VAT cracks

delisleworrell2013A new study by the head of the Central Bank of Barbados and a group of that institution’s economists has found some cracks in the way Government has been collecting millions of dollars in Value Added Tax since the charge was introduced in 1997.

And in light of their research and economic analysis, which the authors said was to their knowledge “the first study that compares the performance of Barbados’ VAT system with the previous regime of consumption taxes”, authorities are being advised to ensure greater compliance and consider hiring more staff to administer the tax.

The conclusions and advice came from the study called A Review Of The VAT System In Barbados conducted by Central Bank Governor Dr. DeLisle Worrell, his Director of Research and Economic Analysis, Michelle Doyle-Lowe, Senior Economist Tracy Maynard, and Economist Chrystol Thomas.

When VAT was introduced on January 1, 1997 at a standard 15 per cent rate it replaced 11 indirect taxes, namely a consumption tax, an import surcharge, a hotel and restaurant sales tax, a travel ticket tax, an entertainment tax, a tax on quarriable minerals, a surcharge on overseas telephone calls, a surcharge on residential rents, a service tax on pleasure cruises, a stamp duty on imports and an airline business tax.

The VAT rate was increased to 17.5 per cent in December 2010 and has remained at that level ever since.

The economists noted that implementation of VAT “did not materially alter Barbados’ tax structure, given that the proportions of direct and indirect taxes to total revenue remained unchanged on average, over the period 1980-2011”, although “the burden of indirect tax increased with the imposition of the VAT, from an average of 6.4 per cent of GDP to an average of 8.4 per cent”.

Despite this reality, however, Worrell and company found that when compared to the consumption taxes it replaced in the context of changes in national income or spending and other efficiency tests, VAT came up short.

“The buoyancy of the VAT was lower than that of consumption tax. The buoyancy of consumption taxes during the period 1980 to 1996 was approximately 1.50 per cent, while the buoyancy of the VAT was 1.19 per cent in the post-VAT era of 1997 to 2011,” the experts found.

“The elasticity of the VAT was also lesser, at 1.26 per cent compared to the pre-VAT figure of 1.67 per cent. The elasticities and buoyancies of all indirect taxes have been lower since the introduction of the VAT, which is likely to be reflective of the need for greater compliance.” In the context of the study, buoyancy was defined as “the reaction of tax revenue to changes in national income or expenditure, without removing the effects of changes in tax rates, the tax base or other movements in the structure of the tax”.

Elasticity, on the other hand, was a measurement that “removes the influences of tax measures and alterations in the tax structure to give an indicator of the responsiveness of the tax in the absence of such changes the buoyancy of the VAT was lower than that of consumption tax”.

“There was some gain in the revenue yield, relative to the tax rate, with the establishment of the VAT, indicated by the three revenue performance measures used. Notably, the administrative costs of collecting the VAT were higher relative to the revenue received, than for the taxes replaced. The indirect tax system has also been less elastic and less buoyant in response to changes in income, since the VAT was created, compared with estimates for the pre-VAT period,” the study concluded.

“The difference between the revenue collection indicators as well as the buoyancies and elasticities prior to the introduction of VAT is indicative of the need for greater compliance. Furthermore, the VAT division would benefit from the employment of additional staff,” it added.

The economists also found that Barbados’ VAT performance compared favourably with other Latin American and Caribbean countries such as Costa Rica and Trinidad and Tobago, but was below Jamaica.

“Nonetheless, Barbados’ revenue performance indicators are on par with that of developed countries such as the European Union and the Americas,” they said. (SC)

One Response to VAT cracks

  1. Professor Gilbert NMO Morris May 17, 2013 at 7:28 am

    Barbados has chosen to be France or Scandinavia, and tax at a high rate. However, in today’s world this is simply not competitive. I applaud the Central Bank Governor and his colleagues for producing what seems like a credible study that does not merely tow the government’s line.
    This sort of thing is what I have come to expect of Barbados.
    However, this experience in Barbados highlights the incompatibility of VAT for so many other Caribbean jurisdictions, lacking in Barbados’ institutional depth.
    There are also issues of non-compliance and slow repayment of rebates, that is damaging to businesses. What is notable therefore, is that given all its fine points, Barbados will have to increase the VAT rate – again – to pay for analysts and enforcement officers to collect the tax and smooth the complexities.

    Professor Gilbert NMO Morris


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