VAT IS NOT ABOUT THAT!

Jul 14, 2011 Features / Columnists, Peeping Tom

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It was always on the cards that the PPP presidential candidate would run on the record of the incumbent regime and would stress continuity in policies.
No incumbent party with a brand new presidential candidate is going to risk an alternative strategy since to do so would open the party to criticism that the reason for the deviation is that the existing policies, and by extension, the present regime, have failed.
But while a candidate can run on a record of continuity, it does mean that everything is going to be the same.
While the presidential candidate of the ruling People’s Progressive Party (PPP) has indicated that he will run on a programme of continuity, he has already begun to exhibit signs of deviation for some of the inflexible positions adopted by the Jagdeo administration.
It will be recalled that the Jagdeo administration has consistently rejected calls by the opposition for a reduction of the VAT. That has been a characteristic feature of the ruling administration. It implements policies at the behest of the international organizations and views any call for a review of tweaking of those policies as suggesting failure and therefore it adopts an inflexible position.
VAT was an imposition by the International Monetary Fund. And as with any foreign imposition, there is always a need to review such policies to ensure they are serving their stated objectives.
The government has however resisted reviewing the VAT. Now in the first sign that he will be open to new thinking, the presidential candidate of the People’s Progressive Party has indicated that the VAT may be reviewed. This is not a commitment to a reduction but any review is likely to uncover many possible areas for reform.
Within the populace there is a demand for the VAT to be slashed but this position is a misinformed one since a reduction in the VAT is not necessarily going to result in lower prices.
The opposition to VAT had a lot to do with the manner of its implementation. It was implemented without sufficient public education, especially to the business community which took advantage of the situation to compound the tax.
This resulted in higher than necessary prices to consumers, a situation that has not been fully corrected simply because many of the business do not understand that the VAT they pay initially on the item is refundable and therefore there is no need for them to incorporate this in their prices.
VAT was also introduced at a time when food prices had increased due to higher import costs caused by production shortfall in many countries. As a result, consumers were subject to a double whammy, first an increase due to increased import prices and secondly an increase due to the misapplication of the tax by the private sector.
Any review of the tax should therefore commence with an analysis of just whom is this tax benefiting. Are consumers suffering at the expense of the private sector?
VAT, it should be recalled, replaced a number of taxes which were higher than the 16 per cent now charged. However, these taxes were never visible to the consumer, quite unlike the VAT which is a tax reflected on the receipts issued when purchases are made. As such the consumer is left with the idea that the VAT is an oppressive tax, which of course it is not.
The rate of VAT should be reduced. Any reduction in the VAT rate will benefit the rich more than the poor since the rich have greater disposable purchasing power and therefore will benefit more than the poor if the rate of VAT is reduced.
What should happen is that instead of reducing the VAT, the financial windfall that has resulted should be distributed in a more equitable manner such as in the investment in wages and salaries for workers.
Whatever review is done must lead to recommendations that benefit the poor and not the rich. The rich has profited from the VAT and at this stage there should be redirection of benefits directly targeting the poor.
The rich of course will press for reduced corporation taxes. And it is understandable that as the tax base widens and revenues increase that the rate of income and corporate taxes should be reduced. But these reductions should be conditional on reinvestment in the economy.
There are many businesses that are shipping their profits to Miami, London and New York. They are free to do this of course but any further tax concessions to the business community should be based on increased reinvestment of profits and not be used to encourage capital flight.
As such any future reduction in income and corporate taxes should be linked to reinvestment of profits. If the business community cannot show that they are prepared to reinvest in Guyana, then they should enjoy any additional tax reduction.
As for consumers, they should not be deceived that a reduction in VAT will cause prices to fall. That is something that has not been a trend in Guyana and they should be deceived into believing that a reduction in the VAT rate will mean lower prices at the supermarket. They should instead ask for higher incomes.

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