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Friday, 09 March 2007 |
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The proposed legislation provides an option for small businesses to
voluntarily register for VAT. However, this option becomes operative
after one year of introducing the tax. A small business which
usually sells to a registered VAT business may find it beneficial to
register under the VAT so that the registered business buying from
him can claim a tax credit on purchases made. A registered small
business would enjoy the same benefits from the VAT system as
large businesses.
Businesses enjoying Fiscal Incentives
Businesses with existing fiscal concessions would continue to
receive those concessions. However, they will be required to pay
VAT on imports and domestic purchases. Furthermore, they will be
required to register which will entitle them to charge VAT on taxable
sales and submit a claim for VAT paid on inputs.
ECONOMIC AND SOCIAL IMPACT
Economic
The proposed VAT as an instrument of policy has proven to be very
effective in promoting economic efficiency, removing distortion of
prices in the production process, and minimizing cascading of taxes.
The economic efficiency impact of the VAT relies on the fact that it
is levied ultimately on consumption, not on businesses. The input
tax credit mechanism ensures that the VAT is not imposed on intermediate
transactions between businesses.
This means that the VAT will remove tax cascading as currently
exists under the GCT. Cascading is the imposition of consumption
tax at various stages of the tax production – including costs, until
the commodity is sold eventually to consumers. VAT will be applied
on the value added at each stage of the production process but the
mechanism allows businesses to claim a credit for inputs through
the invoice – credit or input tax credit method. This characteristic
of the VAT allows Grenadian production of goods and services to be
domestically and internationally competitive as domestic costs are
lessened and exports would not be taxed.
VAT will be applied at a rate much lower than the GCT. It is envisaged
that VAT will transform the overall tax system making it simpler,
reducing the cost of compliance by businesses and, thereby,
raising the effectiveness of tax collection. Under the VAT, the investment
climate would be strengthened as the full crediting of investment
goods will lower the cost of such investment.
VAT, as designed, is intended to be revenue neutral based on the
revenue implication studies conducted. However, with the broadening
of the tax base through the narrowing of exemptions and coverage
of previously untaxed supplies, the revenue yield from the VAT
could be expected to be at least greater than the revenue from the
taxes the VAT would have replaced.
With the introduction of VAT, prices in the economy will increase for
some goods and reduce for others.
The overall effect will be a small initial increase which will soon
level off as businesses adjust to the new VAT system and “old stock”
is used up.
Social
The alleviation of poverty is a fundamental element of the Government
of Grenada’s economic development programme and strategy.
In this regard, the proposed VAT took into account policies aimed at
cushioning any negative impact the VAT may have on disadvantaged
social groups. These policies include the exemption and zero rating
of the following goods and services:
Zero rating basic foods such as rice, sugar, flour, milk, baby foods,
etc
Zero rating certain drugs and pharmaceutical products
Exemption of medical services including dental, optical, and veterinary
services
Exemption of educational services
Exemption of residential rent
Exemption of VAT on electricity consumed below 100 kw
Exemption on public transportation.
Implementation
The implementation process for the VAT has the following components:
Enactment of VAT & Excise Tax legislation
Publicity (consultation and taxpayer education)
Upgrading IT systems at IRD and Customs
Training of technical and support staff at both the Inland Revenue
and Customs Departments
Registration and training of Taxpayers.
Government has established three committees to supervise and
manage the process of introducing the VAT in October, 2007. These
committees include:
Steering Committee chaired by the Minister of Finance and comprising
representatives from the private sector, Official Opposition,
Labour Union and the Grenada Industrial Development Corporation.
This committee is responsible for providing policy guidelines to
the other committees involved in VAT implementation.
Technical Committee chaired by the Permanent Secretary of the
Ministry of Finance. This committee is responsible for monitoring
the work of the implementation team.
Implementation Team managed by a Coordinator and supported by
technical officers from Customs and Inland Revenue is responsible
for the daily co-ordination and implementation of the activities of
the VAT Action Plan.
The Implementation team would facilitate a series of consultations
on this White Paper and the draft legislation leading up to the passage
of the Bill.
The public awareness and education campaign is scheduled to begin
in earnest in January 2007, and would include circulation of pamphlets,
brochures, posters, and other material useful to the public.
Advisory visits would be conducted with private sector firms to discuss
compliance matters and to clarify any concerns with regards to
the administration of the VAT.
Transitional Issues
The proposed legislation would contain transitional arrangements
to facilitate smooth VAT implementation. In principle, no credits
would be allowed in lieu of input tax credit for consumption and
other taxes paid on imports (and domestic supplies) prior to implementation
date. Businesses would have the option of depleting
stocks to minimum levels or utilize bonded warehouses.
CONCLUSION
The proposed VAT is intended to be the gateway to Grenada’s tax
reform programme. It is hoped that it will bring higher levels of
efficiency in the tax system, thereby encouraging voluntary compliance
amongst tax payers. We solicit your support and ideas to realize
the smooth and effective implementation of VAT.
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