THE VALUE ADDED TAX By Vernon Harris The Value Added Tax (VAT) has been extant in the developed countries of Europe and South America for over 50 years. However during the past 30 years it has been introduced successfully in several developing countries including the Caribbean region. A recent IMF study concluded that “VAT can go a long way to raise resources and modernize the overall tax system…but this requires that the tax be well designed and implemented.”VAT is a tax which is levied on the value that a producer or retailer adds to raw material or purchases, excluding labour, before selling the new product or service. The tax is collected at each stage in the production or distribution process and the burden is expected to be borne by the consumer. Its defining feature is that it credits taxes paid by businesses on their material purchases against the taxes they must levy on their own sales. The following example explains the process. Consider that Firm B purchases material valued at $100.00 from Firm A. B produces component parts and sells them to Firm C who then sells to the final consumer. Tax is calculated at 10%: VAT differs from the existing indirect taxes which are in existence. A retail sales tax is collected at the point of sale to the final consumer and a turnover tax is levied on all sales intermediate or final. With VAT producers can reclaim the tax they have been charged on their inputs. It is not a cascading tax (a tax on tax) such as those levied on imported goods and services into the Federation. In the example above the tax payable would have been EC$47.50. in the case of VAT it is only EC$20.00. The OECS Tax Reform and Administration Commission Report 2003 recommended the implementation of VAT in St. Kitts & Nevis. The CDB Report on St.Kitts and Nevis 2007 commented, inter alia, ‘the major focus during the year included an amendment to the Corporate Income Tax in preparation for the introduction of a transactions-based tax (value-added tax).”The Minister of Finance in the 2009 Budget Report re-iterated the Government’s intention to introduce VAT. The introduction of this tax will bring several economic and fiscal benefits to the country. VAT would replace several taxes such as Traders Tax, Stamp Tax, Consumption Tax, Hotel Room Tax and a range of nuisance taxes for example travel tax; overseas telephone tax. This would remove the distorting effects on consumption which resulted from the application of these taxes. It would relieve the tax burden on exports and on the use of capital goods. However, to ease administration, the value-added tax allows for a threshold below which small taxpayers would not be obligated to register to pay the tax. For example businesses with a turnover of less than $100,000.00 Certain categories of goods and services will be exempted or zero rated. These include baby items; books; medicines etc. However the range of goods and services to be included will be greater for example professional services (doctors; lawyers; accountants). VAT is not expected to increase the cost of living. The tax administrators will need to establish a central administrative unit to administer the tax system. Extensive training of staff and education of the public will ensure efficiency and prevent unscrupulous business” from increasing prices and blame it on the application of the tax. The Government will be required to examine the tax structure in this country. The system of tax blanket concessions to foreign investors needs to be reviewed to ensure that other economic and financial benefits flow into the country to increase the nation’s GDP. The system is biased in favour of the foreign investor and this tax revenue available to the nation. VAT is not an enemy of the state and local taxpayers. The positive benefits outweigh the disadvantages. Product Price ($) Tax (10%) Credit ($) Tax Remitted ($) Firm A to B 100.00 10.00 – 10.00 Firm B to C 175.00 17.50 10.00 7.50 Value Added 75.00 Firm C to Consumer 200.00 20.00 17.50 2.50 Value Added 25.00 ====== Total Tax 20.00
