Basseterre, St. Kitts – Nevis
People’s Action Movement
May 31, 2010
The ongoing discussions around the soon to be accomplished implementation of the VAT reveal several troubling issues that are bound to worsen an already difficult transition.
This first problem is the inevitable deceit that characterizes the government’s approach to the implementation; beginning with the ludicrous assertion that the current discussions being organized by the Ministry of Finance are actually consultations. As has been pointed out in this and other media, a White Paper is a policy document that outlines what a government will implement. {A Green Paper is a document of ideas and proposals to be discussed and chosen or discarded during consultations} The White Paper is therefore a fait accompli describing exactly what will happen. It should cause a case of déjà vu as people recall the “consultations” on Electoral Reform. After spending millions of dollars on local and international joyrides, the government did exactly what it had always intended in its White Paper.
So, with scarcely eight months to prepare the country will be launched into a new system of taxation without an anywhere near adequate amount of preparation or education. The ideas being pushed by this government that the VAT will not affect the cost of living, will replace existing taxes, will significantly increase government revenue and will not impair the functioning of small businesses are all assertions that can only be categorized as divorced from reality.
The cost of living
The experience of our CARICOM neighbours with the implementation of the VAT has been an initial increase in the cost of living by at least 50%. In fact, this is so common that it is internationally accepted as an integral part of implementing a VAT and the reason for advising governments to give a population at least two years of preparation and education before switching to a VAT. The rise in the cost of living is compounded if a VAT is introduced when an economy is in serious trouble like is the case in St. Kitts and Nevis. When customers face bills for everyday items like groceries and car insurance increased by 20% when they are unemployed like many here are they will try to buy much less. As demand falls the economic will shrink further and the much needed recovery inevitably delayed.
Will replace existing Taxes
The most seductive idea being pushed by the government is that twelve taxes will be removed and so, the implication is, the tax burden will be lessened. The reality is that each of the taxes that will be removed will be replaced by the VAT. This means that the 3% tax on IDD telephone calls will go to 20% (or whatever the VAT will be). The same will apply to all the other taxes and since only the Consumption Tax is currently above the expected rate on 20% at 22.5% all others will experience significant increases.
Will significantly increase government Revenue
A VAT has one purpose which is to enhance government revenues. The current revenue crisis in the Federation has two main causes, firstly the large scale pilfering of government funds for private use whether from siphoning off money from capital projects or simply diverting it into personal accounts {Lex Consulting LLC}. The other is the large scale avoidance of tax obligations mainly by businesses. The scandal of many strong party supporters failing to hundreds of thousands of dollars in electricity bills is one example. According to the Ministry of Finance tax compliance hovers around 60% which is quite low. The benefit of a VAT is that consumers will be unable to avoid it so that money will be collected but it will also induce even more people and businesses to cheat as was the problem in Greece which is now is so much turmoil. An already low compliance rate will fall when businesses are required to pay VAT on credit purchases before receiving any money themselves and inevitably many will under report earnings.
Will not impair the functioning of Small Businesses
The United States does not have a VAT at the moment ironically because times are hard now and that would make things worse. The VAT there is expected by about 2014 after the economic recovery is established. This means that the current accounting software used here will have to be replaced with much more expensive European systems. This will mean more cost. Smaller businesses will have to hire accountants to ensure that they are keeping proper records which will mean more costs. All this added cost will have two effects increases in price and reduction in staff.
The vicious cycle of hardship causing more hardship will be further fuelled.
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