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VAT AT A GLANCE BOOKLET

1. IS GUYANA THE ONLY COUNTRY TO INTRODUCE VALUE-ADDED TAX?

Guyana is not the only country to introduce Value-Added Tax (VAT). VAT was first introduced in France in 1947. Today, it has been implemented in more than 120 countries, including six CARICOM countries, namely, Barbados, Haiti, Jamaica, and Trinidad and Tobago and, more recently, during this year, Dominica and Belize.

2. WHY IS GUYANA IMPLEMENTING A VALUE-ADDED TAX?

The Government has decided to reform the taxation system, replacing old inefficient taxes with a modern VAT and a separate Excise Tax regime on four selected goods (Petroleum products, Tobacco and tobacco products, Alcoholic beverages, Motor Vehicles). The collection of these taxes will commence on January 1, 2007. Among the reasons for this major reform initiative are:

1. It broadens the tax base

The present consumption tax system focuses mainly on taxation of goods. Most services are taxed only indirectly on the inputs.  This has resulted in high rates of taxation on most goods.   There is clearly a need to reduce the level of taxation on goods and extend the tax base to include more services so as to spread the burden of the taxes more equitably.

1. It makes tax evasion more difficult and creates an incentive to comply with the tax laws.

Under the VAT system, businesses have an incentive to register so that they will be able to reclaim their input VAT whereas under the current consumption tax system they bear the cost of the consumption tax they pay on their inputs. In addition, under the VAT system, businesses have an incentive to purchase their supplies from other registered businesses so that they can benefit from the input credits. This creates a strong incentive for broad-based registration and compliance with the tax laws.

1. It reduces inefficiencies, distortion and cascading in the tax system.

The present tax structure comprises of both direct and indirect taxes.  All of the existing indirect taxes are targeted towards consumption.  However, these consumption taxes carry different names, are levied at various stages and with multiple rates, and are regulated by different pieces of legislation. Furthermore, these taxes are applied mainly on goods, and only on a few services. This has resulted in inefficiencies and inequities within the system and, in some sectors, high costs of conducting business. In many instances, one item is taxed twice with the same tax type before it is sold to the final consumer. 

1. It makes the country more attractive for investment purposes and exports more competitive.

Apart from the domestic situation, exports to the regional and international markets are being adversely affected by the current system as the cost of these exports includes domestic taxes.  The current system does not allow for refund of taxes paid on inputs that go into goods produced locally for export and, as a result, these goods become less competitive since their prices include a significant amount of domestic taxes. In addition, currently, investment in capital goods attracts Consumption taxes which are generally not refundable.  VAT relieves the tax paid on capital expenditures and other business expenses by allowing businesses that are registered to claim a full credit for taxes paid on purchases.  The VAT system will reduce the cost of doing business.

            v)         It prepares the country for compliance with our commitments under various international trade agreements and for anticipated shifts in the productive structure of the economy.
Over time, a substantial part of Government’s revenues, would be significantly reduced by its commitments to CARICOM and by ongoing negotiations with WTO and FTAA.  In addition, local and international trends point towards a shift from the traditional goods-producing sectors to the service sector, which at present is largely exempt from indirect taxes, thus requiring major adjustment to the tax base of the economy. The introduction of VAT anticipates and addresses this issue.

            vi)        It has been advocated as being appropriate by international authorities and domestic stake holders
A recent study by the OECS Tax Reform Commission, initiated by the Monetary Council of the Eastern Caribbean Currency Union, recommended the implementation of VAT as part of a general and comprehensive tax reform programme. In addition over the years all of the major private sector unberella bodies have been advocating the introduction of VAT and the removal of the inefficient Consumption Tax.  

            vii)        Government regards the introduction of VAT as part of an ongoing tax reform process.
Tax reform is an on-going process. Government expects to begin that process with the current major overhaul of the current indirect tax system.

3.   HOW DOES VAT WORK?

Under the VAT system, both the producers and consumers will benefit.  The effective tax rate for most goods will be reduced and the base will be broadened to include most services.  Neither goods nor services will be taxed twice as businesses registered for VAT purposes will be able to collect the tax and take a credit for taxes paid on their inputs/purchases.  The difference will be paid to the Government. 
It is important to note that the business person does not pay over to the GRA all the VAT collected from consumers.  The registered business person will deducts all the tax that he/she pays on purchases for the business from the tax collected from consumers and remits the difference to GRA, if there is a balance.  In cases where the VAT paid by the business person on purchases for the business is greater than the VAT collected on sales to consumers, the business person will get a refund of the excess amount. This will allow Government to collect portions of the tax at different stages.

4.   WILL VAT INCREASE THE COST OF LIVING?

The Government has always maintained that it will continue to monitor and study how VAT will affect consumers and the cost of living and take appropriate corrective action. It would be expected that some goods and services will increase in prices, while some goods and services will decrease in prices. However, overall, a net increase in the cost of living is not expected. In addition, there are many goods that are subject to the payment of 30% consumption tax, and the prices of these goods are expected to decrease since the goods will be subject to the payment of VAT at a rate of 16%. These goods include:

See appendices attached for examples of items before and after VAT.

In the interest of ensuring that consumers and businesses are not adversely affected when VAT is introduced, various measures are now being announced to grant relief to consumers and businesses from the payment of VAT on a range of goods and services. These measures will keep the cost of basic consumer goods and services low, thereby preventing an increase in the cost of living.

In this regard the following items will be Zero Rated for VAT with effect from 1st January, 2007:

1. Basic Food items –
1. Bread
2. Rice
3. Sugar
4. Cooking Oil
5. Milk
6. Baby Formula
7. Split Peas
8. Onion
9. Garlic
10. Potatoes
11. Fruits except apples, grapes, dates, prunes, peaches, plums and strawberries.
12. Vegetables except olives, carrots, black eye peas, pigeon peas, chick peas, (garbanzos), radishes, broccoli, cauliflower.

1. Medical services, and prescription and over the counter drugs
2. Education services and materials (including books)
3. Electricity
4. Water and Sewerage Services
5. Locally produced building materials for construction such as sand, stone, lumber
6. Vehicles for public officers/officials and remigrants
7. Vehicles four years and older
8. Computers
9. Sports gear subject to the requirements under the first schedule of the Customs Act
10. Small gift parcels

The following items will be exempt for VAT with effect from 1st January, 2007:

1. Kerosene
2. Liquid Propane Gas
3. Gasoline
4. Diesel

and the Excise Tax rates on these items adjusted accordingly where appropriate.

On motor vehicles, the government wishes to make explicitly clear that the excise tax on motor vehicles will be set at such a level to ensure that there is no increase in the tax applied.

4. HOW WILL THE GOVERNMENT DEAL WITH SPECIAL CASES SUCH AS:

1. REMIGRANTS – Relief will be granted from the payment of VAT on personal effects and vehicles. These items will be zero-rated for VAT purposes.

1. INDUSTRY

   Changes are being made to provide relief to industries and make it easier for them to fulfill their responsibilities with respect to VAT. The areas in which businesses will benefit include:

1. Stock on hand – businesses will be granted relief for consumption tax paid on goods imported if certain requirements are satisfied. Specifically, businesses which have been registered for VAT before the 15th December and which have stock that they imported during the month of December and still on hand at the end of December, will be entitled to claim the consumption tax, limited to the VAT rate, paid on those imports, if applicable, as input tax credit. These businesses would be required to submit a claim that would stipulate that the stock has been in existence at the end of the year and that they were disposed of in the course of furthering a taxable activity of the business, during the period January- March 2007. 

1. Tax invoices – The requirements for tax invoices are being made more flexible or reasonable in order to make it easier for businesses to comply.

1. Locally mined raw gold and diamonds – A supply/sale of locally mined raw gold and diamonds will be exempt from the payment of VAT.
1. Incentive regimes – Relief will be given to incentive regimes such as:
1. Businesses that have entered into new investment development agreements with the government may benefit from special treatment on their inputs as reflected in their respective agreements. Existing investment development agreements would be restructured to grant appropriate relief.
2. Exporters who will pay input VAT on imports but will not collect output VAT on exports – Businesses that are engaged in exporting at least 50% of its products will be granted relief from the payment of VAT on goods which are being imported for manufacturing and processing purposes, and are subsequently exported. The effect of this would be that the businesses will not pay VAT on imports, and the issue of waiting for a long period to obtain a refund of the VAT paid on imports will not arise.

iv.     Large Capital Items - large capital items, such as bulldozers, excavators, tractors, and heavy duty industrial machinery for which they currently pay zero consumption tax, will be zero-rated subject to such conditions as will be stipulated in the law.
 

1. Fertilizer and Pesticides – Fertilizers and Pesticides will be zero rated from the payment of VAT to give relief to farmers and the agriculture sector in general.

5.  Other adjustments

1. Government Procurement – goods and services imported by Government under foreign-funded projects will be zero-rated for VAT purposes so as to preserve the existing treatment whereby contractors who are engaged in such projects are granted exemptions from the payment of consumption tax. In addition, works and services purchased by Government will be zero-rated for VAT purposes.

1. Specified state agencies, including those that perform regulatory functions, will not be required to register for VAT. These will be listed in a schedule.

1. The Travel Voucher Tax on airline tickets and the Premium Tax of foreign insurance premiums will be reinstated.

1. Government is also very serious about requiring the highest level of compliance with the VAT and Excise Tax laws. In this regard, the relevant sections of the law are currently being reviewed to ensure that the most senior executive officers of the company will be held responsible if their business fails to register for VAT when it should, fails to charge VAT when it should, submits a inaccurate VAT return to the GRA, or fails to pay over to the GRA VAT collected.

The Government is convinced that these measures are necessary and appropriate in the context of its poverty alleviation policy agenda, and the imperative of ensuring high quality affordable social services in order to achieve the Millennium Development Goals, and in the interest of increasing Guyana’s attractiveness as an investment destination which would facilitate high levels of real economic growth.

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