The next government will be faced with the task of running a difficult country with a terrible history. It will need to pay for the promises made during election season, while building vital infrastructure for a sparsely distributed population. The VAT accounts for 25.2% of all current revenues in 2013. The total VAT collected in 2013 was $34.4 billion and total current revenues amounted to $136.5 billion. For the same year companies pay a total of $30.9 billion and personal income tax was $15.2 billion. Excise tax amounted to $27.3 billion, import duties $11.8 billion, property tax $2.6 billion and the travel tax $1.5 billion.
The VAT, therefore, accounts for about a quarter of central government’s current revenues. This implies an agenda of tax reform will have to cast a wider net. The agenda should be constrained not only by the condition of equity and fairness, but also the principle of efficiency with a keen eye on speeding up economic growth. It is known that Guyana does not do well on the World Bank’s measure of ease of doing business. Therefore, the next Minister of Finance would have to think about which taxes to cut and which ones to increase to make revenues neutral, while at the same time not compromising business productivity, and their ability to grow and employ more people. The Minister will have to think about how to improve tax collection (while keeping some rates constant) so that the poorest are less burdened, while the rich pay their fair share.
Take for example property taxes, which accounts for 1.9% of current revenues. There might be no need to increase the rate; instead it could be better to make sure this tax is paid up on the growing list of mansions. The travel tax could be increased as mainly the better off in the society travel regularly. It is better to increase the income tax exemption threshold so that lower income earners experience immediate relief by having a bigger take home pay. The personal income tax only accounts for 11.1% of total central government current revenues. Companies’ tax seems high, but it should not be cut across the board. Preference of lower rates could be given to pioneer industries in health tourism, healthcare, eco-tourism, manufacturing, business process outsourcing and renewable energy, to name a few. The tax on businesses can give the government much wiggle room in a broad framework of industrial policy that incentivizes the diversification of the economy.
The VAT is a tax on consumption and not income. It is collected in a novel manner that avoids many forms of evasion of its cousin, the sales tax, suffers from. However, there can still be fraud, but often at a lesser degree than the traditional sales tax. The VAT is gaining traction globally. Many small economies of the Caribbean and afar have the tax. For example, Barbados has a VAT of 17.5%, but for competitiveness reasons the tax is 7.5% at hotels and guesthouses. The Bahamas has 7.5%, Dominican Republic 16%, Antigua and Barbuda 15% (12.5% for hotels and guesthouses), Grenada 15%, Jamaica 16.5%, St Kitts and Nevis 17% (10% for hotels and guesthouses), Trinidad and Tobago 15%, Botswana 12%, Fiji 15% and Mauritius 15%. The rate in Guyana is 16%.
A list of products consumed by the very poor has to be studied and reviewed. There should be no VAT on the things poor people consume. When the VAT was implemented in 2007 several goods were reported by the Minister of Finance to be exempted or zero rated. These include eggs, bread, raw or brown rice, chicken, milk, fresh locally produced fruits, fresh locally produced vegetables, computers, fertilizers, electricity and numerous others. I am not so sure that the list of exemptions can be expanded significantly. If indeed the mentioned products are not zero rated someone is lying or unscrupulous businesses are robbing the poor. But there might be need for a national discussion on the VAT after political season is over. Should it be replaced by a general sales tax that could be evaded in more instances? Should the rate be reduced?
In general it is better to tax consumption than incomes. Taxing companies’ income effectively increases the cost of production for businesses and the tax on labour income may cause some people not to work as hard, especially in a society like Guyana with its reliable inflow of altruistic remittances of about US$400 million each year in cash and physical gifts like smartphones, computers, clothing, etc.
A second reason for taxing consumption in Guyana has to do with the high level of underground economic activities. The most recent academic study (a paper published in Transition and authored by Prof. Clive Thomas and two co-authors) estimates the underground economy to be around 60% of official GDP. By definition those who operate in the underground economy are able to conceal their incomes. This includes smuggling of fuels, gold, diamonds, beers and foodstuff. It also includes the narco-industry, human trafficking and money laundering. No society for moral reasons will ever count cocaine and human trafficking as part of GDP, although the smuggling of legal goods like gold and fuels takes away from national income, thus taxes are evaded.
Nevertheless, a consumption-based tax like the VAT is the only way to get something from people breaking the law by operating in the criminal underground economy. Those operating in the hidden economy will visit restaurants, buy cars and expensive clothing, purchase expensive building materials, and consume entertainment. Hence, they are made to pay the VAT when making these purchases. It is the best we can do until the hidden economy is brought down to the global average of about 10% of official GDP. If the VAT is maintained at its current rate the funds can be used on projects that help the poor.