The Private Sector Commission (PSC) yesterday called on government to reconsider proposed changes to the Value-Added Tax (VAT) regime, while warning that they would hurt the business community by driving up costs and forcing higher prices on consumers.
In addition to the planned implementation of a 14% VAT on electricity and water, private sector leaders yesterday said that based on the proposals consumers would face higher prices for mobile internet and private education and health services.
“It will contribute to inflation. People will have to pay higher prices and it will inhibit growth in several business sectors,” Chairman of the PSC’s Finance and Economic Sub-committee Ramesh Persaud told a news conference yesterday.
During his presentation of the proposed 2017 national budget on Monday, Finance Minister Winston Jordan announced both plans to reduce the 16% VAT to 14% as well as to apply it to monthly electricity and water bills exceeding $10,000 and $1,500, respectively.
Jordan also announced that he proposed to increase the VAT threshold from $10 million to $15 million, as well as to expand the list of exempt items and eliminate all zero-rated items, with the exception of those pertaining to exports and manufacturing inputs.
Overall, the PSC said the budget takes more than it gives and includes policies that would increase inflation and reduce growth. Persaud said that after examining the budget, the commission was “not very clear of the overall economic direction in which the country is heading.” “We don’t have certainty with regards to plans. The switching of policies from year to year bothers us,” he said.
PSC Chairman Edward Boyer said that the commission would’ve liked to see something conclusive done about sugar, more diversification of the economy and more to build investors’ confidence. “The budget left a bitter taste,” Boyer said.
Persaud congratulated Minister Jordan on having presented the Budget early even as he questioned whether a haste to be early caused the minister to make omissions. “It is a budget that gives very positive things to the private sector but it takes from the business community. It takes more than it gives,” he explained.
Another sore point is the proposal to enable the Guyana Revenue Authority (GRA) to “garnish” funds from the bank accounts of tax defaulters, with the PSC labelling the move as “dangerous” in the absence of a court order and questioning why the judiciary was being bypassed.
According to Persaud, while the PSC welcomes the increase in the VAT threshold, it could not endorse the changes in the VAT regime as they would have several negative impacts on the business community.
He explained that the application of the new 14% VAT to the consumption of electricity and water is a “big blow to small businesses.”
Using estimations based on the 2012 audited reports of Guyana Power and Light Inc (GPL), Persaud said that if the company brings in $32 billion a year, only $12 billion of that sum comes from residential use.
“The rest is from businesses, especially small businesses. Many companies fall below the VAT threshold who will not be able to reclaim VAT they now have to spend on electricity. This is big blow to small businesses,” he stressed.
Persaud noted that while he doesn’t want to sound like a scaremonger, he must present the less than positive reality which exists in absence of further clarification from Jordan.
He was most vehement about the impact that the proposed changes to the list of zero-rated and exempted products would have on the manufacturing and telecommunications industry. He noted that while in the last budget Minister Jordan had taken several steps to add a lot of items to the VAT zero-rated list, this year “he’s eliminating the zero-rated list.” He added that that kind of uncertainty in government policy worries businesses that have to operate in the long term.
Persaud noted that there are, broadly, taxable and nontaxable supplies, with the former including standard-rated and zero-rated supplies. While non-taxable items are considered exempt from taxes, he said manufacturers and suppliers of zero-rated items or services are eligible for refunds on VAT they would have paid on products inputted into the production. “VAT refunds are only applied to taxable supplies, not exempted supplies, so where you can claim a refund of VAT paid on zero-rated items, you cannot do the same for items which are exempt. If you are provider of a totally zero-rated product, like education, you would’ve been able to reclaim all of your input VAT from government. If you were a mixed supplier, your refund was prorated based on proportion of items which were taxable and non-taxable,” he said, while stressing that taxed inputs cannot be reclaimed on exempted supplies.
Services such as education and health services have, according to Persaud, disappeared from both the zero-rated and exempt lists proposed by the minister. Also missing is mobile data, which was zero-rated.
This change may see consumers paying more for their mobile internet service.
Chief Executive Officer of GTT Justin Nedd, who was present at the press conference, said that the changes have stunned the telephone company.
“Our concern is the impact on the consumer. Governments are reducing taxes to attract business but this budget is little less business friendly,” Nedd said.
He added that if the tax on inputs (raw material) are too high then his company will not be able to absorb the impact it and will pass it onto the consumer
“We see that as US$6 million increased cost per year on current services. They have to be passed to consumers and will create a negative cycle involving what we can invest. That negative cycle will affect the company’s ability to grow. The business case for our expansion has significantly changed, giving the increased cost to consumers. We see these VAT proposals having harmful impacts on the consumer and view them as having a 180-degree inconsistency with government’s stated desire to expand the ICT industry,” Nedd lamented.
Also likely to impact data costs is the fact that GTT as a corporation pays a commercial tax of 45%, while some of its “competition pays almost 20% less,” a rate of 27.5%.
The National Milling Company of Guyana (NAMILCO) is also expecting to absorb heavy losses due to the proposed changes.
Persaud told reporters that while all of NAMILCO’s products are zero-rated, it will not be able to claim over $200 million in VAT refunds.
Finance Controller of NAMILCO Fitztroy Macleod said that due to the competition his company faces, it is unlikely that their prices will increase but what might happen is a “serious contraction in terms of the ability to service local consumers,” since simple items, such as fertilizer and pesticides, have been removed from the zero-rated list.
Also to be affected are private schools earning more than $15 million dollars and services provided by private hospitals.
“A child going to a private school earning more than $15 million a year will be expected to pay VAT on the tuition. Also, if you go to a private hospital, you will have to pay VAT on your doctor’s fee,” Persaud explained before once again calling for government to reverse the movement of items from the zero-rated list to the exempt list.