By Patrick Hoyos From Caribbean360

BRIDGETOWN, Barbados, Thursday November 6, 2014 – Regaining control of the VAT base is critical in a small open economy such as Barbados that relies heavily on imports, says a new IMF report, and the main problem is tax does not produce enough revenue for the Treasury, because there are too many zero-rated items.

The report, titled “A Tax Reform Roadmap For Simplicity And Revenue Buoyancy,” produced for the Freundel Stuart Administration by the Fiscal Affairs Department of the IMF, says the VAT base haa been eroded by extensive domestic zero-rating and exemptions.

As a result, the report advises the government to eliminate, as soon as possible, all VAT exemptions at the import stage, unless required by international conventions.

It also recommends the reduction of the VAT rate to 16 per cent to partly offset the removal of almost all zero-rating, and to return the reverse tax credit to its former level to further compensate the lowest-income households.

Over the medium and long term, the IMF report says the government should raise the registration threshold to an amount between $200,000 and $300,000 and index for inflation annually for the future.

The reason for this, the report said, was that of the just-over 6,000 VAT-registered firms in Barbados, those with a turnover of $1 million or more accounted for nearly 87 per cent of the total VAT paid, while registrants with turnover of between zero and $300,000 accounted for under 4 per cent, but comprised over half of the total number of registrants. Removing them would save time and money for the Barbados Revenue Authority. The remaining registrants would still bringing 96% of current revenue.

And despite the multi-decade concessions made to the Sandals group and recently extended to local hotels, the report also recommends raising the rate on tourism supplies towards the standard rate over the next 3-5 years. Finally, it suggests that government extend the VAT base to include new housing sales, general insurance, fee-based financial services, agriculture, gambling and lotteries.

The value added tax (VAT) is levied on most imports of goods and the supply of goods and services within the domestic economy since January 1, 1997. The VAT currently has three rates – a standard rate of 17.5 per cent, a reduced rate of 7.5 per cent applied to certain supplies related to tourism, and a zero rate, which applies to exports and to a wide array of domestic supplies.

The Value Added Tax brought in $863 million to the Treasury last year, or nearly one-third of total tax revenue, but it has fallen from its peak of $940 million, which was achieved in fiscal 2012, the first full year of the tax at 17.5%.

According to the report, the numerous instances of zero rating for both domestic and imported items – and what it called overly-generous refund provisions – have undermined the VAT. Not only do they reduce the amount collected by the tax, but in some cases, for example, agriculture and food, and the financial sector, they remove large parts of economic sectors from the VAT net altogether. This causes the VAT burden to be distributed unevenly and unfairly, and makes the tax harder to assess and more costly to collect.

The report said that the fastest and safest way to collect VAT and all other indirect taxes is through Customs when the goods arrive at the country’s ports of entry, and this process also protects collections down the supply chain in the domestic economy.

Zero rating, when it applies to both domestic supplies and imported goods, said the report QUOTE “breaks the VAT chain and invites revenue leakage and fraud – for example, submission of fake invoices showing VAT paid in order to claim fraudulent refunds,” UNQ

Exemptions also break the chain but they pose much less of a revenue risk, it said. However, the IMF said the list of VAT exemptions goes beyond usual practice, and there was little justification for such an extensive list of exemptions.

Minister of Finance Chris Sinckler has said that getting more revenue out of existing taxes rather than introducing new taxes was the government’s preference, and he is expected to take on board at least some of the IMF’s recommendations in his Budget Speech expected before Christmas.

IMAGE: Pat-Hoyos-The opinions expressed in this commentary are solely those of Pat Hoyos. Pat Hoyos is a business writer and publisher of the Broad Street Journal.

For more on this story go to: http://www.caribbean360.com/business/patrick-hoyos-imf-show-zero-tolerance-for-zero-rating-in-barbados-vat-regime#ixzz3IIuzn7SW