By G.A. Dwyer Astaphan
During a conversation with a lady last Friday in town, I had a bit of a sneezing and coughing fit. So she asked: “You catching de VAT?”
I found it interesting that she would describe the Value Added Tax (VAT) as the latest flu going around.
Come on, VAT is supposed to be a ‘cure’, not an ‘illness’. A ‘cure’ which is intended to simplify our country’s tax regime (although its administration is not simple) and to increase revenue.
A ‘cure’ which the International Monetary Fund (IMF) has been trying to administer to us, and which we have been resisting, for maybe the last ten years.
Here is the deal, plain and simple. There are four sobering realities which we face.
Firstly, ours is a tiny and extremely vulnerable country and economy.
Secondly, over the years, St. Kitts & Nevis, like other Caribbean territories, has been quite dependent on import duties and tariffs as a source of revenue. But our regional and international trading obligations have been forcing these duties and tariffs downwards, essentially removing them from our future menu of policy options, so we have had to find alternative ways of generating revenue.
Thirdly, with external financing sources not as flourishing as before, we have come under increasing pressure to find local resources (often through expensive loans) to finance our development.
And fourthly, our country has been carrying a massive and unsustainable debt for the past ten years, with a present debt to GDP ratio of over 175%, the third highest on the planet.
It is for these, and other, reasons that the IMF has long been advocating a number of measures in order that we might achieve fiscal and economic stability, including controlling the public payroll and public spending generally, prioritizing capital spending, corporatizing the electricity service (and maybe water too), ensuring greater accountability from statutory corporations, curbing tax concessions, improving the efficiency of tax collection, and introducing (or reintroducing, as the case may be) Personal Income Tax (PIT), and Value Added Tax (VAT).
Let’s deal with VAT.
In a 2002 paper entitled ‘The Relevance of The Value Added Tax to Eastern Caribbean Currency Union (ECCU) Member Countries’, Laurel Bain, Adviser to the Eastern Caribbean Central Bank (ECCB), stated:
“The VAT in Grenada was a failure. This was primarily related to the poor planning for the implementation of the tax. In addition, the granting of concessions to various interest groups complicated the administration of the tax”.
Bain went on:
“The VAT is administratively demanding. Its implementation should be preceded by:
1. extensive education campaigns;
2. the training of tax administrators;
3. proper tax administration;
4. a comprehensive registration system; and
5. appropriate legislation (including a comprehensive review of the present tax system to ensure that the new arrangements are not too burdensome on the poorer sections of the population)”.
I understand that Grenada is about to make a second, smarter attempt at VAT. Frankly, I don’t know that it has much of a choice.
Meanwhile, other Caribbean countries such as Trinidad & Tobago, Jamaica, Barbados, Guyana, Belize, Dominica and Antigua & Barbuda have also introduced VAT, with varying degrees of success and failure thus far.
Their collective experience shows that in order for the VAT to work:
1. preparation (recommended time is three years), training and education are critical;
2. taxable persons need to pay the VAT on time and the Government needs to effect refunds on time;
3. the right mix of taxes has to be in place; so that the poorer folks can receive some relief while producers and suppliers can remain competitive;
4. uncertainty and inflation can be expected during the implementation stages of the VAT; and
5. targeted revenues may not be achieved for years after the VAT has been implemented.
We in St. Kitts & Nevis are at the back of the line, and without the benefit of time or fiscal ‘oxygen’, we are now under severe pressure to get it right in all of eight months.
Having looked at the Government’s White Paper and, in the public interest, I have some questions and comments for the Minister of Finance.
1. How much revenue is Government expecting to receive from VAT, and generally, for the first five years?
2. What is the VAT rate that Government intends to apply? 15%, 17.5%, 20%?
3. What is the anticipated net effect on consumers? Will we end up paying more, or less, tax? If more, by how much, and what inflation rate can we anticipate annually over the next five years? If less, by how much?
4. And if consumers end up paying more, what is to happen to the small businesses which survive on patronage of the poor who will now have even less spending power? Do you anticipate closures of small businesses, and if so, at what rate? And what impact will that have on the overall economic and social stability of our Federation?
5. Could all of this lead to a situation in which our citizens find themselves in an even more desperate struggle to compete for jobs and entrepreneurial opportunities in the country of their birth? And if so, have the potential immigration implications been considered?
6. What is the intended sales volume threshold by which businesses will be exempt from VAT? Will it be $100.000.00 annually?
7. What concrete steps will Government take to ensure consistent budgetary surpluses over the next five years so as to make a dent in the Federation’s debt, and its debt-to-GDP ratio?
8. How will Government finance its capital projects, maintain its roads, hospitals, schools, national security and safety infrastructure, and other social programs over the next five years?
9. As part of its adjustment, Government will retire a number of persons who have reached the age of 55 years. Will Government publish the names of all public sector workers aged 55 years or older (excluding Members of Parliament) with an indication of those whom it intends to retire?
10. Are there other public servants in their 20’s, 30’s, 40’s and 50’s below 55 years of age who, under ordinary employment circumstances, would be made redundant? If so, what are Government’s plans for them?
11. Will Government also publish a list of all persons, if any, whom it has employed since the elections of 25th January 2010, and the projected net increase or decrease in Government’s spending as a result of the impending retirements and recent hirings (if any)?
12. Will Government publish in detail its plans to cut costs and trim fat wherever it is necessary to do so?
13. Will Government publish the names of all consumers of electricity and water who owe $50,000.00 upwards? Will they now have to pay up?
14. Will Government publish the names of all persons who owe property or other taxes of $50,000.00 or more? Will they now have to pay up?
15. Will Government publish the names of all persons who owe rents to Government of $50,000.00 upwards? Will they now have to pay up?
16. Will Government publish the list of all properties that it is renting and indicate the rent that it is paying for each of those properties?
17. What exactly is the meaning of the statement on page 8 of the White Paper “the current Excise Tax will be reformed to support the implementation of VAT”?
18. How much will that Excise Tax be, and why is it to be applied to motor vehicles and aerated drinks?
19. Please explain the application of Excise Tax and VAT to motor vehicles.
20. Will the Environmental Levy which has been expanded to include motor vehicles up to two years old to attract a Levy of $1,000.00 per annum be again expanded to include vehicles between two and five years old? If so, what will the Levy be on those vehicles?
21. At what rate will the Excise Tax on fuel be charged?
22. Why would gaming establishments not also be subjected to either an Excise Tax or a VAT? Why can’t they pay, say, a Tax of, say, 3%-5% of sales? Especially so if Excise Tax is, as some people say, a ‘Sin Tax’?
23. Why should offshore companies and other entities not pay a VAT on purchases of local services, whether purchased from Government or from private suppliers? Would a 5% VAT on their purchases close down their sector?
24. Why is the list of items (see page 13) proposed for zero rating limited to rice, sugar, flour, milk, infant formula, and infant and adult disposable diapers?
25. Has enough thought been given to easing the blow to the poor people who will be given a proportionately larger burden to carry than anybody else under VAT, which, on the face of it, is regressive and disadvantageous to the poor?
26. If “some of the services provided by financial institutions” (page 14) are to be exempt from VAT, which are the other services that will attract VAT?
27. Why are all educational services exempt? Why not apply VAT to tuition at the universities based here? Say, at the rate of 3%-5%, effective 2011?
28. If the first 100 units of electricity for domestic use are exempt from VAT, then the tax will apply thereafter. This will increase costs to householders. At the same time, if VAT is to apply to all electricity sold to commercial consumers, then the cost of energy will rise steeply for businesses and they in turn will have to relay their costs to consumers. What arithmetic has Government done on this?
29. Will all commercial consumers have to pay it or will some be exempt as part of their parcel of fiscal concessions? Further, if they are not all forced to pay it, what will the IMF now tell us? On the other hand, if they are forced to pay it, then we can expect them to relay the additional costs to their customers, and we know where that leads us.
30. If the supply of Government goods or services is effected at a nominal charge, and Government does not intend to recover costs from the sale, then the supply is exempt (page 14). I will presume from this that any other service will attract VAT. Can you explain in some detail? For example, stones and aggregate from the Quarry, certain medical services, supply office items, and so on.
31. Please explain what is meant by a “passenger allowance” of $400.00 being exempt from VAT (page 15). Does this mean that VAT is payable on anything above $400.00?
32. Will Government assure the public that VAT is exactly the same in St. Kitts and in Nevis?
33. Will Government assure the public that all sales transactions at ‘tourist’ stores, restaurants .etc will be subjected to VAT?
34. Will time share sales be subjected to VAT? If not, why not?
35. Will Personal Income Tax (PIT) be reintroduced? If so, when?
36. What if the VAT experiment fails?
The public has a right to be properly educated on VAT, and on the fiscal situation.
Indeed, the public has an obligation to know, and to act accordingly, because it is only we, not the Government, who can really ensure the protection of our interests.
We already see evidence that the Government’s political priorities and timing are not necessarily in harmony with our best fiscal interests. Because here we are at this eleventh hour, with VAT being forced down our throats, when (but for political machinations) this could have been done with more preparation time 8-10 years ago.
VAT is not the latest flu, and it is not the latest style or fashion, to be forgotten a month from now. Rather, it is a long-term measure designed to help us out of the deep hole in which we find ourselves.
But it is a measure that will itself cause pain to the people of this country, especially to the poorer ones; and it will also cause political fallout (which explains why it was resisted by the Government for so long, and why it is being introduced right after an election so that the governing party might have enough time to fix things by time the next election comes around).
On the political platform, the Prime Minister likes to ask his supporters: “All you ready?”
Well, now that the election hype is over, now that the election opiates are almost worn off, and just before the nice food and drink of Sunday’s Labour Party Conference at Beaumont Park Race Track are digested and passed out as waste, I ask the people of St. Kitts & Nevis: All you ready...for VAT?
