Reduce the VAT, suggests Arthur
No more tax please!
Former Prime Minister Owen Arthur has come out in full support of an International Monetary Fund (IMF) recommendation that this country’s rate of Value Added Tax (VAT) be lowered from 17.5 per cent to 16 per cent.
Addressing a meeting of the Institute of Chartered Accountants of Barbados here on Tuesday night, the former minister of finance also warned Government against going the route of increased domestic taxation, saying any further reduction in the disposable income of Barbadians was bound to affect the performance of the VAT.
“So there is much merit in the proposal contained in the IMF report to lower the rate to 16 per cent, broaden the base by reducing the wide array of zero-rated and exempted transactions and hence let the VAT do the work that it was intended to do,” he said.
The VAT was introduced here back in January 1995 replacing a system with 11 taxes with a total yield of $416.32 million, or 14.25 per cent of nominal Gross Domestic Product.
Arthur also recalled that in the first six months of its implementation, the VAT yielded $560 million, which was considerably more than the revenue-neutral target of $492 million.
“This explains the immediate adjustment that was made to trim the base of the VAT by zero rating a basket of food items to allow it to be revenue neutral as intended,” he said.
However, in assessing the performance of the VAT over the past 20-plus years, he complained that since then too many items have been either zero-rated or exempted from the tax on consumption.
A similar concern was raised by the Fiscal Affairs Division of the IMF in a 2014 study, which concluded that the VAT architecture of Barbados has deteriorated significantly since its inception.
The study also asserted that the numerous instances of zero-rating of domestic supplies as well as imports of inputs goods, export waivers of VAT, and overly generous refund provisions had undermined the VAT.
In support of the IMF’s position, Arthur, who is a trained economist, pointed out that over the years the list of zero-rated domestic supplies had grown to nearly 20 broad categories of goods and services.
“The bottom line in all of this is that the VAT regime was intended to be a regime characterized by a broad base, a low rate, few exemptions and simplicity in its operational features and its administration,” he told the ICAB meeting at the Lloyd Erskine Sandiford Centre on Tuesday night.
However, he supports recent amendments to the operational structure of the VAT, as outlined by the current Minister of Finance Chris Sinckler in his 2015 Budget presentation. The independent Member of Parliament for St Peter said the changes should help to mitigate some of the effects of its weakening foundations.
“It is also good that the reverse tax credit has been retained as one of the chief means by which the potentially regressive effects of the VAT on low income citizens can be mitigated,” he said in further support of Government’s efforts to restructure the VAT.
“The raising of the threshold at which entities become eligible to pay the tax to $200,000 also makes complete good sense,” Arthur said, adding that “the broadening of the base to include gaming and lotteries, cell phones and the likes are also justified”.
However, with Sinckler currently preparing for the annual Estimates of Revenue and Expenditure parliamentary exercise, Arthur said “the core of the recommendations which may yet have to be acted upon are that most of the exemptions and zero ratings may have to be eliminated, the standard rate reduced to 16 per cent, the reverse tax credit should be continually adjusted and the rate on tourism supplies should be raised to the standard rate over a three to five year period”.
He stressed the importance of having the standard VAT rate for the vital tourism sector, especially given the Government’s recent difficulty in meeting tax refunds.
“It arises not just from the cash flow problems facing the Treasury, but from some of the structural features of the VAT itself including the differential between the tax on inputs and the tax on outputs applied to the sector,” Arthur explained, adding that the situation was made worse because the difference between the 7.5 per cent output tax and the 17.5 per cent tax on inputs had made tourism enterprises eligible for larger refunds.
“In the final analysis it may have to be resolved by subjecting both outputs and inputs to the standard rate, as proposed,” he stressed.
The former minister of finance also suggested that Government’s decision to increase the VAT to 17.5 per cent came as a result of a steep fall in revenues, especially corporation taxes earned by the International Business and Financial Sector.
However, he warned that the plunge in the revenue from $356 million to $93 million was not due only to the migration of companies, but also to the fact that the rate of tax had been cut by 50 per cent.
“It would therefore have been better for Barbados to fix the conditions for doing business and for facilitating investment than fiddling with the tax rate,” he said, while stressing that any further attempts to increase the domestic tax rate in a shrinking economy would be counterproductive.
The former prime minister also did not resist the urge to take a jab at the outgoing Governor of the Central Bank Dr DeLisle Worrell on account of the VAT, saying that by way of interesting historical footnote, his was the most powerful and influential voice raised against the introduction of a VAT in Barbados.
“Happily, there will be finer things for which he will be remembered,” Arthur quipped.