Saint Lucia Chamber Of Commerce, Industry & Agriculture. Questions on the VAT White Paper

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1 Saint Lucia Chamber Of Commerce, Industry & Agriculture Questions on the VAT White Paper Section Question Answer General comments Introduction The simulation presented (which is seriously flawed in its pricing methodology) demonstrates that of all the parties involved in the trading process, (Government [tax], consumer [purchaser] and private sector [vendor]), the private sector should be the one that will not be in a better position in the final analysis. Surely, the local economy cannot be asked to subsidize the consumption of hotel services and tourism infrastructure. What exactly constitutes Hotel Accommodation needs to be defined. And does it mean that VAT will be applied on other services provided by the Hotel Sector? What makes the hotel sector in St. Lucia deserving of such special treatment? This treatment is opposed by the Chamber on a number of grounds. The VAT is a tax on consumption and thus does not affect competitiveness but rather it affects profitability. It is unfair to the rest of the business community. We suggest Government review the list to ensure that it is not too long or some key items have not been left out. As a general principal the Chamber suggests an extremely short list of exempt and zero rated items. This is just an example. The VAT Implementation Project Team is in no position to determine pricing methods used by businesses. Under the Draft VAT Bill, a hotel is defined as a building or group of buildings in the state occupied together, comprising not less than five bedrooms for the purpose of providing hotel accommodation for reward. Accommodation is defined as sleeping accommodation. Under the VAT system, it is recommended that only hotel accommodation be exempt from VAT. All other services provided by the hotel will attract VAT, unless otherwise stated in the legislation. Based on consultations with the Ministry of Tourism, the Saint Lucia Tourist Board, and the Saint Lucia Hotel and Tourism Association, the recommendation was made that hotel accommodation be exempt from VAT. Noted

2 Registration Taxable Supplies Zero-rated Supplies It is conspicuous that one of the most contentious issues in the WTO, where St. Lucia is concerned, i.e. the Customs Service Charge, has not been signalled as having to be repealed. Serious consideration must be given to allow the Environmental Levy to continue. The importance of cleaning the environment cannot be overemphasised and the St. Lucia Chamber of Commerce, Industry and Agriculture strongly recommends the keeping of the Environmental Levy and its use for the stated purpose. One should note, that though this Levy was initially removed in Barbados, it has resurfaced. Clarification is required; does this include institutions set up by statute that are tax exempt, such as those with development agency status, business associations, sporting institutions and facilities that send out bills and pay VAT and statutory institutions that provide services to the public? How should firms display their prices? VAT inclusive or VAT excluded only to be shown at the check- out counter? Should VAT be charged on original price or the Special price? Treatment of Hire Purchase Why are duty-free goods zero rated and not subject to VAT? This is a policy decision made by the Ministry of Finance. Noted Once those institutions referred to meet the threshold in respect of their taxable activity then they will be required to register. All prices for registered taxpayers will be VAT inclusive and receipts will indicate the total VAT charged. VAT is to be charged on the price payable original or discounted It has been decided that for hire purchase the supply is deemed to be made when the credit agreement is made. This is distinct from rental of goods and the supply of services where payments are made successively and in which cases the VAT is due per periodic payment becoming due or made. The principle of the operation of duty free shopping dictates that when the item is sold for export no taxes are payable. If however the good is sold for local

3 Exempt Supplies Educational Services: needs clarification to explain what services are contemplated. For instance, the Chamber hires trainers and facilitators to conduct workshops and training programs. Is this taxable? What about the payment by students and other individuals of lessons to teachers? Is this VAT exempt and why? consumption all applicable taxes are to be levied and collected. education services means tuition or instruction for students provided by an institution recognized by the Ministry of Education pursuant to the Education Act, Cap whether public, private, assisted or denominational, being (a) a pre-primary, primary, or secondary school; (b) a technical or vocational school or college, community college, or university; or (c) an educational institution established for the promotion of adult education, vocational training, technical education; or (d) an institution established for the education or training of physically or mentally disabled persons; (e) an institution established for the training of sports persons. Educational training provided privately (by the Chamber of Commerce for example) would not normally fall under the definition of educational services. If the Chamber were to hire a trainer or facilitator, that trainer or facilitator would charge the chamber VAT if the trainer of facilitator is a registered person. If the Chamber of Commerce is itself a registered person, then it would charge VAT to the recipients of the training on any fee or charge they must pay to attend the training session.

4 Students in recognised educational institutions would not be charged VAT or pay VAT for teaching lessons. The educational services would be exempt. Outside of that setting (in private lessons for example) the student would only have to pay VAT if the teacher is a VAT registered person. Exempt Imports Based on the listing, one expects that there will be VAT placed on sale of commercial property. What about the stamp duty, will the VAT be additional or will stamp duty be repealed? Due notice is taken of the fact the residential accommodation is VAT free, is there an appreciation of the impact of imposing a 15% VAT on commercial accommodation? Will Government pay VAT on goods they purchase? Members in the Security Business are suggesting that in light of the high crime rate security equipment should be VAT exempt. How would goods that a firm has concessions for be treated? Will there be need to have their concessions amended or will they be attract a VAT? Will Tax Free have to be refined to now mean VAT free? Stamp duty is not one of the taxes recommended to be replaced by VAT. Registered businesses will be allowed to claim input tax credits on commercial accommodation. Yes. Government becomes another consumer. Noted. All concessions granted under the Consumption Tax and Environmental Levy Acts will cease immediately on the repeal of the legislation and the commencement of the VAT. Other concessions of Import Duty, Customs Service Charge and Excise Tax will be unaffected. Goods and services will be classified as taxed (at the VAT rate of 15 percent), zero-rated or exempt. Payments How does the VAT treat bad debts? When a registered business incurs a bad debt, there will be provision under the law for the business to claim an input tax deduction in the amount of the bad debt. In order for the business to be able to claim the input tax deduction, it must write off the bad debt in

5 its accounts and it must satisfy the comptroller that reasonable efforts have been made to cover the amount. The deduction will be allowed only if the supply was made to (1) an unregistered person or (2) to a registered person and the person claiming the deduction issued a tax credit note to the registered purchaser listing the amount claimed. If the bad debt or any portion of it is subsequently recovered, then the business must account for it. Is VAT payable only on cash sales or cash collected? Is VAT payable on interest charged on a late bill? Is VAT levied when an invoice is raised or when it is collected? Are we to understand that VAT is only paid on the difference between what you paid and collected. The time frame for filing VAT is too short, needs to be extended How exactly will VAT affect vehicles that have an excise tax? The issue of how bad debt and returned cheques needs to be set in a clear policy How does VAT work in cases of bankruptcy? VAT is payable on the sale, not only on cash received. No. VAT is only payable on the selling price of the good or the charge for the service. VAT is levied when an invoice is raised, not when cash is received. The VAT payable is the difference between the VAT due/chargeable (including cash collected) on a sale and the allowable VAT paid/payable on inputs/purchases and imports. Noted. Will be reflected in the report. It is being recommended that the Excise Tax be adjusted downwards to compensate for the application of VAT. Addressed earlier. NB. The registered taxpayer however has to confirm that efforts have been made to recover outstanding debts or collection is remote. A bankrupt business would more than likely be refunded most/all input tax paid as there would no

6 sales to be deducted from. The business would need to inform the IRD of their operations when sales are declining. (De-registration/Cancellation) Refunds Accounting and Records A specific suggestion is that VAT should be recovered from Government when a traditional receipt is produced by a business house. This way even though a firm may produce a VAT invoice showing that they have been charged for VAT, unless they actually pay the VAT to the firm they should not be allowed to claim it. This will resolve many of the questions raised above with credit and bad debt and VAT due. This essentially has the business funding the operations of Government at an interest free rate while they are more than likely paying high interest rates to the banks. This is dangerous and may lead to further undercapitalizing of business. A better approach is that is less costly to the Business Community is needed. This is 90 days credit to Government but Government, only wishes to offer 21 days credit. So Government is borrowing long and lending short The interest rate that Government should pay should be prime plus or at least the same that the Business Community pays at the bank. The Business Community cannot afford to finance Governments operations Government must examine whether it is useful to secure international funding to support the VAT readiness of some members of the Business Community either through financing of new equipment, software and hardware as well as staff training and business reorganization. The Chamber stands ready to work with Government in executing such a program of Business Development. The concept of a VAT invoice and a VAT receipt must be viewed in context of the role they play in the administration of the tax. The issuance of a VAT invoice is equated to the writing of a cheque against the Treasury as it entitles the recipient to claim input tax that has not been paid. The tracking of payments between registered taxpayers is not a suitable alternative. A VAT receipt is only issued to a final consumer. The carry forward of any surplus input VAT is a standard feature of many jurisdictions. It must be noted that the credit can be used in the following month to account for any payment that may arise output VAT payment. In effect the credit may be all exhausted before it becomes refundable. Taxpayers will have the benefit of any tax collected during the month e.g. JAN 1 FEB 21 before it becomes payable to the IRD. Noted. Noted and will be considered prior and during registration / transition period.

7 Objections and Appeals The firm must pay fifty percent of the amount in dispute, if they object, in addition to all that is not in dispute, again tying up finances of the business. Is there a minimum time for the Appeal Commission to meet and rule? Does the 50% payment earn interest? The legislation will have a limited period of time within which the Appeals Commission must give a decision. That period of time is proposed as 180 days from the date an objection was lodged. Yes the 50% of the amount in dispute will earn interest should it be returnable to the taxpayer. The rate of interest will be specified in the regulations. Penalties Explanation of the Non-compliance with pricing requirements phrase is required? Does Government plan to institute more price control and how does Government envisage the existing system working? Non-compliance with pricing requirements refers to a registered business not including the VAT in its displayed or advertised prices as will be required under the law. The continuation or expansion of the price control is a matter of Government policy. The project envisions a more expanded role for the Consumer Affairs Department. Agricultural Sector One notes the differential treatment of Agricultural products sold in the formal and informal sector. The formal and informal sector needs definition and clarification. This will make locally grown food more expensive, simply because it is sold in supermarkets. Has anyone taken time to examine what volumes of agricultural produce are sold in supermarkets compared to other areas? The treatment of a good or service is the same whether in the formal or informal sector and the application of VAT will be non- discriminatory being levied at the same rate on domestic production and imports. Education Need to define educational services and education establishments. Please see the response to the question on educational services under the section Exempt Supplies Exports A definition of the Export Sector is required. Are these all goods and services that are being exported? Or is that all manufacturing? Please define what makes up the export sector. Exports include any transaction by a registered taxpayer in the manufacturing, wholesale, retail or services sector where the supply of a good or service to any person outside of Saint Lucia.

8 Duty Free Shopping Small Business Small Business Businesses enjoying Fiscal Incentives Is there any particular reason why duty free goods cannot attract a VAT even though it is being exported and attracts no duties? How did we arrive at $120,000 as the cut-off point? The narrative in this section demonstrates a lack of sensitivity to how businesses operate. By suggesting upfront that the public can expect the price of goods sold by small businesses to increase will create a self fulfilling policy. In fact, there may be no business reason for prices to rise in the small business sector. The White Paper has provided an excuse and an expectation that prices will rise. And no doubt most of, if not all small business will add on the 15% VAT that they pay but cannot pass on to the consumer. One also has to consider the impact on small suppliers who may be dropped by their buyers who may see a disadvantage of trading with a non-vat registered business, on whose suppliers they cannot claim a refund, versus another from whom they can. It would appear that an opportunity has been missed to examine the impact of fiscal incentives on Government Revenue and the actual contribution made and impact of those incentives on those firms benefitting. See above comments for Zero-rated supplies and Exports A study was conducted by CARTAC to determine the recommended number of taxpayers to allow for an efficient VAT system. The VAT Implementation Project Office worked together with the Inland Revenue Department to determine the ideal threshold to be used to generate the recommended number of taxpayers. What this section attempts to say is that the difference in price between the purchase and sale of the item will increase by at least the amount of VAT paid on purchase. This is because small businesses are not required to register for VAT, and therefore cannot claim input tax credits. The VAT paid on purchases will be absorbed in the cost of the item. It is not intended to provide an excuse for an overall increase in price. We have considered the impact and we have indicated that there will be voluntary registration for small businesses. Noted. Transitional What is a short period of time? Will GOSL mandate SLASPA Discussions are continuing on this subject and the

9 Issues Economic Impact to make appropriate arrangements by clearing the area of empty containers so there will be space and will this be at no cost or low cost? Can the existing Customs database track and indicate the quantity of stock on island at any point in time and duty paid? Can businesses be required to conduct a stock take which will be opened to verification? The first statement in paragraph four in this section is incorrect. VAT will not transform the overall tax system nor will it make it simpler, reducing the cost of compliance by businesses. The overall tax system will not be touched and transformed by VAT. VAT will tackle only a small component of the tax system. It will complicate the record keeping and the administrative system and process for business. This is a fact and should be properly represented. The second line is also incorrect, to suggest that under VAT, the investment climate would be strengthened. St. Lucia s existing tax system is not foreign to any investor and has never been seen or judged to be complex and confusing. Also, as it stands right now, the average foreign investor faces minimal additional charges once they are granted our most liberal incentives and concessions. These have been heavily criticized by the IMF and others, due to its impact or lack of positive impact on GOSL tax revenue. It is thus confounding why such a statement will be made in the White Paper. It is also incorrect to suggest that VAT is designed to be revenue neutral. outcome will be made available for discussion. The Customs database tracks import transaction and not disposal after clearance. Thus a clear indication of stock on island would not be available from that source. The requirement for a stock take has not been fully explored at this time as well as the idea of the transition credit. VAT is a platform for tax reform. It is a simpler system to administer, it replaces a number of taxes, therefore reducing the different pieces of legislation, it allows for a higher compliance level, and it minimizes exemptions. Noted. VAT is designed to be revenue neutral. There is no history of a sales tax in Saint Lucia, therefore noone can predict how VAT will perform. We recognize that VAT broadens the taxation base and also provides for higher compliance than the existing taxes. However,

10 based on exiting information on consumption, and using conservative estimates, VAT is revenue neutral.