Taxpayers and their compliance with VAT – Part 2

Jul 17, 2016 News

---

By Kiana Wilburg

Last week, we started a discussion with Chartered Accountant, Sean Naughton on taxpayers and their compliance with Value Added Tax (VAT).
In the first installment, it was noted that tax revenue plays an important role in financing a country’s planned development activities. So important is its role that countries are keen to protect themselves from tax revenue shortfalls. They do this by planning several strategies to ensure a stable tax revenue collection regime.
The planning strategy usually includes countries seeking to ensure that the parameters required for each type of tax to perform well are actually met.
Continuing along this line, Naughton said that given the fact that VAT is a sales tax, being satisfied with the correctness of the sales reported by registered businesses would be of extreme importance in ensuring maximum revenue collection.
However, because of the level of compliance issues in Guyana, the Chartered Accountant expressed that Section 61 of the VAT Act will need to be used until taxpayers become serious about compliance.
Section 61 of the VAT Act provides that a taxation officer, having a writ of assistance from the High Court, may enter the business premises of taxpayers and search and seize their internal records for the purpose of making assessments.
He believes that this provision is important, since many businesses that do not properly comply with tax laws still keep full records of their operations for their own purposes.

EXEMPTING GOODS/SERVICES
The range of goods which are not charged the tax when sold, will impact the performance of the tax revenue. As such, Naughton believes that it is therefore critical for the level of exemptions offered to be constantly monitored in the interest of stable revenue.
Research indicates that the rich benefit from VAT exemptions more than the poor.
As an example to demonstrate this, Naughton said that a rich family of four may acquire four computers, one each for family members, while a poor family of four may acquire only one. In this case, he said, the rich taxpayer would have benefited from four times the tax exemption that the poor taxpayer benefited from, since computers are zero rated goods.
The tax analyst said that food businesses purchase virtually all ingredients, for meals, free of the tax.
His estimation however is that less than 10% of these food businesses are registered and many can be observed making over $35,000 in taxable sales within a 15-minute period.
The Accountant said that $35,000 in sales daily (not in 15 minutes) for a six-day work week exceeds the current threshold, but the problem is proving that this is the average daily sales over a period of 300 days.
Naughton stated that these exemptions are intended to benefit the poor (at least, more than the rich) in a progressive tax system, and as such the current system has an undesirable effect. Because of this ‘exemption distribution’, Naughton explained that some countries are currently looking at ways of providing only poor taxpayers with exemption from tax on certain goods/services. He said that the proposed Fair Tax is an example of such a system.
The Fair Tax system proposes to tax virtually every good/service supplied in the USA. It however provides that poor taxpayers will be refunded (in advance) the tax on certain goods/services which are absolutely necessary for their basic consumption (in limited quantities).
This is done by projecting basic consumption needs in agreed quantities. The refund of the related tax is then paid to poor taxpayers, in advance, so that they could shop without feeling the impact of the tax.
The tax expert said that fixing the ‘exemption distribution’ problem will not be easy, but Guyana may start by looking at capping public utility services.

REFUNDING INPUT TAX CREDITS
VAT is not to be borne by businesses. To ensure of this, the system allows for businesses to be refunded of VAT paid, either via set-off against VAT received from consumers or in cash from government.
The sales tax system currently operating in the USA provides for no tax to be charged when sales are made to intermediaries (businesses purchasing goods for resale or further manufacture).
Naughton opined that refunds of the tax would therefore not need to be paid to these, reducing the risk of refund fraud. He said that the VAT system Guyana operates requires the passing of the tax to each business in the chain, with each needing to be refunded. He said that the handling of government’s revenue by all businesses in the chain, through to the retail business which sells to consumers, increases the risk of revenue loss.
“We may want to reconsider the way we deal with refunds. The USA system simply certifies certain business intermediaries for this purpose,” the Chartered Accountant added.
Naughton believes that the performance of a tax depends on the achievement of certain parameter-objectives. He said that when a tax starts underperforming, the relevant authorities would need to revisit these to see which sub-objective (parameter) is not being achieved.
In the case of Guyana, Naughton informed this newspaper that VAT registration of collecting agents is a major issue which needs to be addressed. He said that under reporting of sales is a compliance problem which also continues to affect business tax revenue in Guyana. He believes that it is time the relevant authorities begin enforcement; making use of Section 61 of the VAT Act.
The Chartered Accountant stressed that tax exemptions are costly. He noted that this issue is not at all easy to deal with and deserves deep research. With its income tax regime proposed replaced, he said that the USA would have no option but to pay refunds to the poor (to effectively exempt the tax). Countries which continue to operate income tax regimes would, at least partly, be able to use tax free thresholds to effect refunds, he said. Perhaps, our system of refunds as it relates to intermediaries is also worth revisiting.

---

---