Time to revisit VAT

The small business community and the wider business sector waited expectantly for the 2024 Financial Statements and Budgetary Proposals, a key feature of the presentation of the Estimates of Revenue & Expenditure for the ensuing fiscal year, to be presented by the Minister of Finance.

While at its core definition, the Budget is designed to address revenue-generating measures to close the gap between government’s expected revenue and projected expenditure for the budget year, the public has become accustomed to some relief being provided through this policy instrument. Quantitative information is traditionally given on revenue to be generated from a variety of incentives, capital projects and proposals to drive economic activity. This allows for a contrast to be done of the projected expenditure presented during the Estimates debate.

It is against this backdrop that many were expecting some reprieve from the high level of taxation, which arguably contributes to the high cost of doing business in Barbados. Though not an exhaustive list, some areas businesses were hoping to be reviewed include the sewage tax, particularly for agro-processors, the foreign exchange tax on online transactions, the high cost of fuel at the pump, and the burdensome cost of compliance for companies. While there is a view that governments do not easily give up revenue, the deleterious impact of an overtaxed business sector is clearly producing diminishing economic returns. There is little or no growth in the productive sectors, with the exception of tourism which is being treated as a cash cow for the economy.

One opportunity missed is the Value Added Tax (VAT). This area can be considered a low-hanging fruit that is ripe for a revision in the amount of VAT charged and/or the threshold of the tax for businesses. The former approach could easily have provided ease in the cost of living for the average consumer, while the latter would further ease the administrative burden on micro firms, thus spurring employment generation.

In considering the VAT threshold for Barbados, the question of statistical or economic significance is important. What is the impact on the revenue of the government and the cost on the firm, particularly small firms?

The VAT threshold is the volume of annual turnover at which businesses are required to register for VAT. When VAT was first introduced, small businesses were exempt from having to charge VAT if their annual income was less than $60 000. A 15 per cent basic VAT rate was applied to goods and services and a 7.5 per cent concessional rate was set to accommodation in hotels, guest houses and inns as well as several zero-rated and exempted items. The VAT rates remained unchanged until December 2010, when the standard VAT rate was raised to 17.5 per cent, the concessional rate was increased to 8.75 per cent and the VAT threshold was revised to $80 000. Later in 2015, the threshold was further increased to $200 000.

VAT is applied to the difference between a business’ sale of goods and services (to businesses or consumers) and its purchase of inputs from other businesses. It is thus a tax on the value added to a good or service at each stage of the production process. Gale et al (Entrepreneurship and Small Business Under a Value-Added Tax, William Gale, Hilary Gelfond, Aaron Krupkin, March 2016, Economics Studies at Brookings) argued that the net revenue collected from including very small businesses is usually meagre and could be negative. The government’s costs of collecting and enforcing the tax at every small business may be excessive and compliance costs are relatively high for small businesses (as a share of revenue) due to the high fixed costs of invoice and tax preparation. Research from three studies showed that the compliance burden as a percentage of annual sales in Canada, New Zealand and Australia falls with income, from approximately two per cent for businesses with less than USD$50 000 in annual sales to 0.04 per cent for businesses with more than USD$1 million in sales.

A scan of some of the OECS countries suggests that Barbados’ VAT rate is highest at 17.5 per cent with St Kitts & Nevis closest at 17 per cent.

All countries with thresholds allow small businesses to register for VAT if they choose to. Unregistered small businesses do not have to collect or remit VAT on their sales, but they cannot use the tax credits generated by their purchases. Businesses that do register owe VAT on their sales, but they can deduct the VAT paid on inputs. While firms exempt from VAT are not allowed to reclaim the related input tax paid to suppliers, sellers of goods or services subject to zero-rate taxation are allowed to do so even though they do not pay any tax on their sales.

With the increased administrative cost of compliance, a review is needed in 2024 of the VAT threshold. Much has changed in the business environment since the last increase in 2015. The 17.5 per cent VAT rate was announced in 2010 as a temporary measure but appears to have morphed into a permanent feature in the overall tax regime. With the relevant policy statement, VAT can be a panacea of relief to an otherwise burdened population.

The Small Business Association of Barbados (www.sba.bb) is the non-profit representative body for micro, small and medium enterprises (MSMEs).