VAT: EASY “MATH” TURNED HARD “CALCULUS” BUT WHY?

I was indeed very happy to hear the Comptroller of Customs and the Head of the VAT Implementation Office put the unfortunate emotive comments of the President of the Manufacturers Association about the new VAT export procedures for registered business in a rational perspective. I was even happier to hear that the membership of the association distancing itself from the president’s highly charged and seemingly “unpatriotic” comments.

In a nutshell, the new VAT export procedures require exporters to give 48 hours prior notice and then wait 24 hours before inspection. In defending the new export verification policies for registered manufacturers, the Comptroller of Customs explained the rationale for the requirement was for “checks and balances”. He said his department had stepped in where there were inconsistencies, thereby saving government from making unwanted refunds. The comptroller’s position was also shared by the head of the VAT implementation Office who explained that it was of paramount importance to ensure that revenue was being collected and not lost.

Notwithstanding the “confused” position of the President of manufacturers association, it is obvious that the manufacturing community (at large, it seems) has made the “paradigm change” to VAT, while the president is obviously “lagging behind”. And while “bravo” and kudos are in order for our manufacturers, it also looks like all is not “fair and well” for VAT in that community.

Let’s use the bottled water sub-sector as an illustration.

Up to two weeks before VAT, the selling price of a five-gallon bottled water was a flat $20.00 inclusive of tax. The breakdown on the purchase receipt showed the base price was $18.18 and “the tax” as $1.82 or 10%.

However, just one week before the implementation of VAT, the price of the water rose by an additional $2.00 to $22.00. The salesman informed customers that the increase of $2.00 represented a “consumption tax” charge.

When VAT became effective on October 1, the price of the five-gallon bottled water increased further by an additional $1 to $23.00, and the salesman explained this was due to the implementation of VAT.

If the base price of the water remained unchanged and assuming that the formula applied by the bottle water company is representative of the entire industry, then the question is, “What are the taxes levied on bottled water?”

The two scenarios

SCENARIO 1		SCENARIO 2
Traditional Consumption Tax	10.0%	Price Increase	10.0%
Pre-VAT Consumption Tax	11.0%	VAT	16.5%
VAT	5.5%
TOTAL INCREASE	26.5%	TOTAL INCREASE	26.5%

Using the information on the pre- and post-VAT purchase documents from the supplier, two scenarios are deducible: Either there was a price increase of 10% on water to coincide with VAT (Scenario 2); or there is double taxation (Scenario 1)! But what is most interesting is the calculus behind the increase.

If scenario 2 was applied, then the logic is straightforward: the “old consumption tax” was replaced by an increase in the price of the commodity and then VAT was applied based on that increase.

Although the “calculus” applied in Scenario 1 is confusing and may merit investigation by the authorities, the result of either scenario is a 26.5% increase in the selling price of bottled water from $20 (inclusive of tax) to $23 over a short period of one week, representing either a price increase of 10% and a 16.5% VAT or the application of VAT (16.5%) and “inexplicable” consumption taxes.

I must admit that I am as confused by the “taxing structure” as much I am amazed by the “pricing structure” for bottled water. The net impact on the consumer is sudden “price jump” from $20 to $23 a bottle. What was pre-VAT consumption tax now represents a price increase; and the motivation is clear: to “take advantage” of the transition period; and Gov’t needs to intervene and regularize the “pricing” and “taxing” structures to ensure compliance.

HORRIBLE WASCO WATER

Meanwhile, it may also be a good time for WASCO to step up to plate and provide consumers with potable, drinkable water!

Questions and issues

The above discussion raises certain questions and issues: Are there other merchants who have configured the pricing structure using the above “calculus”, and how many?  Is that calculus the rule or the exception? In any case, is it the calculus authorized by government? Are there hidden fiats in the pricing calculus that we the citizens don’t know about? Or is it an indication of naked price gouging by ungracious merchants?

Whatever the situation may be, the “bottled water” scenario might well be a snapshot, a microcosm of a bigger, broader and hidden “national” crisis related to VAT, where some merchants might be capitalizing on the initial implementation problems inherent in the transitional phase and government must intervene urgently to resolve those attendant anomalies before they explode. I am tempted to add that the VAT authorities might be too “laid back” or “accommodating” in dealing with the problems of that nature.

Redress for citizens

Government needs to step up to the plate and to nip anomalies or occurrence of potentially fraudulent business practices from the bud. We can learn lessons from Jamaica when the country was transitioning to GCT in 1992, where allegedly fraudulent business practices proliferated.

One of the measures that our government might consider implementing is to introduce “decentralized complaints/citizen bureaus” where citizens can report problems, potential infractions and deliberate atrocities (without delay) associated with the initial implementation of VAT.

While I understand that the profit motive is driving force behind business, I do not believe that businesses in their pursuit of wealth should attempt to cheat the people and the state and escapes scot-free.

Transition challenges

The implementation VAT should not normally create much confusion if the introduction is fair and efficient. If businesses are honest and transparent, then the VAT calculus should be very easy! The difference between consumption tax and VAT should not be substantial and in some cases zero or even negative. (In any case and to the best of my knowledge, VAT is supposed to be a tax only on the “mark-up” and not the total value of the item or service). The difference will be greatest only for the sectors which never paid consumption tax before and now have to pay VAT, in which case, a straight 15% will be payable. 

Also, in the initial transition, there may be the spectre of “double-taxation”. This is understandable only in instances where there is still an inventory of old stock passing through the system.

Permit me to explain: if we are already paying 15% consumption tax on “the old stock” and a 15% VAT is also imposed, then there will inevitably be “double-taxation” and we will end up paying as much as 30% tax. That does not mean that the price of the item will “increase” by 30%. NO! It should be less.

(Let us take a hypothetical example: Suppose the base price of “old-stock” Avon roll-on is $10 and the consumption tax thereon is $1.50, then the pre-VAT shelf price would be $11.50; however, with the introduction of 15% VAT, the new price would now be $13.00 (not $14.95). Work it out and you’ll find this is the case!)

As I said earlier, issues of that nature will even out themselves as the old tax structure gradually gives way to the new (VAT) tax structure.

Preferential treatment for hotels

And finally, a word on the controversial “concessionary” VAT requests by hotels. To the best of my knowledge, hotels have already received a concessionary 8% VAT on certain services. They are now also requesting a waiver on VAT on service charge.

I completely understand the contribution of the hotel sector to the economy, especially in this protracted economic downturn resembling another “Great Depression”; but I find the sector to be an unreasonable corporate citizen in the “VAT initiative” trying to compounding its implementation. However, I can’t comprehend their “pre-emptive strikes” on VAT which are apparently not evidence-based! They are predicting a drastic impact of VAT on the sector without the data presenting any data to prove their case. Further, there seems to be a striking parallelism between their concessionary requests and “Romney-Ryan’s tax cuts for the wealthy.

The relationship between the state and the hotels must be “symbiotic” and “reciprocal”! The latter may well be Government’s biggest beneficiary when it comes to concessions – for it is a fact that government and tax-payers invest millions every year to bring business to the hotel sector.

So, why are the hotels not on board with us? Doesn’t the sector understand that the “fiscally stronger” government becomes, then the more the hotel sector benefits! Isn’t VAT on “service charge” the rule for all hotels where VAT is in force; why then should we be an exception? Why should we discriminate?

Make VAT Universal

Personally, I don’t believe VAT will chase the tourists away and impact negatively on hotel business in the way depicted by “the stakeholders”. Perhaps, they can give us examples and precedents and then we will act accordingly!

I am of the opinion that the sector is much bigger than the picture it paints! If our tourists have no difficulty paying for US$3500 rooms, then why do we assume that they will encounter difficulty paying a small 15% or 8% VAT?

We have to strike a balance and I don’t believe that this balance will necessarily constitute a “push” factor against tourism for the simple reason that VAT is a universal – it is not unique to St. Lucia!

Mr Minister of Finance my sterling advice to you is: Let all hotels pay VAT and let’s see how it works! Let everyone hop aboard the VAT train . . . only then we can learn about its Strengths, Weaknesses, Opportunities, Threats and then make intelligent adjustments!

It is now time to stop the bickering about VAT. It is here and it is for all of us, it is for our children. It is a necessary investment in our country.