Saturday, February 22, 2014

...Value added tax (VAT) is an inappropriate tax for a tourism-based economy

Value added-tax ‘anti-tourism’

Central Bank of Barbados chief says VAT system ‘a mess’ there and urges government to replace it with sales tax

Guardian Business Editor

BARBADOS – Claiming he has seen “declining enthusiasm” for the tax over the years in his own country, the governor of the Central Bank of Barbados has called value-added tax (VAT) an “anti-tourism” tax which has hurt its local industry and which he is lobbying to see removed there.

In an exclusive interview with Guardian Business on VAT and its effects, Governor of the Central Bank of Barbados Dr. Delisle Worrell, who has held the post since 2009, said that VAT is “horribly complicated” to administer and called Barbados’s own VAT system “a mess”. Worrell said that in his view a “simple sales tax” would be a far preferable means of revenue generation for the Barbadian government.

Admitting that his position on the tax is considered “very radical” among his colleagues and does not necessarily represent that of the bank as an institution, Worrell said that he has been opposed to the tax in Barbados since its inception.

The government of Barbados introduced VAT at a rate of 15 percent in 2010; it was later increased to 17.5 percent in 2010 for what the government at the time said would be a period of 18 months and has remained at that level since.

The economist, who has recently concluded a study on VAT for the Central Bank, said: “I take a very radical stance on VAT. I think VAT is an inappropriate tax for a tourism-based economy. The rationale for VAT is that it is an export promoting tax, because if you are exporting physical goods (VAT is not charged on) those goods, but the producers are able to claim refunds/rebates on their inputs.

“They are ‘vattable’ goods but because their sales are external you’re not going to charge VAT on the exports, only on the domestic sales. So if they are a sugar producer they will pay VAT on local sales but anything they export they won’t pay any vat on, but they will claim a rebate on all of their inputs. So there’s a bias in the VAT in favor of export industries; that is if you are exporting physical things that are consumed outside, but not if you are exporting tourism, because the tourists come to you to consume.

“So VAT is an anti-tourism tax if you are a tourism producer because it makes your tourism more expensive than the people who don’t charge VAT, and that’s why all tourism countries who apply VAT have to apply it at a lower rate. A simple sales tax would be much better.”

Barbados applied a 7.5 percent rate of VAT to its tourism sector when it implemented VAT in 1997. This was later increased to 8.75 percent when the general rate rose to 17.5 percent, but as is proposed in The Bahamas, the lower rate was only applied to room-related transactions, and other tourism services such as restaurants on the hotel property, tours, activities, car and boat rentals, for example, remained subject to the full rate of VAT.

Worrell suggested that a sales tax, something a number of Bahamian business owners and operators, most prominently Rupert Roberts, President of Super Value, have proposed, “a more efficient way to raise the same level of revenue” for the government of Barbados, or The Bahamas.

Confirming the fears expressed by a number of Bahamians regarding the administration of VAT, Worrell said it “puts a tremendous burden on government administrations” and businesses.

“It’s a very complicated tax, especially if you are selling services - what are your inputs? If I am making a cell phone I know I need silicon, I know I need different materials and so on so I can inventory the materials I’ve brought in and say for each cell phone I need X amount of these materials, it’s clear. But if I am an engineer and I am supplying engineering services, what are my inputs? And so it becomes horribly complicated,” he told Guardian Business.

With reference to the refunding of excess VAT paid to the government, the Governor confirmed that the government has not managed to pay these sums back to businesses in a timely fashion, despite interest being owed by the government to the business if it takes more than six months to pay the refund after it is owed.

“They are in arrears on refunds and they are also a known quantity of refund claims that are outstanding, and there are cases where the companies have claimed the refund and the VAT office has not necessarily accepted those,” he added.

On the plus side, Worrell said that VAT has been successful at raising revenue for the government. In a recent study, titled “A Review of the VAT system in Barbados” Worrell and his three co-authors at the Central Bank said there was “some gain” in revenue yield relative to the tax rate with the establishment of VAT in Barbados, but the administrative costs of collecting the VAT were higher relative to the revenue received than for the taxes they replaced.

Finding that VAT has been “less elastic and less buoyant” in response to changes in income than its predecessor taxes, the authors said that this indicated the need for “greater compliance” with the tax in Barbados, noting that the VAT division of the government could benefit from employing additional staff.

Asked yesterday if the Central Bank of Barbados is therefore recommending that the government of Barbados do away with VAT as a source of revenue, Worrell said: “Not the Central Bank - me.” He added that the government is not officially considering removing VAT.

February 21, 2014