VAT: An outrage or a blessing?

May 22, 2016 News

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Governments treasure it. Quite a few consumers see it as an abomination and many in our business community are wary of it. But let’s face it, whether your politics lean left or right, the Value Added Tax (VAT) gives you some things to love and

some to hate.
But before we go further, let’s lay some basics about “VAT” on the table. VAT is a tax calculated on the price of certain goods (and services) consumed in Guyana and it is charged on consumers. There are two important elements to this definition.
First, VAT should only be charged on goods used or consumed in Guyana. This simply means that goods shipped out of Guyana for overseas consumption should attract no VAT. On the other hand, goods coming into Guyana which will be used us are subjected to VAT at the port of entry.
Secondly, VAT should only be borne by the persons consuming the goods (referred to by some as the final consumer). Businesses responsible for getting the goods to the final consumer will pay VAT, but the tax gets refunded, therefore they do not bear the tax.
To achieve this, the laws allow for a system of refunding VAT paid by those registered businesses. Using the legally allowed VAT system, the tax is passed from business to business until it gets to the final consumer.
For example, a registered importer in Guyana will pay the tax on imports. If he sells the goods to another registered business he will normally charge VAT on the sale, so will effectively receive a refund of VAT he paid on imports, from the buyer. When the goods are sold to the final consumer by the second business, that consumer would be charged VAT and as such, some of the VAT would refund the seller and the balance will be sent to the Government Only the final consumer will not get a refund for VAT paid (since he will not sell the goods but will consume same).
Note that because businesses usually sell goods at higher prices than prices paid for those goods, VAT collected on sales made is usually higher than that paid on purchases (16% of a higher price). Any over-refund occurring which resulted from higher VAT received from sales, should be paid over to GRA.

EXEMPT AND ZERO RATED GOODS

Helping us to go a little deeper into this topic is Chartered Accountant, Shawn Naughton.
According to Naughton, exempt goods and zero rated goods do not attract VAT. One might then be tempted to ask, “If this is the case then what is the need for the distinction?”
Naughton explained that the final consumer is required to pay VAT unless the goods purchased for consumption are either exempt (for example, gas) or are zero rated (for example, basic foods).
He said that exempt goods are not taxed at all, while zero rated goods are taxed at zero percent. He said that the cash-flow effect is the same for the buyer, but the treatment of the goods is very different.
The Chartered Accountant went on to explain that exempt goods are not part of the VAT regime, so even if the sale of these products surpass the VAT registration threshold which is $10M per year, VAT registration will not be required. Naughton said that sales of exempt goods are simply not considered for purposes of VAT registration; only taxable goods (i.e. 0% and 16% goods) are.
As indicated, a zero rated supplier may be required to register for VAT. The Chartered Accountant expressed that since the sale of zero rated goods results in no VAT being collected from consumers, GRA would normally need to pay the refund to such registered businesses on any VAT paid on purchases (domestic or imports).
For example, if Cindy, a grocer, buys goods at $100 plus $16 VAT from a manufacturer and sells these for $150 plus $0 VAT to the members of her community, then those consumers did not pay any VAT. The government therefore must refund Cindy the $16 she bought the item for.
Naughton also noted that a business which makes wholly exempt sales will not be VAT registered, so will not be able to get such refunds. He said that businesses which are not registered for VAT are not allowed to claim refunds of VAT paid on purchases made or to charge VAT on sales.
He stressed that the distinction between exempt and zero rated goods is therefore very important. It is important to note that schedules of zero rated and exempt goods are included in the VAT Act. Any goods not listed in any of these two schedules are standard rated (16%) goods.

DECLINING REVENUE
The aforementioned seems to be a pretty straightforward and understandable process. Yet, there have been complaints by the Government of declining revenue from the tax system. Naughton said that the answer to this question is simple—it’s just poor compliance by business taxpayers.
Poor compliance means that many taxpayers are not complying fully with relevant VAT laws. With this in mind, Naughton asks that we consider the following compliance issues and effects:-
a. A business consistently reports annual sales below $10M just to avoid being registered for VAT. The effect here is that the number of consumers paying the tax will be lower than it should be since businesses which are not registered should not collect the tax;
b. A business only keeps records (for GRA) of a portion of its total sales and accounts to GRA for VAT only on that portion of sales. The effect here is that VAT on sales not accounted for, will be lost to the Government. Note that unreported sales may be made with or without VAT. There have been reported cases where customers are offered the ‘no VAT’ option in exchange for being issued ‘no receipts’ (in effect the seller and purchaser are conspiring together to cheat the people of Guyana). Note that where VAT is collected on sales which are not reported the taxpayer is enriched with the relevant VAT;
c. A business reports that it made export sales, which would otherwise have been standard rated, of $100M while goods actually sold and shipped to foreign countries totals only $70M. The effect here is that Government loses VAT on goods claimed to have been sold to, and consumed in, other countries (zero rated sales) when these were actually consumer locally (standard rated sales); and
d. False purchase tax refund claims being made by way of set-off or otherwise. The effect here is that the Government would make refunds of VAT that should not be available given current law.
Naughton said that all of these are schemes which contribute to declining VAT revenue for Government. The Chartered Accountant said that when businesses collect the tax and do not remit same to Government (that is, defraud the people of Guyana) consumers could feel the full effect of the tax (the full 16% effective rate) while Government may only be benefiting from say 80 % of the VAT revenue (12.8% effective tax rate).

REMEDIES
Naughton believes that there are a few remedies which could be used to fight the compliance issues cited above. He said it would be almost impossible for government to prove that all sales were not reported unless the GRA uses aggressive approaches to locate internal records not made available by the taxpaying businesses.
He said that it is important to note that like in the context of income tax, where indirect methods of estimating net income are reliable, there are fewer indirect methods for estimating gross income and VAT is computed on gross income (sales). He said that GRA must therefore get to the internal records.
The Chartered Accountant added, “Keep in mind that people who are cheating the government out of tax revenue, will do everything possible to make sure GRA does not get their full and complete records.”
Naughton said that export documents evidencing that goods for export have been shipped should always support claims that goods were sold to export markets. Until such documents are made available, he said that these goods should be treated as domestic goods and taxed at the standard rate. He said that this could easily be reversed once the shipment evidence is made available.
The Chartered Accountant noted that false purchase tax refund claims are relatively easier to combat and as long as there is timely action and appropriate allocation of resources, GRA should be able to get this compliance issue under control.
He asserted, however, that general benefits could be derived from simplifying the VAT regime. Naughton said that a simplified regime could significantly improve compliance. He said that some of the issues with compliance come not only from purposely cheating the government, but also from a lack of understanding of the regime by taxpayers. He added that this issue is exacerbated by the limited administrative resources available for monitoring compliance and educating taxpayers.
Naughton stressed that there are numerous effects of gradually removing zero rated/exempt goods from the regime. He said that applying a tax rate of zero to certain goods is intended to ensure that basic goods remain affordable to the poorest consumers. He added that current research however suggests that this may better be achieved by increasing the disposable income of the poor (by fine tuning the income tax rules, for example).
Naughton said that the effect of applying the standard VAT rate to all goods, while ensuring the disposable income of the poor is topped-up to help them to pay the extra tax, would likely be:
a. To see a reduction of the standard rate of VAT while maintaining an acceptable level of VAT revenue;
b. To see a simplified VAT regime;
c. To see the rich unable to benefit from preferential tax rate (zero rate) intended for the poor; and
d. To see general improvement in compliance and compliance monitoring.
Naughton said that it is important to appreciate that the most effective tax system is one that is simple for taxpayers to comply with and makes little demand on administrative resources for its monitoring. In the context of VAT, he said that this would include minimizing the need for goods being taxed at different rates.
In conclusion, the Chartered Accountant expressed that VAT is a very important source of tax revenue globally; not just in Guyana. He stressed, however, that improving the performance of the system should be priority.

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