By NIKOLAOS

KARAGIANNIS, Ph.D.

School of Business

and Economics

Winston-Salem State

University North Carolina, USA

THIS article seeks to explain the broad concept of the Value Added Tax (VAT) and detail the process of its implementation in the particular case of Barbados.

A VAT is a consumer tax collected on the selling price of all taxable goods and services. It is a sales tax charged on goods and services at import, and at all stages of sale. The 'value added' is the difference between the sales and the purchase prices of taxable goods. The weight of the tax is presumed to fall on the final consumer, and thus the tax burden is distributed in relation to consumer spending.

VAT is considered to be a more efficient way of collecting revenue and a transparent tax, since people know how much VAT they pay and when they pay it. It is paid by all consumers. In theory, VAT systems are introduced with the intention of achieving revenue neutrality with the taxes they replace. However, in many cases (for example, Trinidad and Tobago and Jamaica), revenue exceeded estimates by measurable amounts.

Many argue that VAT is more equitable because it lowers the tax rate and broadens the base. But this is countered by those who point out that a wide cross-section of people pay the tax regardless of their income level. Indeed, whenever a broad-based sales tax of this nature is introduced, there is a concern that its regressive effects will fall inequitably on economically-challenged persons. Given this vein of thought, theorists contend that VAT may be both an efficient system and an inequitable one, since it levies a greater burden on those with lower incomes than others. However, governments can provide incentives to industry and alleviate pressure on the economically dispossessed. Where there is evidence that the most vulnerable members of society are at risk, there are measures that can be employed to protect the vulnerable.

The introduction of a VAT system requires: (1) organisational issues (for example, a separate VAT office); (2) staffing requirements and training; (3) lead-in time; and (4), publicity and taxpayer information.

The main issues involved with VAT administration are: (1) taxpayer identification; (2) invoicing and bookkeeping requirements; (3) filing and payment requirements; (4) VAT audits; (5) refund; (6) penalties; and (7), costs of VAT administration.

The VAT was introduced in Barbados on January 1, 1997, at a standard rate of 15 per cent, as the country joined the growing number of states that have implemented the tax in recent times. The VAT first emerged in France in 1927 as a simple turnover tax. Since then it has gone through a number of refinements, and today it is used in more than 60 countries around the world.

The VAT's taxonomy and administrative expediency makes it the internationally-accepted form of indirect taxation. In England, the standard rate is 17.5 per cent, and in France is 18.6 per cent. In the Caribbean, all of Trinidad and Tobago, Jamaica, Belize and Grenada have had the VAT or some variant of it. Trinidad and Tobago implemented VAT in January 1990, while Jamaica introduced the General Consumption Tax (GCT) in 1991. Belize introduced the VAT in April 1996, but Grenada introduced and abolished the VAT in a very short period of time in the 1980s. Trinidad and Tobago, Jamaica and Belize all have rates of 15 per cent.

An examination of the history of VAT systems in several countries, including Trinidad and Tobago and the UK, demonstrates that, once introduced at the correct rate, a country may be able to retain the rate for several years. Economists assert that a standard rate below 10 per cent is likely to be inadequate for any VAT system. In the case of Trinidad and Tobago, there has not been any change in their rate of 15 per cent over its 13 year. The system in the UK, which was introduced on 1 April, 1973, has averaged one change every six years. This was intended to offer greater stability than the Consumption Tax in Barbados, which has suffered changes in rates on an almost annual basis.

Among the reasons for Barbados' implementing the VAT was (1) to reduce the complexity of the country's indirect tax system; (2) to reduce the high level of duties and taxes on imported extra-regional goods; and (3) to avoid cascading. The country's indirect tax system was considered to be very complicated and filled with anomalies. There were a number of problems, including multiple rates, cascading, non-transparency and arbitrariness of exempt status. Apart from consumption tax, stamp duty and import duty, there were 42 minor taxes that included excises, hotels and restaurants, licenses and services taxes.

Although the complexity of the Barbados system had been known for some time, efforts to correct it had been limited. The only attempt was the failed effort at a sales tax in the 1970s. In 1979, Professor John F. Due, of the University of Illinois, did a comprehensive study entitled Indirect taxation in Barbados. His mandate was to recommend measures to aid development, simplify the indirect tax structure, improve the operation of indirect taxes and improve equity. As a result of the study, it was recommended that since the single-stage sales tax and the consumption tax were unsuitable, a VAT should be implemented. However, instead of implementing the recommendation, the Barbados government sought to expand the consumption tax regime, and added a stamp duty in the early 1980s.

Intense discussions on serious indirect tax reform came to the forefront when Barbados underwent stabilisation and structural adjustment under the auspices of the International Monetary Fund (IMF) in 1991. The government, with the assistance of two IMF consultants, set about preparing empirical estimates of the impact of the proposed VAT and excise taxes in Barbados. Two reports came out, the first entitled Barbados: Reform of Indirect Taxation, by J. Bristow and B. Wurtz on August 6, 1992, and the second entitled, Barbados: The Structure of a Value-Added Tax, by J. Bristow on September 8, 1993. The results were "back-of-the-envelope" estimates, and were initially accepted by the Sandiford administration as the basis for implementation. Out of the estimates, a VAT rate of 15 per cent was deemed adequate to replace the plethora of indirect taxes.

In order to coordinate the extensive work of implementing a VAT, Barbados established a VAT Implementation Unit (VIU) in 1993. VIU was established as part of the Ministry of Finance and Economic Affairs. Three local officers were seconded to the unit, and in February 1994 were joined by consultants skilled in policy matters, law, computerisation, organisation and management related to VAT. The VIU also engaged the services of Professor John F. Due as non-resident advisor on policy matters.

In January 1994, a technical cooperation agreement was entered into by the Inter-American Development Bank (IDB). Under the agreement, funds were allocated for the Customs and Excise Department, and for the design of the VAT. The loan was provided to finance the improvement of tax administration and government expenditure management, as well as a programme of institutional strengthening. A contract was signed in July 1994 with the Inter-American Centre of Tax Administrators (CIAT). The CIAT contract aimed at strengthening Barbados' fiscal administration by enhancing operational efficiency.

When the Arthur Administration came to office in 1994, the implementation of the VAT was postponed to April 1996. A request was made to the IMF Fiscal Affairs Department for technical assistance to do a more extensive study to estimate the VAT rate scientifically, as well as the impact of the tax on revenues, prices and the productive sectors. The project team comprised a local consultant, an IMF consultant, the economic advisor to the Prime Minister and an economist from the Central Bank of Barbados. The team met for the first time on November 7, 1995, to establish modalities and to prepare outlines for the assignment. It was soon discovered that an enormous task involving research within the public and private sectors had to be undertaken. The report was completed in April 1996. As a consequence, the date for implementation of the VAT was postponed to January 1, 1997.

The VAT Implementation Unit, in association with the Barbados Government Information Service (GIS), started the public relations outreach programmes in May 1995. To effect this goal, the programme identified four main target audiences: (1) the private sector (retailers, manufacturers, importers and managers); (2) the government sector agencies involved in the administration of the system; (3) members of the general public (consumers)' and (4) the school system. In addition to the public campaign by the GIS, workshops and seminars were held to further educate the public and business sectors. Members of the VIU were invited to make presentations at these events or television and radio appearances. A couple of pamphlets and booklets were released as part of the effort.

The drafting of the legislation was undertaken by the Chief Parliamentary Counsel (CPC) with the assistance of a Canadian legal consultant. The legislation was based on the Canadian, New Zealand, Jamaican and Trinidadian Acts. The first draft was completed in November 1994, and was submitted to the CPC. The refined draft was circulated for discussion during August 1995. It was examined by businesses, various organisations, and other legal practitioners who submitted comments. A session was convened in November 1995 to discuss the draft Act. Several comments were received by the Ministry of Finance, and each was scrutinised - not only on the basis of written comments, but also in conjunction with meetings between the VIU and the Ministry. The major features of the Act were passed by the Barbados House of Assembly and assented to by the Head of State on September 9, 1996. This paved the way for the registration process to take place on October 1, 1996. A copy of the draft regulations had been circulated, but these only came into effect from the date the Act took effect, January 1, 1997.

The move to the new tax system in Barbados created its problems. Some were conceptual, while others were administrative. There were innate fears of the abuse of the system by businessmen, and the general public was keen to know how the authorities were planning to combat the potential for such abuse. Admittedly, history provides reason for this fear. However, this fear was allayed by recognising the fact that, aided by the presence of full computerisation, unnecessary delays had to be avoided. The last thing the authorities wanted was a high incidence of avoidance and evasion. Only those traders who were registered, and who displayed a Certificate of Registration, were legally authorised to charge VAT on the taxable goods and services they were selling. On the other hand, those traders who were not registered were paying VAT on the goods they were buying, but were not legally authorised to charge VAT on the goods they were selling. Questions were also raised over the issue of lower rates on certain commodities, such as food and concessions on other items. The Government had to decide very carefully how many goods and services would be zero-rated and exempted.

An administrative issue that was a critical feature of implementation was timing. The beginning of a period, especially a fiscal or financial year, seems to have been the rationale for the proposed April 1, 1996, implementation. However, with conceptual and logistical difficulties this was not a reality. Timing was also critical for businesses, as they needed to know how to manage inventories and run down stocks in anticipation of the new tax. For the merchants who had bonded warehouses, their concerns were whether to stock up for the Christmas season.

Apart from the inventory issue, no other issue was as contentious as the treatment of tourism (especially the accommodation sub-sector). Although VAT was applied at a rate of 15 per cent on most goods and services, it was applied at a concessionary rate of 7.5 per cent on accommodation in hotels, inns and guest houses. The policy of a VAT of 7.5 per cent on tourism accommodation resulted in a loss of $7 million to the Barbados government - and a concession to the industry.

As the Bahamian economy is a predominantly services driven one, the real challenge for this country's policymakers is to introduce a VAT system that could achieve certain economic (especially fiscal), social and developmental objectives, while avoiding any adverse effects on tourism, bankingand associated services. Therefore, whatever the components of the Government's role in the Bahamian economy, it must ensure that those areas of serious social, economic and political significance receive special attention.