The VAT is a consumer tax collected on the selling price of all taxable goods and services. The VAT 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 purchases 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. VAT 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. An objection to this point is that a wide cross-section of people pays the tax regardless of their income level. Indeed, whenever a broad based sales tax of this nature is introduced there is the concern that its regressive effects will fall inequitably on the economically challenged persons. In this vein of thought, theorists contend that VAT may be an efficient system but an inequitable one, since it exacts a greater percentage of the disposable income of the economically challenged persons than it does of the others. However, the governments can employ techniques to 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, separate VAT office), (2) staffing requirements and training, (3) lead-in time, and (4) publicity and taxpayer information. Main issues of VAT administration are: (1) taxpayer identification, (2) invoicing and book-keeping of requirements, (3) filling and payment requirements, (4) audit of VAT, (5) refunds, (6) penalties, and (7) costs of VAT administration.
The VAT was introduced in Barbados on 1 January 1997 at a standard rate of 15%, as the country joined the growing number of states that have implemented the Value Added Tax in recent times. The VAT first emerged in France around 1927 as a simple turnover tax. Since then it has gone through a number of refinements and today it is used in more than sixty countries around the world. The VATﾒs taxonomy and administrative expediency makes it the internationally accepted form of indirect taxation. In England the standard rate is 17.5% and in France is 18.6%. In the Caribbean, Trinidad and Tobago, Jamaica, Belize and Grenada have all had the VAT or some variant of it. Trinidad and Tobago implemented the VAT in January 1990, 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. Also in the region, Trinidad and Tobago, Jamaica, and Belize all have rates of 15%.
An examination of the history of VAT systems in several countries, including Trinidad and Tobago and England, demonstrates that, once introduced at the correct rate, a country may be able to retain the rate for several years. Fiscal economists assert that a standard rate below 10% 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% over the 13 years of the system. The system in England, which was introduced on 1 April 1973, has averaged one change every 6 years. This was hoped to offer a greater likelihood of stability than the Consumption Tax in Barbados, which had tended to suffer changes in rates on an almost annual basis.
Among the reasons for Barbadosﾒ implementation of the VAT was (1) to reduce the complexity of the countryﾒs indirect tax system, (2) to reduce the high level of duties and taxes on imported extra-regional goods and (3) to avoid cascading. Indeed, the countryﾒs indirect tax system was considered to be very complicated and filled with anomalies. There were a number of specific problems inclusive of 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 system had been known for some time, efforts to correct it had been limited. The only attempt to ever correct this was the failed attempt 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 the 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 Government sought to expand the consumption tax regime, and add a stamp duty in the early 1980s.
Intense discussion of serious indirect tax reform came to the forefront when Barbados underwent stabilisation and structural adjustment under the auspices of the International Monetary Fund in 1991. The Government with the assistance of two IMF consultants set about the task of preparing empirical estimates of the impact of the proposed VAT and excises in Barbados. Two reports came out: the first entitled “Barbados: Reform of Indirect Taxation” by J. Bristow and B. Wurtz on 6 August 1992, and the second entitled “Barbados: The Structure of a Value-Added Tax” by J. Bristow on 8 September 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% was deemed adequate to replace the plethora of indirect taxes.
In order to coordinate the extensive work of implementing a VAT, the government of 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 a VAT. Also, the VIU engaged the services of Professor John F. Due as non-resident advisor on policy matters.
In addition, 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. Consequent upon the technical cooperation agreement, a technical cooperation agreement contract was signed in July 1994 with the Inter-American Centre of Tax Administrators (CIAT). The CIAT contract aimed at strengthening the stateﾒs 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. In addition, 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 VAT 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 7 November 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 from 1 April 1996 to 1 January 1997.
The VAT Implementation Unit in association with the 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 in order 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 in 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 passed by the house of Assembly and assented to by the Head of State on 9 September 1996. This paved the way for the registration process to take place on 1 October 1996. A copy of the draft regulations had been circulated but these only came into effect from the date the Act took effect, 1 January 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 incidence of 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 that the authorities would wish is 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 like 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 which was a critical feature of implementation was timing. The beginning of a period especially a fiscal or financial year seemed to have been the rationale for the proposed 1 April 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 especially for the Christmas season.
Apart from the inventory issue, no other issue was as contentious as the treatment of the tourism (especially the accommodation sub-sector). Although the VAT was applied at a rate of 15% on most goods and services, it was applied at a concessionary rate of 7.5% on accommodation in hotels, inns and guest houses. The policy of a VAT of 7.5% on tourism accommodation resulted in a loss of $7 million to Government ﾖa concession to the industry.
As the Bahamian economy is a predominantly services driven one, the real challenge for the countryﾒs policy-makers would be to introduce a VAT system which could achieve certain economic, social and developmental objectives while avoiding any adverse effects on tourism, banking and associated services. Therefore, whatever the components of Governmentﾒs role in the Bahamian economy, it must ensure that those areas of serious social, economic and political significance receive special attention.
