By Marva Cossy
“Value Added Tax? Turks & Caicos Islands (TCI) is getting a VAT?” I asked somewhat incredulously. “Yes, the editor confirmed, asking if the telephone line was bad. The line was as close to perfect as I have ever experienced, but I had assumed that since TCI was an overseas territory of the United Kingdom, the VAT or one of its cousins – the general consumption tax – was long instituted there.
I heard very little else of what he said as I vividly recalled all the drama associated with the introduction of VAT on my island Barbados, a few years ago in 1997. More recently, I have heard the outcry in St. Lucia as its government introduced the VAT on October 1, becoming the last in the Organisation of Eastern Caribbean States (OECS) to do so.
We all have a love-hate relationship with taxes. We welcome their usefulness in running the country, including ensuring that our citizens have access to adequate public goods such as roads and good sanitation, but we moan about the drain on our pockets. VAT, however attracts special fury. It is an all-across the board tax, hitting us almost every time we spend and demanding the same amount (percentage wise) from the rich and poor every time they make a purchase.
Moreover, given that lower income earners spend a higher proportion of their earnings than those in higher income brackets; it follows that a higher portion of poor people’s ‘income’ will attract VAT which is therefore regarded as a regressive tax.
As such, introducing a VAT, any time, but more particularly during a recessionary period is a brave step for a government and provides political fodder for an opposition party. However, governments, including Barbados’ have dealt with some of the negative fallout by selecting a basket of goods deemed necessities such as some foods, especially for low income people, and charging VAT on them at zero rate; while some services are exempted.
In contrast, the TCI government, according to its White Paper, will exempt items that appear necessary for ensuring that households can afford proper nutrition and vital supplies.
These include basic foods, meat, vegetables, contraceptives, hurricane protection items, baby and infant’s items as well as certain services for vulnerable groups including the disabled. Also on the list are items which send loud signals regarding government’s policy; for example agriculture supplies are exempted while exports of goods and services, the supply of water and electricity are zero-rated.
From a consumer perspective, exempted and zero-rate goods have the same effect, no tax; but from a business’ perspective, the difference is important. Unlike in the case of zero-rated goods and services, sellers cannot claim tax credit on inputs associated with exempted items.
This means that though no VAT is charged at the point of sale to the consumer in both cases, the price on a zero-rated good or service should be lower because of the business’ ability to claim tax credits, when compared to a similar good or service that is exempted.
In essence, though governments use these tools, zero-rate and exemption to ease vulnerable groups and to make sure that the new system is not a disincentive to growth in key sectors of the economy. So do these manoeuvres make VAT a preferred tax?
Honestly, I did not like the VAT, but today after fuming about its introduction as another burdensome aspect of economic globalism, as a consumer I have settled down to paying it without complaining to cashiers and anyone willing to listen.
I recognise that multilateralism as dispensed by the World Trade Organisation (WTO) puts pressure on countries to reduce or eliminate trade taxes. Governments, especially those of small, open, indebted economies like ours in the Caribbean have to find revenue-raising tools, which will not burden our households or discourage business expansion particularly in the export sectors, yet we need to generate enough finance to meet the cost of the rising expectations of our people for proper services; to pay for infrastructure and other things key to restructuring our economies in a changing technological driven world as well as to propel economic growth.
We also have an aging population which has implications for payroll taxes as well as government pension schemes since the possibility exists that we may have to be paying pensions to a large number of former workers from the pockets of fewer employees. Additionally, the development of service economies as well as economic hardships has pushed more citizens into the informal sector where tax evasion is easy under traditional tax systems. So I understand the search for an efficient tax that can tackle evasion, but I am not sure that VAT is the answer.
I am thankful that prior to VAT’s January 1, 1997 introduction into my country all sectors of the economy – business and households were exposed to an island-wide education and information programme.
The relevant government agencies published final consumer prices with breakdowns that showed the imported prices and the effect of the multiplicity of taxes which were being replaced by VAT.
This was accompanied by charts showing the effect of VAT, so we had a good idea of which final consumer prices were likely to increase after VAT; those that would remain constant and yes, those that would fall. We were armed with facts that could help us identify price gouging. Retailers, though, behaved admirably, and the January 1 start was helpful as it coincided with the time when inventories at retailers would now have to be replenished after Christmas.
However, all is not well with our system. Few glitches need to be worked out. I watch small business operators cringed, weighted down by the additional work to keep proper accounts, to file their VAT returns and in dismay over government’s slow machinery in sending refunds. I see Government’s effort to deal with defaulters, business that take VAT payments but find it difficult to hand over those monies.
I leave my thoughts on small businesses and the hotel sector for another instalment. Indeed, as I tried to put myself in the place of a Turks & Caicos islander, my thoughts went to tourism and the recognition that most Caribbean islands, dependent as they are on tourism treated that sector with special VAT arrangements. The question really is that necessary? Is it fair to other sectors? But more in particularly does it affect the effectiveness of VAT? Does it signal that VAT is wrong for any country that has to make a significant allowance to anyone sector? I will try to answer in my next column.
• Marva Cossy is a Barbadian international trade consultant and journalist and the Turks and Caicos SUN’s Eastern Caribbean Bureau Chief