Kaieteur News – The introduction of the Value-Added Tax (VAT) caused a significant uptick in the cost of living, evident through rising prices. Many attributed these price hikes directly to the VAT, leading some to mistakenly conclude that the tax was solely responsible for the increases.
This misconception regarding the VAT’s impact on price inflation was exacerbated by the fact that, around the same time as the VAT’s introduction, the acquisition costs of several imported goods, such as milk and wheat, experienced noticeable increases. In reality, these price hikes were driven by elevated import costs, but in the eyes of the public, the primary culprit appeared to be the Value-Added Tax.
At this juncture, it is prudent to re-evaluate how the tax affects Guyanese consumers and discern who truly benefits from it, as the general public perceives VAT as a burdensome tax.
Undoubtedly, the government has enjoyed a surplus of funds thanks to VAT. It is unlikely that the tax will be reduced, even though its returns have exceeded expectations. The government is gearing up for a spending spree in the coming year and, consequently, requires every cent collected. Thus, there is resistance to any VAT review at this time.
The negative image associated with the tax is less about its rate and more about how businesses have implemented it. The business community has been the primary beneficiary of VAT, capitalizing on weak tax administration structures and incentives to underreport or skim off some of the taxes collected from consumers.
In reality, VAT is not an expense for businesses. When an importer pays VAT on imports, it doesn’t constitute a cost since the importer can later claim a credit for the VAT paid. Therefore, the importer is not obliged to pass on the full VAT amount to consumers, as it doesn’t represent an expense. The importer will reconcile the import VAT when filing returns, along with the VAT paid by consumers, including import VAT and the VAT on their markup.
However, many businesses have resorted to creative accounting practices for tax purposes. They struggled, and perhaps still struggle, to adapt their accounting to a tax that is no longer an expense for them. Consequently, they simply added the VAT to their prices, leading to skyrocketing prices.
The government’s objective in reviewing VAT should be to determine whether businesses continue to treat VAT as an expense. A straightforward consumer survey could shed light on this matter.
The call for a VAT review should not solely revolve around reducing the VAT rate. While there have been requests to lower VAT due to high collection rates, simply reducing the rate may not necessarily translate into more disposable income for consumers. Many businesses may persist in treating VAT as an expense, even if the rate is reduced. Reducing VAT would simply result in lower taxes, not necessarily addressing tax avoidance.
For both businesses and consumers, it is crucial to have a clear understanding of how VAT should be treated. Import VAT is not a cost for businesses, whereas it is an expense for consumers.
Certain prominent businesses in Guyana grasp this concept, and authorities should collaborate with them to prevent consumer exploitation by ensuring that prices do not increase due to VAT.
Ultimately, it is the responsibility of the business community to comprehend how VAT functions and to ensure that prices do not rise because of VAT. Regrettably, many businesses in Guyana engage in creative accounting and attempt to evade their fair share of taxes. Some even reportedly advise consumers that they can obtain products without paying VAT if they decline a bill.
Under the current administration, a VAT review appears unlikely. The administration is reluctant to undertake tax reforms, and given its alignment with the propertied class, it is improbable that any measures will be taken to disrupt their prosperity just two years the next general elections.
(The views expressed in this article are those of the author and do not necessarily reflect the opinions and beliefs of this newspaper and its affiliates.)
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