Widely regarded as an invention of Continental Europe, and its paternity in 1954 attributed to France, VAT is an indirect tax collected mainly by businesses but borne by consumers. The term VAT itself is misleading because value as in Value-Added means no more than the cost and mark-up added at each stage in the production/distribution chain.
VAT’s rapid growth has often been described as the most dramatic and probably the single most important fiscal development in the area of taxation in the latter half of the twentieth century. In fact, while in the late 1960s less than ten countries utilised any form of VAT, according to the Organisation for Economic Co-operation and Development (OECD), some 166 countries operated VAT or General Sales Tax (GST) in 2016. Other jurisdictions are recent adopters, such as Malaysia and Tanzania (2015), Egypt (2016), India (2017) and Member States of the Middle East’s Gulf Cooperation Council (2018).
In Guyana, support for the introduction of the Value-Added Tax in 2007 was canvassed not so much for its revenue gathering potential but that it repealed several taxes which had a cascading effect on prices. Nevertheless, in the very first year of its introduction in Guyana, VAT accounted to a whopping 26.8% of the tax revenue of Guyana, despite the promise by the then Administration that the tax would be revenue neutral.
One of the major taxes was the Consumption Tax which was charged, at the modal rate of thirty percent (30%) while a small number of items were taxed at rates in the three-digit range, which were added to the product’s cost as it passed through the supply chain to the consumer. VAT it was argued correctly, had several superior virtues including the credit system under which the VAT paid at stage one of the supply chain was allowed a credit at the second stage, and so on. This system had several other virtues. For example, it could seamlessly apply to services as well as goods; it required a VAT invoice to be used in the case of each taxable supply; it allowed a veritable self-auditing process since the VAT input of one registered supplier is verifiable to the VAT output of another.
Another major feature of the Value-Added Tax is articulately set out in the OECD International VAT/GST Guidelines noting that fundamentally VAT is a tax on consumption and that while it is collected by businesses, it is borne by the final consumers; that businesses should not bear the burden of the VAT, hence the embedded mechanism allowing for a refund or credit of the tax levied on transactions between businesses; and finally, that in relation to international trade, VAT is based on the destination principle, meaning that exports are free of VAT and imports are taxed on the same basis and at the same rate as local production. The Guidelines note that the destination principle is sanctioned by World Trade Organisation rules.
It seemed the perfect tax – imposing the larger share of the fiscal burden not on income but on expenditure and introduced the novel idea of a zero rate so that while the price to the consumer is free of VAT, the supplier at any stage of the distribution cycle is allowed to recover any input tax paid on any other supply. It is for this reason that unlike other tax laws, VAT law automatically permits the collecting agency – the GRA in our case, to make refunds without any parliamentary appropriations.
The past and current Administrations both caused to be reviewed the tax system with one report in 2014 under the Ramotar Administration and two under the Granger Administration, one in 2015 and the other in 2016.
The consensus of the Reports, shaped by their terms of reference, was that the list of zero-rated items needed to be trimmed. Duke’s recommendation was to “severely limit zero-rating outside of exports and to use income-tested tax breaks or welfare payments to offset possible adverse impacts of VAT on low income persons”. The TRC recommended a dual rate of 14% and 7% and a reduction of the list of zero-rated items, shifting some to the intermediate rate of 7% and applying the standard rate of 14% to other items.
CARTAC recommended that “all semi-processed and processed foods and beverages, non-prescription drugs and health supplements, items for household use, computers and peripherals, appliances, and other final consumer goods, at the standard rate.” They also recommended to exempt a short-list (10 – 15 items maximum) of currently zero-rated unprocessed (staple) foodstuffs.
Over the life of this Administration, there has been a continuing recession from several of the fundamental principles of VAT – and an implicit rejection of the recommendations – with a systematic removal of an endless number of items off the VAT list (standard-rated and zero-rated) to the non-VAT, exempt list.
Without a functioning Consumers Association this pattern of action has met only with a muted response, paradoxically when the Government imposed VAT on education services galvanising the chauffeur moms into protests outside the Ministry of Education and the National Culture Centre, forcing the Government to back pedal after one year. In 2017 and then again in 2018, significant segments of the private sector were affected by these unprincipled changes which caused a war of words in which the Administration accused the Private Sector Commission of not understanding the VAT, oblivious to the fact that the PSC had made a submission of substance to the Select Committee to which the Draft VAT Bill 2005 was referred. It was this submission that caused the Select Committee to make many modifications to the VAT Bill and its subsequent unanimous approval for the eventual introduction in 2007.
The main issue of contention which has arisen between the Administration and the private sector is the decision by the Administration not to treat as zero-rated any export item which is included in the exempt list for domestic purposes. What this means is the rejection of one of the most fundamental tenets of VAT – that exports should not bear VAT, not only on any technical basis but for the common sense reason that in depriving the exporter the right to deduct input taxes, the exporter faces the economic dilemma of either absorbing the VAT with the consequence of reduced profits and reduced taxes, or attempting to pass on the tax in the form of higher prices risking making the product less competitive on the international market.
At first, as though it was not self-evident, the Administration asked the sectors to bring the evidence to show that they were not adversely affected by this dubious decision. But despite overwhelming evidence provided, the Administration has stubbornly persisted with its misguided policy. In fact, the matter is considered so serious that one exporter has taken the Government to court over the matter.
It seems hard to fathom that the Administration is unable to recognise that many of the affected sectors, including rice, sugar and fisheries and certain manufacturing businesses, are critical to rural employment and development, that they employ large number of persons and are earners of foreign exchange. It is therefore no wonder then that of roughly ninety countries featured in the EY World VAT Guide 2018, not a single country causes any exporter to bear any VAT. This is as true of all the Caribbean, Asian and South American countries as it is in the European Union countries, from Austria and Belgium to Yemen and Zimbabwe, and for those countries of the EU where Exempt with Credit is the term used to ensure that no VAT is borne by their exporters.
No tax, including VAT, should be seen and applied only for their revenue garnering potential or simplicity for tax administrators. By treating VAT as a one-way street with heavy emphasis on no credits and no refunds, he is virtually returning to the unpopular Consumption Tax. If on the other hand he wants to ensure the competitiveness of Guyana’s exports, to avoid the Dutch Disease and to demonstrate his acceptance of the fundamental tenets of VAT, then he needs to balance the tax’s virtue of gushes of revenue with its other advantages, as well as the work and the cost that goes with processing refunds.