Location of the Burden
As was observed last week, evidence to suggest that VAT had not led to a reduction in tax evasion might exist. The case for the likelihood of high loss of VAT revenue perhaps resides in the location of the burden for the tax. Some might say it is the nature of the beast. VAT makes its way through the production and distribution process to the final consumer. Everyone in the production and distribution chain, except the consumer, is able to obtain a refund of the VAT paid. The buck therefore stops with the consumer. Consumers have an incentive to cheat since VAT adversely affects their bottom line. The income that is in the line of sight of the VAT is the disposable income or the income left in consumers’ hands after income tax and NIS deductions are made. VAT reduces the real income of consumers or the quantity of things that they can buy because they must give up an additional G$16 every time they spend G$100 without getting anything of value in return. They cannot even point to intangibles such as clean drains and canals, protection from the police or even safe roads as a consolation since none offers any satisfaction to the average Guyanese consumer.
Opportunity and Motive
No one knows for sure which consumers are involved and the inclination might be to point a finger at those consumers with lower or the lowest incomes. Indeed, those persons tend to have a higher marginal propensity to consume and therefore could find their already meagre funds running low faster than any other income group from the need to spend. However, it should be kept in mind that the consumer cannot evade VAT without the aid of the retailer. That many businesses avoid contributing to the National Insurance Scheme (NIS) indicates that that community of actors might be willing to evade its responsibilities in other instances. There is opportunity and motive for evasion since the retail segment of the economy is highly fragmented and is dominated by small businesses whose owners probably feel the same way as their customers about life in Guyana.
Economic Reasons
There are economic reasons too. The competition is very tight in the retail segment of the market and profit margins are generally thin. While there is no scientific evidence to support the claim, many local merchants reportedly complain about severe competition from foreign nationals. Many of the adversely affected businesses surely do not follow generally accepted accounting principles with respect to the maintenance and valuation of inventory. Many operate without highly professional staff and keeping good records might neither be a priority nor a matter of interest to such businesses at this point in their life cycle. It is even likely that the retailer might have gotten the idea of evasion from his or her wholesaler or distributor. The GRA has many responsibilities that limit the availability of its resources to monitor evasive behaviour by a large population of sellers. In addition, the VAT lost at the retail endpoint might not be worth the cost of recovery given the onerous responsibility investigating these matters represent. The cost of tracking the sales of potentially recalcitrant retailers and measuring their inventory therefore might be greater than the benefit of recovering lost VAT. Rational thinking by the GRA to ignore them because of cost/benefit considerations might be a motive for retailers to continue the practice.
As noted, many of the justifications for introducing VAT can be found on the website of the Guyana Revenue Authority (GRA) and are consistent with the economic reasons offered by other countries for having a VAT system in place. Among the reasons cited for using VAT is that the VAT is effective in controlling the growth of overall consumption. As regards the issue of consumption, the VAT might not be doing a good job in controlling it.
Added Inducements
At this point, it becomes a little tricky in making the comparison in performance between the Consumption Tax and the VAT. The principal reason is that the number of items that was included in the measure of consumption prior to the introduction of VAT was less than the number included in the measurement of VAT today. It becomes even more important here to eliminate the effects of exempt and zero-rated policy since they tend to keep prices low and increase affordability for consumers. A third factor is the amount of subsidy being provided by the administration that could influence prices, and hence cause distortions in the elasticity of demand. Added inducements by the government as was done between 2005 and 2007 to spur investment in preparation for World Cup Cricket and in 2008 to combat the effects of the global economic crisis at that time further complicates matters. The other factor that could complicate matters was the base price on which to measure the rate of change in consumption.
Complexity
The complexity of the issue is demonstrated by the growth rates calculated by the Guyana Bureau of Statistics that span the period 1990 to 2009 using the base year prices of 1988. It shows that even with the removal of the price effect, it is not easy to reach a definitive conclusion about consumption rates. In both the period of the Consumption Tax and VAT, consumption expanded. In general, consumption expanded at a faster rate during the era of the Consumption Tax than it did during the VAT, even though consumption increased faster from 2006 to 2009 as compared to 2002 to 2005, the period immediately preceding the implementation of the VAT.
Another way
There is another way to examine the issue and that is using the trend in national savings. One consequence of slower consumption should be an expansion of the national savings rate. This variable escapes all the complications surrounding the measurement of consumption since it represents what was not spent. From 2007 to 2011, the national savings averaged about G$51 billion per year. The national savings rate during the same period peaked at 12 per cent of gross domestic product (GDP) in 2009, only showing growth twice in the last six years. However, since the savings rate started its decline, it has done so in successive years to reach seven per cent of GDP last year. In contrast, the national savings during the 2002 to 2005 period averaged G$31 billion. The savings rate peaked at 21 per cent before settling down at 18 per cent. In periods prior to that of 2002 to 2005, the national savings rate was just as robust.
The significantly higher estimate of the savings rate during the era of the Consumption Tax suggests that the VAT has not been curbing consumption as it is supposed to do.
