September 30, 2016

What happened to VAT reduction?

An object lesson for Guyanese citizens on the tendency for Opposition politicians to exploit irresponsible populism to garner votes has been the volte-face on the A Partnership for National Unity (APNU) and the Alliance For Change (AFC) on their promise to reduce the Value Added Tax (VAT). From the moment the People’s Progressive Party/Civic (PPP/Civic) introduced the 16 per cent VAT in 2007, the mantra of the then Opposition was it was just another mechanism to “punish poor people”.
The reduction of VAT became one of the major issues during the 2011 and 2015 elections, with the Opposition parties calling for slashing the rate by half and later settling for a three per cent reduction. The PPP/C Government balked and insisted in light of globalisation and liberalisation, the VAT was the most equitable method of collecting revenues to compensate for the reduced revenues precipitated by lowered tariffs under the new international trading regimes. The World Bank and International Monetary Fund (IMF) had consistently recommended VAT as a more efficient method of collecting taxes on consumption rather than the old Consumption Tax it replaced. By the time Guyana adopted VAT, Jamaica, T&T and Barbados were already on board. Today, more than 140 countries collect VAT.
However, while VAT is a fiscal measure concerned with generating revenues for the State to function, it obviously has a social impact which Governments have to take into consideration. This is frequently dealt with by exempting basic food and other items that form a larger part of the shopping basket of the poor. In Guyana, the PPP/C exempted a large number of foods such as rice, etc, from VAT. Obviously another route would be reducing the overall rate which would have to be calibrated, so that the State still collected enough revenue to perform the functions demanded by citizens.
One of the 21 promises made by the new APNU/AFC Government – to be completed in its first 100 days in office – was to: “Immediately implement a phased reduction of VAT and the removal of VAT from food and other essential items”. But as with so many of the promises, there was no change. What the Government did was to follow the old British tactic of establishing a Committee in June to re-examine the tax regime and within that context, reduce VAT as it has been promising for seven years. When the Budget was presented in August; however, there was no reduction in VAT but only some inconsequential extension of zero-rated items.
The Committee submitted its recommendations on January 18, 2016, but without revealing its specifics, Finance Minister Winston Jordan confessed that “reducing VAT was not straightforward”. Repeating the PPP/C’s arguments since 2007 against APNU and AFC, Jordan stated that if the VAT were reduced, some zero rated items would have to attract VAT and this would be regressive from a social perspective. He alluded to the situation in Trinidad and Tobago, where the Government had just reduced VAT from 15 per cent to 12.5 per cent, but simultaneously taxed some previously zero-rated items.
In his presentation two weeks later when he presented Budget 2016, Jordan still did not reveal the proposals of the Tax Reform Committee on VAT, only saying they were “submitted too late”. It is now revealed that the Committee had recommended a reduction of two per cent bringing the VAT rate to 14 per cent. During the Budget debate, the now-Opposition PPP/C reminded the Government of its Manifesto promise on VAT and promised to support any reduction that would be proposed. Another suggestion, which had been proffered for years by now Minister of Tourism Cathy Hughes, was to lower VAT in tourism – a practice followed in several tourism locales. For instance, the Bahamas has a 15 per cent VAT but 10 per cent for tourism, while Barbados reduced their 17.5 per cent VAT even more steeply for tourism – 7.5 per cent. Unfortunately, there has been no change on tourism VAT also.
We await this Government’s action on VAT.

About GuyanaTimes