GRA head explains the correct application of VAT

Jun 02, 2011 Letters

Dear Editor,
Allow me the opportunity to respond to an unnamed writer whose letter appeared in the May 25, 2011 edition of the newspapers under the caption, “VAT is three times the burden”. The said letter has caused much reaction albeit for the wrong reasons, as any Value Added Tax (VAT) Registrant would attest.
The author’s lack of knowledge on how VAT is administered is evident since the letter contained distortions and misapprehensions about the tax. According to the letter writer, an item which costs $100 will result in the final consumer being charged $50 as VAT, if the commodity were to pass through the chain of importation, wholesale and retail by a supermarket (with a 10% markup applied at each staged of the chain).
The correct application of VAT, as provided for in the VAT Act, No. 10 of 2005, is as follows:
*Importer: – Cost of item on importation $100
* VAT charged @ 16% (16% of $100 (cost price on importation) $16
* Markup on item sold to wholesaler (10% of $100) $10
* Cost of item to wholesaler ($100+$10+$16) $126
* Wholesaler: – Markup on item sold to supermarket (10% of $110) $11
* VAT charged by wholesaler (16% of $110) $17.60
* Cost of item to supermarket ($100+$10+$11+$17.6) $138.60
*Consumer: – Markup on item sold to consumer (10% of $121) $12.10
* VAT charged by supermarket (16% of $133.1) $21.30
* Cost of item to final consumer ($100+$10+$11+$12.10+$21.30) $154.40
As can be seen from this computation, the final VAT charged is $21.30 with the businesses making a cumulative markup of $33.11. Note, when applying their markup neither the wholesaler nor the retailer includes the VAT paid on the acquisition of the item for resale. The mark-up is applied directly to the purchase price.
Apart from stating, that VAT replaced existing taxes and is probably applied at the lowest rate in this hemisphere with more than 100 commodities either zero-rated or exempt; permit me to make the following observations regarding some positive attributes of VAT:
(1) As can be seen in the above computation, even though the rate of VAT is considerably less than the rate of markup charged at each stage of the cycle, it is the businesses and not the Government, which have the larger share of the increase;
(2) The principle that is inherent in computing the VAT charged at each stage, is that the largest share of the VAT is charged when the goods are imported than on the incremental increase that is due to the markup; 16% of $100 (cost of import), is greater than 16% of $33.1 (markup by businesses on the item).
In addition, unlike the previously repealed Consumption Tax, VAT is never charged on VAT and this is a major benefit to consumers.
(3) While businesses are allowed to offset VAT paid by them against VAT collected from consumers, this is only permitted on purchases wholly related to the business and never on the goods acquired for personal use. As such, there is no distinction between the salaried VAT payer and the business as it relates to personal purchases.
It is hoped that the letter writer and readers now have a better understanding of VAT and are in a better position to challenge the erroneous basis being used by unscrupulous businesses to charge VAT.
Persons who wish to find out more above VAT or any of the other taxes administered by the Guyana Revenue Authority can contact call our Tax Hotline on telephone number 227-6060, visit the Tax Advisory Services Unit, 210 ‘E’ Albert and Charlotte Streets. Tax related queries could also be sent to the agency via email address [email protected].
Khurshid Sattaur
Commissioner-General
GRA

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GRA head explains the correct application of VAT

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