THE VISIBLE TAX
Peeping Tom
Kaieteur News
January 14, 2007
Just what is the PNCR taking to the streets over? Is the PNCR taking to the streets over casino gambling legislation and over the effects of the Value Added Tax?
Before the supporters of the PNCR exercise their democratic right to protest against the VAT, I would urge them to recall that the PNCR supports VAT as a system of taxation for Guyana . And before they take to the streets screaming about how that party called for a lowered tax rate, I would like for them to find out just how much less than the present 16% did the PNCR call for.
Before the protests begin to shut the country down over casino gambling, I would like to ask the supporters of the PNCR to understand that it was the PNC which reintroduced certain forms of public gambling back into Guyana .
While I feel sorry for the PNCR and the fact that they could only muster 35% of the popular vote during the last election, I feel even more sorry for the Commissioner of Taxes. He is right about what is happening out there but he is wrong in his approach to the problem. The government was also wrong about some of the assumptions made and thus finds itself asking the Commissioner of Taxes to fetch a burden that is not of his creation.
The first wrong assumption was that consumers would react favorably to seeing a tax that was previously “invisible”. As the saying goes, what you do not see cannot hurt you. For years consumers were not seeing the taxes they paid. And import taxes were simply passed onto them without them knowing. What many of them did not recognize was that part of the price they paid, contained taxes which were simply passed on in the final price of the item. This is why it is stated that VAT is not a new tax; it simply replaces taxes that were always there but which were “invisible.”
VAT consumers are seeing what they are paying and instead of improving their happiness, it is scaring the living daylights out of them. A smart business tactic in this the interim period would therefore be for businesses to quote their prices as VAT inclusive since psychologically consumers will be better disposed to this form of pricing.
The second incorrect assumption was that prices would decrease as a result of a lower tax being charged. Since many items are zero–rated and now taxable at a lower rate than what was previously charged, it was presumed that this would make the introduction of VAT smoother. We, however come from a business culture where businesses do not always pass on the benefits of tax reductions to consumers.
It was also assumed that the tax credit that was offered to businesses would serve as an incentive to reduce prices. This assumption proved wrong because we come from predominantly a cash economy and even for big businesses a dollar in the hand is worth more than two on a tax credit. At the end of the week, businesses want to see increased income in cash, not on paper.
The fourth incorrect assumption was that since VAT was not a cost to businesses, there would be no need for the introduction of VAT to result in increased overheads and thus increased prices. This assumption is premised on another false assumption and that is that the vast majority of businesses in Guyana actually declare their true sales to the Guyana Revenue Authority and since they do not bear the burden of VAT would ensure the smooth transition to VAT.
Fifthly, there was historical amnesia on the part of government. I recall that during the floods of 2005 when Guyanese were enduring extreme hardships, some business houses increased their prices without consideration about the suffering of the people.
We are seeing some of that today, but there are also many business places, especially the large retail establishments that have acted responsibly and have reduced their prices to accommodate reductions in the VAT that is charged. In other cases, while some items have increased some business have opted to forego part of their profits and are offering discounts at this difficult time rather than simply dropping their prices to create an artificial price, which in any event they would be forced to increase after the transition period.
The sixth mistake was that VAT should have been phased in by introducing it first to those items and services on which taxes were previously paid or zero–rated, then after one year introducing it to services that previously were not taxable.
The Peeper however has the benefit of hindsight and therefore at the least, I must commend the government for moving bravely to introduce a tax that would ultimately help the poor. Unfortunately, it is now hurting consumers.
I have never in these columns called for a boycott of businesses. I will never do so. However where I choose to shop is where I think I will get a fair deal and since the introduction of VAT, I have been shopping around and taking note of those that I believe are trying to please their customers.
I believe that this difficult period will pass. In fact, I know of someone who has decided that he will be importing a large quantity of consumer items which he says that he will sell cheaply on the market.
This person is not a Good Samaritan. He simply sees an opportunity to break into a big share of the market for groceries and his strategy is to bring in his stocks now, undersell everyone through a small mark up while his competitors are struggling with old stock.
Old stock is a problem but I believe that this problem is being exaggerated. To their credit, it was PNCR that brought attention to the dilemma many businesses would face from having to carry old stocks on which consumption taxes at a rate higher than 16% would have already been paid. Of course some establishments would also carry stocks on which consumption tax at a lower rate than 16% would have been paid and therefore ought not to increase these prices.
Through the agitation in part by the PNCR and the businesses community, the government offered a tax credit for stocks imported in December and which must be sold by the end of March. I did not hear too many protests that this was not good enough, and knowing that businesses had six months to prepare for VAT, I did not expect to now be learning that some businesses have large inventories from last year which they cannot or are not prepared to sell at a loss.
I am further surprised that businesses in this the age when there are good systems of inventory management still carry large inventories, knowing that this can ultimately be a huge cost to their gross profits. Why would they carry large inventories when they know VAT is coming and that VAT will be charged at 16% for items of their old stock which they had imported at a higher tax? Why risk having dead stock on your hands by fetching large inventories?
Well I urge them to keep their old stock because I can tell you that there are others like my friend who will soon be importing new stocks and since these new stocks will be at a cheaper rate than what was charged before, a lot of people are going to be left with stocks that they cannot sell in the future.
This is how to counter the negative aspects of VAT, not by shutting the country down, because whether we like it or not, VAT is a good tax and is here to stay.