VAT’s not the problem

There has been misunderstanding among some business people about how the input tax credit works, and the Value Added Tax (VAT) implementation unit is advising persons in need of clarification to come in to talk to them.

Consultant Manager at the VAT office Alma Dougan told Searchlight that this misunderstanding is the reason why some people are saying that the VAT is not just 15%, but compounded.{{more}} This, she said is not true. According to Dougan, the VAT was specially designed to avoid tax being charged on tax.

Amidst the constant ringing of the telephone, Dougan, and fellow VAT unit staffers: Quenella Thomas, Assistant Comptroller at the Inland Revenue Department and Roslyn Warner, Supervisor at the Customs Department, sat down with Searchlight on Tuesday to give their impression of how the first week of VAT had gone.

Thomas said that most of the businesses that were experiencing problems were those that tried to avoid embracing VAT. “They thought it would not come … they did not prepare themselves for it. So now it’s in their face, they need to address it … some people actually had a mind block against it.

But those businesses that actually came into the consultations, the majority of them are doing well.”

Customs Officer Warner explained that if the VAT of 15% is correctly applied to goods which previously attracted a consumption tax of greater than 15%, and everything else remains equal, the item should be cheaper than it had been before. However, if the consumption tax was less than 15%, the item would most likely be more expensive.

Warner worked examples how of an item which previously attracted a consumption tax of 20% under the old system would be priced, and compared it with a similar item imported by a registered business under the VAT system, and another example of an item imported by an unregistered business (see table at right). In both cases, under the VAT system, the item was cheaper than before.

She pointed out that for registered businesses, the 15% VAT paid at the customs should not be added to the value of the import when calculating the mark up, since the input tax paid would be refunded.

They all agreed that the week had been hectic, but this, they said, had been expected. The VAT practitioners commented that consumers are very alert, and had been calling the office mainly seeking clarification as to why prices had increased and if particular businesses were authorized to collect VAT.

Thomas said that the increase in prices was expected while old stock remained in the storerooms or on the shelves of registered businesses, but generally prices should level out when new stock was received.

Dougan emphasized that all input VAT paid by registered businesses will be refunded, not only that paid on their imports and purchases, but also the VAT paid on their rent, electricity, advertising, etc.

The VAT staffers indicated that there were quite a few businesses that had decided to absorb the VAT and therefore not raise prices. These businesses were commended.

Dougan said that while registered businesses are within the law to add the 15% VAT to old, non-zero rated stock, unregistered businesses have no reason to do so. “What increase in cost would they have had between the start of VAT and now,” she asked. She however said that going forward, these unregistered businesses would have to pay VAT when they buy goods and services, and therefore the VAT would become part of their costs because they are not entitled to the input tax credit.

And businesses, whether registered or not, are also being warned not to use the introduction of VAT as an excuse to excessively increase prices, as there are penalties under the law for doing so. Dougan said that already, one business which had advertised an increase in fees had been written to. “From where we sit … we didn’t think that they were justified. … They indicated to persons that the increase was because of transaction costs related to VAT. We have written to them about it. We have given them a first warning and are waiting to see what their response would be.”

She said that for the first month, the unit intends to work with businesses to have them comply. When complaints are received, the unit responds, and where warranted, they advise the business on what should be corrected. Dougan said that if at the end of this period, they see no sign of the concerns being addressed, they would look at the next level, that of taking action as specified in the law. “We however still would like them to comply without using the big stick, we are still trying the carrot. We are still trying to work with them.”

Points to note:

Businesses like banks or medical practices which provide exempt services are still required to pay VAT. As long as they are consuming or renting from an entity which is registered, then the businesses must pay VAT. The VAT will now become part of the cost of providing the service. The businesses are however not authorized to charge VAT to their clients.

All medication (including contraceptives) as classified in Chapter 30 of the customs tariff is VAT exempt whether prescribed by a doctor or not. Dietary supplements and herbal remedies however are subject to VAT.

All bread, whether bought at a bakery or at a shop or supermarket is exempt.

Agricultural products bought directly from the farmer are exempt. However, if agricultural products are bought from a shop or supermarket, the produce will be subject to VAT.