A tax for us all! Such is the mantra of the project office responsible for implementing the new Value Added Tax system to Saint Lucia. Theirs is a clarion call for the nation to rally behind their efforts at “simplifying the collection of tax.” Sounds nice and simple, doesn’t it?
First established by the late Sir John Compton, the Value Added Tax Implementation Project opened in October 2008 and immediately made headlines with rumours that the then administration had gifted them with a whopping $30 million purse to execute their duties. By April 2009, with a new King at the helm, the UWP administration indicated it would implement the tax in one year. In keeping with that mandate, the project unleashed an extensive public education campaign: all the bells, whistles and even a train. Then, nada!
Like a mischievous child in the principal’s office, the project lost its voice and energy. Most critics were more than pleased, however, given that the project had made the introduction of a new tax seem like a 16-candle birthday cake—even though it’s not your birthday! St Lucians seemed to respond positively to the transparent approach adopted by the project team and appeared ready to swallow the pill.That sugar coated laxative included policies circulated in their VAT White Paper.
Proposed indirect taxes to be replaced by VAT: consumption tax; environmental protection Levy; mobile cellular telephone tax; motor vehicle rental fee. It would not affect direct taxes: income tax; corporate tax; withholding tax.
The VAT will consist of a standard rate of 15 percent (15%); a rate of zero percent for certain goods and services, and a list of exempt goods and services.
Zero-rated Goods and Services: No VAT is charged (i.e. 0 percent). Registered businesses can claim for VAT paid on inputs.
Exempt Goods and Services: No VAT is charged. Registered businesses cannot claim VAT paid on inputs. VAT threshold is $120,000.
A major thrust of the project team was to ensure that the tax system was not regressive and they proposed “social policies to cushion the impact of VAT.” However, such policies are at the whim of the political directorate—as is implementing the tax in the first place. Yes, contrary to popular opinion, implementing VAT is a policy decision and not a system shoved down our third-world throats by the higher-ups.
In fact, the recommendation to implement VAT came in 2003, when an ECCB commission chaired by Sir Allister McIntyre proposed the tax system as “part” of tax reform. Weeks later, in delivering his 2003-2004 Budget Address, Prime Minister Dr Kenny Anthony indicated having received the report and promised a decision within the next year. Needless to say, there was no word of the taboo tax before the 2006 elections.
After the ECCB recommendation, Belize (2006), Dominica (2006), Guyana (2007), Antigua and Barbuda (2007), St Vincent and the Grenadines (2007) and St Kitts (2010) all implemented the tax. So, too, did Grenada—twice! The spice isle didn’t get it right in 1986. The system was repealed, reintroduced in February 2010.
Most, if not all the Caribbean territories implemented with the integral support of the Caribbean Regional Technical Assistance Center (CARTAC). The same is true in the case of Saint Lucia, the project team having visited some of those countries to record lessons learned.
However, both the project and CARTAC remained firm that while the operational components never change, VAT is not a copy and paste tax. They suggested the system be tailored to suit culture, economy and other country specifics. This usually refers to the chosen items to zero rate or exempt; the threshold and the VAT rate. Par example: it may be economically wise (politically too!) to zero rate nutmeg in Grenada, but pointless doing so in St Lucia.
The hard reality: The VAT system is designed to improve a government’s collection of tax. It does not collect more taxes per se, but its efficiency ensures that more of tax due is received by the State and hence government realizes higher compliance. The businesses, depending on the sector, will also benefit from the tax. The remittance period will mean that some companies will be eligible to tax refunds (not the same as will receive!) before their supplies have sold out. This also means that as they collect VAT from their consumers, they have a three-month window within which to pay the net tax to government (three months being the maximum roll-over period).
In comes the global concern of fraud, tax evasion and under-invoicing. A businessman can purchase all his household supplies through his company and never pay VAT as an individual. With increased avenues for fraud, the need for well-trained staff and well-equipped administration of the tax is ultra important.
In any tax system, it is always the consumer who pays the tax. VAT is a consumption tax and is no different! Consider this: the rich spend 20 percent of their income on food, while the poor expend 50 percent. When VAT is implemented there will be no more concessions (not even on barrels) or special treatment to any individual. So no VAT on sugar, milk and eggs means: no VAT for the rich or the poor on sugar, milk and eggs. However, for each $100 forgone by Government by zero rating food items, only $20 reaches the poor. Indeed, the office proposed ways for VAT to not make more people poor: Koudemain Ste Lucie; Food Stamps; bolstering School Feeding Program and Transport Subsidy. But those policies, as was being proposed by the project, ought to have been implemented prior to the tax.
With less than five months till V-Day, the member organizations are crying foul, angered by the perceived rush to implement. The project office has a new head with just two months on the job, the public education campaign still has sand stuck in its eyes, the legislation is yet to be disseminated or passed in parliament, the staff yet to be trained on the tax and software and the building earmarked to house the new unit is still very much under construction. Oh, but wait: a law can be easily passed by a government’s majority and what’s the point of educating the public, anyway? Saint Lucians don’t read, right?
Economists directly or indirectly associated with the project are still arguing over the best threshold for a Saint Lucia VAT—the lower the threshold the more businesses which will have to charge and collect the tax! So it’s possible that your lunchtime meal or Speculator outfit may attract a 15 percent tax.
Simple maths yes, but it means that the vendor must register with the department, supply you with a VAT receipt and keep proper accounts—another taboo subject in St Lucian business. Besides, one change to any of the policies will have a ripple effect, the impact of which must be studied prior to implementation.
But let’s face it, when was the last time public outcry over government action or inaction had any impact? So, with a new Budget based on concessionary loans, it’s easy to understand why the new administration will feel forced into implementing VAT! Certainly, the new system must be a condition stipulated by lenders. But is the timing right? Simply put, VAT is necessary for tax reform and revenue efficiency. However, in all instances, implementing VAT is a decision to be made by the political directorate and for which sufficient time must be given for effective implementation. Hastily implementing such an overhauling tax could easily result in creating more inefficiencies.