IMF calls for comprehensive reform of Value Added Tax system
The International Monetary Fund has called for sweeping changes to Barbados’ tax system.
The proposals for reform are contained in a 68-page report entitled Tax Reform Roadmap For Simplicity And Revenue Buoyancy prepared in August and which is under consideration by the Freundel Stuart adminstration.
Today, we zero in on the IMF’s recommendations for comprehensive review of the Value Added Tax system.
1. The value added tax (VAT) is levied on most imports of goods and the supply of goods and services within the domestic economy. The VAT Act was introduced on October 1, 1996, and the tax was implemented on January 1, 1997. The VAT currently applies at a standard rate of 17.5 per cent. A reduced rate of 7.5 per cent applies to certain supplies related to tourism. Finally, the zero rate applies to exports and to a wide array of domestic supplies.
The standard VAT rate was 15 per cent at the inception of the tax and was raised to 17.5 per cent in December, 2010. The increase in rate to 17.5 per cent was initially intended to last only 18 months, but this provision was subsequently removed by amendment. The reduced rate at inception was 7.5 per cent, later raised to 8.75 per cent (effective May 1, 2011) and subsequently brought back down to 7.5 per cent.
2. VAT is an important revenue producer for Barbados. Over the period 2009/2010 to 2013/2014, VAT revenue has remained within a band between 7.7 per cent and 10.8 per cent of GDP. Table 1 provides more detail on revenue performance based on several revenue and national accounts indicators. Over the same period, VAT accounted for almost two thirds of indirect tax revenues and about 40 per cent of total tax revenue. Note that the VAT revenue figures cited here are based on gross collections before the payment of VAT refunds.
3. The Value Added Tax Act 1996, Chapter 87, provides statutory authority over the VAT. The last Law Revision Order (consolidation) took place in 2008. A significant number of statutory instruments have served to amend the act since. (Hereafter in this chapter, act and VAT Act are used interchangeably). The Value Added Tax Regulations, 1996 (as amended), provide guidance as to the application of the VAT Act.
4. The VAT’s architecture has deteriorated somewhat since its inception. The numerous instances of domestic zero rating, import (of both inputs and final goods) zero rating, ex post waivers of VAT due, and overly generous refund provisions have undermined the VAT. Firstly, they curtail the revenue production of the tax. Secondly, they effectively remove economic sectors or large parts thereof from the VAT net altogether (agriculture and food, and the financial sector). Thirdly, they cause the VAT burden to be distributed unevenly and unfairly across sectors. Finally, they complicate tax administration considerably and promote an allocation of administrative resources that is contrary to the Treasury’s interest.
5. The sections that follow review the key issues encountered by the mission. The issues considered here include zero rating and exemptions; registration threshold; VAT rates and reduced rate on tourism; refunds; waivers; and other issues and sectors.
A. Zero rating and exemptions.
6. The VAT Act provides for an extensive list of zero-rated domestic supplies. Nearly 20 broad categories of goods and services are zero-rated. In decreasing order of importance measured by the number of sections in the act: food items, unprocessed and processed; agricultural and fishing inputs, including live animals and plants; prescribed drugs and medical devices; certain supplies related to tourism and travel, including hotel service charges; computer systems and peripheral and accessories; crude oil and kerosene; water and sewerage services; literature of an educational or scientific nature; school restaurant meals; certain supplies of cultural goods; unconditional gifts to charities; construction materials used by qualified homeowners; and supplies of services (utilities and professional) to diplomatic missions. The list has grown over the years.
7. The act also provides for extensive zero rating of imported goods. Aside from imports that are zero-rated in accordance with international conventions, the following benefit from zero-rated imports: raw materials, packaging and equipment used in manufacturing; educational institutions; companies enjoying incentives under the Fiscal Incentives Act; plant, machinery, equipment and spare parts for the use of the specific enterprises named in the Third Schedule (as amended); goods imported by foreign sales corporations, international business companies, exempt and qualifying insurance companies, international trusts, management companies, shipping companies, and suppliers of licensed financial services; goods imported under the Tourism Development Act; and goods imported by charities. A potential revenue gain of $65 million is estimated by eliminating the zero rating of imported inputs, assuming that they become taxable at the current rate. This estimate is based on the data presented for 2013/2014 in Table 3.
8. Generous zero rating provisions are the main factor behind the VAT’s low revenue performance. On the basis of its current high standard rate of 17.5 per cent, the VAT should produce substantially more revenue than it currently does.
9. Broad zero rating provisions are poorly targeted instruments to deliver relief to low-income households. Middle and high-income households consume more than low-income ones and therefore derive a larger absolute benefit from zero rating. In developing countries, it has been observed that benefits to high-income households can range from five to six times those to low-income households. For this reason, domestic zero rating is an inefficient way of delivering relief, and is fundamentally inequitable. One mechanism that can be used as a substitute to zero rating of consumer goods is a refundable tax credit under the personal income tax. In Barbados, the Reverse Tax Credit resembles such a tool and its use should be expanded and the credit enhanced. In Canada, the refundable Goods And Services Tax/Harmonized Sales Tax Credit is applied for by filing a personal income tax return and is tied to household income and number of dependents (not actual VAT paid) with a claw-back provision to reduce the value of the credit as household income rises.
10. Import zero rating provisions weaken the role of imports as a tax handle. Entry of goods at Customs is the fastest and safest way to collect VAT and all other indirect taxes. Owing to the invoice-credit mechanism, this process protects collections down the supply chain in the domestic economy. In addition, it can generate a cash flow benefit for the Treasury when goods are cleared quickly and resold quickly with VAT. Regaining control of the VAT base is critical in a small open economy such as Barbados that relies heavily on imports. In the current situation, imported goods that are released in the domestic economy with no VAT paid have little hope of attracting the correct amount of VAT downstream. The potential for leakage with supplies reaching non-registered persons tax free is high. Zero rating, when it applies to both domestic supplies and imported goods, breaks the VAT chain and invites revenue leakage and fraud (for example, submission of fake invoices showing VAT paid in order to claim fraudulent refunds, or charging VAT on resale of goods that did not attract VAT when purchased, possibly without remitting VAT due, andso on.). Exemptions also break the chain but they pose much less of a revenue risk since they should not generate excess credit positions and applications for refunds.
11. The list of VAT exemptions goes beyond usual practice. Exempt supplies include financial services, including insurance; all sales of real property; post office supplies; non-commercial activities of charities; medical, dental, nursing, paramedical and related services; hospital, nursing home and ambulance services; instruction; trade union supplies; supplies related to games of chance; membership subscriptions to non-profit sporting clubs; and supplies of goods or services by the PomMarine Hotel. There is little justification for this extensive list of exemptions aside from those often granted for purely technical reasons (margin-based financial services) or following income distribution or merit good arguments (education and health care). Typical exemptions for international organizations, projects, and so on, while problematic, are outside the scope of this review and hence not discussed further.
B. Registration threshold.
12. The VAT registration threshold currently stands at $ 80,000. A person is required to register for VAT if the annual taxable turnover equals or exceeds $ 80,000. Any business with taxable turnover below that amount is deemed a “small supplier”. The threshold at inception amounted to $ 60,000. This was raised to the current amount on December 1, 2010. A business that has been operating for less than a year but which realizes a turnover that equals or exceeds $6,667 per month is required to register.
13. The act contains provisions for voluntary registration. A small supplier may attempt to register by submitting an application to the Commissioner of Revenue. The commissioner must be satisfied that the applicant will comply with the act and approve the application for the registration process to commence. The act does not specify an annual turnover floor under which no business can apply for voluntary registration.
14. The act contains provisions for cancellation of registration. Cancellation is based on a number of tests that involve expected annual turnover, a period of time (two years), the nature of supplies, and residence in Barbados. Cancellation is a two-way process. On the one hand, the registrant may apply to the commissioner for the cancellation of her/his registration. On the other hand, the commissioner may cancel the registration. The act contain a deemed supply rule to apply upon cessation of registration.
15. There are convincing arguments in favour of a higher threshold in general. Barbados’ VAT threshold is very low by international standards and in relation to the Revenue Authority’s capacity. Best practice has tended to evolve in the direction of higher thresholds with the understanding that low thresholds present tax administrations with a poor trade-off: extra revenue from a threshold below the optimal level is almost always not worth the extra compliance and administrative costs that must be incurred to obtain the revenue. When the threshold is too low –– which is often the case in developing countries –– administrations essentially perform unproductive work on small registrants. By raising the threshold, administrations can free resources to focus on medium and large businesses that will collect the vast bulk of the revenues.
A higher threshold will still raise revenue from VAT on inputs purchased by non-registrants. That result critically hangs on making business inputs taxable and not allowing a VAT refund. If inputs are zero-rated or input VAT is refundable, as is the case in many situations in Barbados, then that revenue is lost too. Historically, several value-added taxes have failed shortly after implementation because thresholds that were too low flooded unprepared tax administrations with a wave of small registrants that produced almost no revenue.
16. The most reliable tool to inform the threshold setting decision is to prepare a size distribution of registrants by size of turnover and VAT collections. Table 2 shows such the results of such an analysis for the fiscal year 2013/2014. Several results emerge from the data. Firstly, consistent with numerous field observations in developing countries, the distribution features a very significant share of VAT collections at the top end of turnover ranges. Registered firms with turnover of $1 million and over account for 88.6 per cent of the total VAT paid in the sample. Secondly, registrants with turnover between zero and $300,000 account for only 3.8 per cent of the total VAT paid. Put another way, setting the threshold and assuming no behavioural changes, registrants with turnover equal or above $ 300,000 would account for 96.2 per cent of the total VAT currently paid. Again, assuming no behavioural changes, such a change would remove 3,140 taxpayers from the registrant rolls, or over half.
17. Size distribution data illustrate some of the effects of the various VAT concessions. The effective VAT rate shown in the last column of Table 2 is calculated by dividing total VAT paid in each turnover interval by turnover in the same interval. This average effective tax rate declines monotonically throughout starting at zero except for a small increase somewhere between $100 million and $400 million.
18. The size distribution strongly suggests that the threshold is much lower than its optimal amount. Again, the vast bulk of VAT is collected by the largest firms. It should be recalled that a well designed VAT is a consumption tax whose burden should not fall on registered persons. As suggested in this chapter, the VAT in Barbados is far from that ideal. Consistent with best practice, serious consideration should be given to selecting a substantially higher threshold. As noted earlier, setting the threshold at a higher level would sacrifice a small amount of collections (although see caveats below regarding refunds), but would free the administration from having to deal with many businesses that collect little, no, or negative revenue. The often cited figure of US$100,000 would mean a threshold of $200,000 at the current exchange rate. Inspection of the first two data rows of Table 2 shows that the revenue loss would be minimal in comparison to the decline in the number of persons the Revenue Authority must interact with. That being said, $200,000 may be on the low side and $300,000 may be a more appropriate amount.
19. Voluntary registration provisions should remain but should be tightened. Equity considerations between businesses require that voluntary registration provisions be maintained. For instance, a small supplier (as defined by the act) that derives much of its value added from purchased inputs might want to register to recover the VAT it pays on inputs. This may be reinforced by the fact that registrants prefer to purchase from registered suppliers since this avoids VAT being built in prices when a small supplier makes exempt supplies because it chose not to register. From the perspective of the Revenue Authority (BRA), such small suppliers may be desirable registrants. This is not the case of small suppliers whose value is added primarily through labour. Over the medium term, the BRA may consider setting up a simplified tax regime that would represent a final tax meeting the obligations for VAT, personal income tax, and corporate income tax with one low tax rate (in the four to five per cent range) on gross receipts for persons over the common threshold for that combined tax.
C. VAT rates and reduced rate on tourism.
20. The VAT features three tax rates, including an important reduced rate. As noted earlier, the standard rate is 17.5 per cent, the reduced rate of 7.5 per cent, and the zero rate which applies to many domestic supplies, inputs, imports, and exports. The 7.5 per cent rate is key because it applies to an important sector of economic activity. The hotel and restaurant sector, an imperfect proxy for the tourism sector, accounted for 13.2 per cent of GDP in 2012. At the VAT’s inception, the 7.5 per cent rate applied only to the supply of accommodation by hotels, inns, guest houses or similar places. This legislation was amended several times since the inception of VAT. The new Fourth Schedule to the act, which was passed in the 2013 Budget, broadened the scope of the reduced rate considerably. The goods and services subject to the 7.5 per cent rate now include entertainment; cruises other than international cruises; supplies related to sport and recreation; supplies provided at spas and retreats; supplies made at conference facilities; and meals, drinks, and dining services.
To qualify, the person must satisfy a number of requirements and be registered with the Comptroller of Customs as a provider of tourism supplies. In addition, the person must first be registered with, or have a licence from, the Barbados Tourism Authority, The Barbados Hotel & Tourism Association, Inc. or Small Hotels Of Barbados Inc.
21. Reduced rates create a number of problems. Firstly, they are difficult to administer and are likely to invite disputes regarding the classification of goods and services for tax rate purposes. Secondly, depending on the difference between the standard rate and the reduced rate, refund problems may arise. Refunds will arise when providers of tourism supplies make suppliers subject to the 7.5 per cent rate but purchase enough inputs subject at the 17.5 per cent rate to generate excess credit positions. The availability of zero-rated inputs (mostly imported by tourism) mitigates this problem to some extent but it does so at a large cost, since the leakage problem discussed above may be very serious in its own right.
The suspension of tax on inputs, although administratively appealing on the surface, cannot be trusted since it lacks an effective enforcement mechanism. Finally, reduced rates create pressures to extend the treatment to more supplies, which is what has happened in Barbados as evidenced by the Fourth Schedule.
22. Tourism should be subject to all general taxes, including VAT. Not only can this be considered equitable (in treating all businesses in the sector as well as other sectors), but it eases VAT administration considerably, and permits a credit in the case where the service is in fact a business input. In addition, when all competing jurisdictions in a region adopt this rule as part of a tax coordination effort, costly and destructive tax competition –– a race to the bottom –– can be avoided. Many of the countries in the region do tax hotels and other tourism services under their general sales taxes. In theory, tourism supplies to foreigners could be plausibly argued to constitute exports and, as such, they should be zero-rated. The flip side of this statement is that imports should be taxed in the country of origin of the resident. There exists no mechanism to enforce this result so it is widely accepted that some taxation of tourism on an origin basis is preferable to no taxation at all . . . . .
23. The tourism industry faces challenges which cannot be adequately addressed by subjecting their services to a reduced VAT rate, even a zero rate. The VAT cannot be used to address structural problems in the industry. In fact, using the VAT to attempt this could create a precedent that would undermine the tax by having negative spillover effects on other sectors facing problems. It would be better to focus on other factors that impact upon input prices, in particular import duties and the cascading of taxes.
24. The rate structure should be rethought with a medium-term goal of a single standard rate. The current rate structure with two fractional rates that are far apart presents important challenges for compliance, administration, and popular acceptance of the VAT. In the short term, consideration should be given to the adoption of an integer standard rate. A standard rate of 16 per cent is possible, with other adjustments to make the reduction revenue neutral. In the medium term, consideration should be given to adopting a unique standard rate and eliminating with a phase-out period the reduced rate on tourism suppliers.
25. Converting some portion of currently zero-rated supplies into taxable supplies would permit a revenue-neutral reduction in the standard VAT rate. For example, based on the aggregate VAT data reported in Table 3 below, if the standard rate is reduced from 17.5 per cent to 16 per cent, bringing 40 per cent of domestic zero-rated supplies (in value terms) into the VAT net would more than recover the lost revenue. In fact, the extra revenue would permit a restoration in the Reverse Tax Credit to $1,300 annually for 15,000 recipient households. Thus, this revenue neutral package of policies would also compensate the lowest-income households for the extra burden placed on them by the reduction in domestic zero rating. Similarly, bringing a greater share of the domestic zero-rated supplies into the VAT net would permit a larger revenue-neutral increase in the Reverse Tax Credit for these households.
26. Managing refunds appears to be a serious problem, arising from several structural features of the VAT. Firstly, as noted earlier, extensive zero rating of domestic supplies of many final goods means that excess credit positions will arise as long as some VAT at a positive rate is paid on input purchases. In this situation, it is difficult for BRA to determine whether the excess credits are due to zero rating of supplies, unprofitable operations (revenues do not cover cost of sales so that gross margin is negative), or a combination of both. Secondly, the VAT Act has provisions to provide refunds to non-registered persons. According to the Application For VAT Refund form VAT 102 (01/11), the following persons or organizations can apply: diplomatic missions; consulates; international organizations; the international financial sector; approved educational institutions; and unregistered exporters. Notably, the form does not require significant detail to support the claim. The treatment of approved educational institutions and unregistered exporters is not a typical of VAT. The supplies made by educational institutions are usually exempt, not exempt with a refund like in Barbados. In the absence of tight verification of refund claims, this treatment is open to abuse due to the many dual use goods that enter the delivery of educational services. It is preferable to increase direct funding that to refund the VAT. Likewise, unregistered exporters should be exempt, not eligible for refunds. Those that meet the criteria for voluntary registration should register. Those that do not should bear the VAT on inputs.
27. The analysis of VAT return data supports the contention that refunds are a problem. Table 3 shows the results of such an analysis using a sample of VAT returns for fiscal year 2013/2014. The top part of the table presents the raw data organized by output tax calculation (left side) and input tax calculation (right side). More illuminating are the performance ratios shown in the bottom third of the table. Here are the highlights on the output side. Firstly, zero-rated consideration for VAT represents almost 36 per cent of total consideration. Secondly, the ratio of total output tax to total consideration net of VAT equals 10.3 per cent, less than 60 per cent of the standard rate, suggesting that about 40 per cent of the output effectively goes untaxed. Reduced rate consideration equals only 2.6 per cent of total consideration; so tourism supplies at the reduced rate play a very minor role in explaining this observation. Here are the highlights on the input side. Firstly, total input tax represents almost 75 per cent of total output tax. This is a large proportion by any standard. Secondly, VAT payable amounts to only 31 per cent of total output tax. Finally, VAT refundable amounts to almost 20 per cent of VAT payable.
28. The analysis of VAT return data over a longer period supports the above contention. Table 4 presents a comparison of VAT payable and refundable over five fiscal years from 2009/2010 to 2013/14. VAT payable grows moderately from year to year but experiences a slight dip in 2013/14. VAT refundable increases for three years starting in 2010/2011 before dropping in 2013/2014. This is consistent with the effects of the financial crisis starting to wane.
In all years except 2013/2014, VAT refundable amounts to almost 20 per cent of VAT payable. The only improvement in the sample is seen in 2013/2014 where the ratio falls to 17 per cent. The exact reasons are unclear. The mission learned that refunds present serious challenges to the Revenue Authority. Refunds require significant audit attention under pressure by various stakeholders to pay quickly so that claimants can avoid cash flow problems. Refunds require additional administrative effort because funds used to pay refunds are not drawn on the Revenue Authority’s budget but rather from requisitions from accounts at the Ministry of Finance.
29. The Revenue Authority should devote more resources to manage and control refunds. There are standard risk assessment methods to manage refunds. In addition, many administrative best practices have been identified which can help administrations manage refunds while protecting revenues. It does not help that some refunds are awarded by means of Value Added Tax (Remittance) Orders, which are statutory instruments issued for the benefit of particular companies in the hotel sector.
E. Other Issues and sectors.
30. Real property transactions are generally exempt. The only exception is non-residential leases of less than 25 years, which are subject to VAT. Important publications such as the Red Book 2014 for Barbados do indeed quote prices for commercial leases per square foot plus VAT. The overall treatment of real property is far too restrictive and inconsistent with best practices. The most modern VAT systems (Australia, Canada, New Zealand, South Africa) effectively work on the following principles consistent with the normal invoice-credit method: firstly, all commercial transactions are subject to VAT; secondly, sales of new or substantially renovated residential housing is subject to VAT; thirdly, resale of used residential housing is exempt; fourthly, residential rentals are exempt; and fifthly, the construction sector (construction services, materials, equipment, capital goods, and so forth) are subject to VAT at the standard rate. The treatment of land varies somewhat from country to country.
31. New residential real property and the construction sector should be subject to VAT. The most important step to modernize VAT treatment of real property would be to make sales of new or substantially renovated homes subject to VAT. To work well, this VAT treatment requires that the construction sector be subject to VAT so that a registered contractor can deduct VAT paid on purchases made for construction from VAT charged (and collected remitted and by him) on the sale of a new home. If construction materials are zero-rated at import, for example, then the VAT chain breaks and some of those construction inputs may never be taxed in a way that links with output VAT.
In the short term, a simple method to achieve this treatment is called the margin scheme. Essentially, VAT would be assessed on sales of used housing with the tax base being the increase in value, or the difference between the sale price and the price of the last purchase transaction. In the medium term, consideration should be given to the establishment of a VAT system that provides for a coherent treatment of all real property and land.
32. Financial services and insurance are exempt under VAT but fee-based services can be taxed easily. The VAT Act provides for a general exemption of financial services, defined as services-related to financial intermediation, market intermediation and risk pooling. A few examples –– mostly margin-based services –– are cited: exchange of currency, provision of credit, and so on. Fee-based services are also exempt from VAT.
Margin-based intermediation services, including life insurance, are very difficult to tax correctly under VAT. Some modern VATs address the difficulty of taxing financial services under a VAT by taxing all fee-based financial services. VAT exemption is then limited only to margin fees and life insurance. All fee-based financial services should be taxed under VAT. Taxing them under a separate transaction tax may be cumbersome both for businesses and tax administration and is unlikely to give rise to the correct amount of VAT credit. Asset taxes as a proxy are economically damaging.
33. Property and casualty insurance is subject to the General Insurance Premium Tax. The tax is levied on gross direct premium income at a rate of 4.75 per cent in respect of property insurance business, and four per cent for other general insurance business.
34. Taxing general (property and casualty insurance) services under VAT is feasible and desirable. Since these are effectively fee-based services there are few administrative complications in taxing them. The value added of property and casualty insurance companies may be defined as the difference between premiums collected and benefits and indemnities paid out. Most modern VATs (Australia, for example) therefore tax these insurance companies on their net margin by imposing VAT on all premiums and indemnities paid out. The tax credit is allowed for indemnities received by VAT-liable businesses. In a way, the VAT Act attempts to mimic this treatment in part by mandating that deemed VAT be charged and collected by the insurer that pays an insured for a loss.The General Insurance Premium Tax should be repealed if VAT becomes applicable to that type of insurance.
35. Life insurance premiums are subject to the Life Insurance Premium Tax. This tax applies to the gross premium income of the insurance company. Premiums from new business written in a given year are taxed at a rate of six per cent for both resident and foreign life insurance companies. Premiums from renewal business are taxed at rates of three per cent and five per cent for the two types of companies, respectively. In contrast to property and casualty insurance, life insurance embodies a considerable savings element which should be VAT exempt. The Life Insurance Premium Tax does not tax actual value added. At best, it acts as a turnover tax which is likely to increase the amount of gross premiums.
36. Agriculture should not benefit from preferential VAT treatment. The agricultural sector accounted for only 1.4 per cent of GDP in Barbados in 2012. Given the very broad zero rating of food and agricultural inputs, the sector has effectively been taken out of the VAT net. Zero rating inputs of large-scale producers, whose output may be exported in part, carries little incentive for them; their exports would be anyway zero-rated and tax paid on inputs claimed back. There is also no compelling reason to treat small-scale farmers or fishermen, with turnover below the VAT registration threshold, differently from other small suppliers.
In fact, there are very compelling administrative and revenue reasons (see earlier discussion of threshold) to leave them as exempt traders: it simplifies administration considerably, and generates VAT on inputs provided that inputs are subject to VAT at the standard rate.
37. Gambling and lotteries are exempt from VAT and subject to Betting And Gaming Duties. The following supplies, when they permit or entitle the recipient to participate in a game of chance, are exempt: lottery, sweepstake or instant money tickets; bingo cards; any other ticket, card or other licence, right, or device. A supply of a service of accepting a bet is also exempt. Betting and gaming activities are subject to betting and gaming duties. Duties and fees are assessed on the following activities: lottery and sweepstake tickets, bingo, and bets accepted by a racing business; bets made by pool betting; gaming machine licence; amusement machine licence; certificate of registration issued on connection to pool betting or racing service business; and amusement arcade licence.
This system appears to operate as a licensing fee regime in part. In addition, there are statutory exemptions from the duties. The fee schedule is a complex combination of full-year and half-year licence fees, duties equal to fractions of dollar bets, ticket purchases, bingo, and so on. Revenues from betting and gaming duties in the fiscal years from 2009/2010 to 2013/2014 amounted to $8.5 million; $18.4 million; $1.1 million; $1.0 million; and $1.0 million, respectively. Revenues fluctuate wildly for some reason.
38. Gambling and lotteries should be brought into the VAT. The fee structure of the Betting And Gaming Duties Act is unlikely to be efficient and revenue maximizing. Modern VATs have developed methods to effectively bring gambling, lotteries, casinos and other games of chance in the net in a way that is consistent with the taxation of consumption in general and with the input crediting mechanism in particular.
In general, supplies that are remunerated by fees or prices can be subject to VAT in the usual way. Supplies that relate to games that involve takings and winnings can be taxed using a margin scheme. In the case of a slot machine, for example, taxable output equals the difference (on a tax-exclusive basis) between the amounts paid into the machines and the winnings paid out. In the medium term, consideration should be given to abrogating the provisions of the VAT Act that exempt games of chance and making as many of the supplies subject to VAT at the standard rate.
At that time, all duties (in the First Schedule of the Betting And Gaming Duties Act) that burden consumers directly should be abrogated. Licence fees for operators are of a different nature, and there is no reason to eliminate those.
Tax 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.
Complement the elimination of the zero-rated treatment of the above supplies by an enhanced Reverse Tax Credit to target compensation to low income households.
Convert all remaining domestic zero-rated items to exempt items.
Tax all business inputs (including all construction services and purchased inputs) at the standard rate and avoid any deferral or suspension of VAT on imported goods and services, except for large purchases of capital goods by compliant registrants.
Eliminate all refunds to non-registrants (except for those required by international conventions) and make their supplies exempt.
Tighten statutory language with respect to refunds to registrants and increase pre-refund audits.
Strengthen and clarify voluntary VAT registration requirements to guard against abuse while favoring the formation of new businesses.
Eliminate all VAT exemptions at the import stage unless required by international conventions.
Make the standard rate non-fractional (an integer) and consider reducing it to 16 per cent to facilitate the acceptance of the recommended base-broadening measures, and consider adjustments to the reverse tax credit to further compensate the lowest-income households for the burden imposed by base-broadening.
Recommendations (medium and long term).
Raise the registration threshold to an amount between $200,000 and $ 00,000 and index for inflation annually thereafter.
Raise the rate on tourism supplies gradually towards the standard rate over 3-5 years.
Extend the VAT base to include new housing, general insurance, fee-based financial services, agriculture, gambling and lotteries. Eliminate all predecessor sectoral transaction taxes where applicable.
Consider the implementation of a simplified tax (calculated at a low rate on gross receipts) that would represent a final tax for all VAT, personal income tax, and corporate income tax obligations for persons below a threshold common to all three taxes.