply added the VAT onto their prices thereby causing prices to skyrocket.
The government should see therefore the purpose of any review of VAT as trying to determine the extent to which this process of treating VAT as a cost to the importer still continues. A simple consumer survey will establish whether this is so.
The government should therefore not see calls for a review of VAT on an insistence that the rate of VAT is too high. There have admittedly been calls for VAT to be reduced because of the high collection rates, but simply reducing the rate may not necessarily mean more disposable incomes for consumers since many businesses may continue to treat VAT as an expense to them when it is not. Reducing the VAT will simply mean reducing taxes, not necessarily tax avoidance.
It is in the interest of both businesses and the consumer for there to be a clear understanding of how VAT is to be treated. For the business, import VAT is not a cost. For the consumer VAT is an expense.
There are big businesses in Guyana that understand this and perhaps the authorities need to work with these big stores to drive prices down so as to ensure that consumers are not ripped off.
It is the business community which needs to take the lead in understanding how VAT works and in ensuring that prices do not increase because of VAT. But too many businesses in Guyana are engaged in creative accounting, too many simply do not wish to pay their fair share of taxes. Some of them, according to the stories that are heard throughout the country, even try to cheat on the system by advising consumers that if they refuse a bill, they can obtain the product being purchased minus the VAT should be paid.
There is not going to be a review of the VAT under the present administration. The present administration is averse to tax reforms and given its insertion into the propertied class, it is not likely that one year before general elections to do anything to interfere with the prospering of that class.

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