Government applied different standards to VAT on medical services from those on education services

Clearly unmoved by fifteen thousand signatories and the heartfelt arguments, pleas and entreaties of hundreds of parents and students at the Government-Parents-Adminis-trators VAT on Education consultation, Cabinet’s subsequent announcement of no review of VAT on education until 2018 has effectively killed any further meaningful discussion on this issue. In this my last contribution to the debate, I write only to show how the government has applied vastly different standards to VAT on medical services and education services, and more particularly private education services.

In his Budget 2017 Speech, the Finance Minister announced proposals to “expand the list of exempt items and [to] eliminate all zero-rated items, with the exception of those pertaining to exports and manufacturing inputs.” In neither list of exempt nor zero-rated items attached to the Budget Speech did education or health services appear, meaning that those items, both of which were previously zero-rated, would become taxable. The doctors at a meeting at the Ocean View Hotel protested and lo and behold, when the actual law was published, not only did health services mysteriously appear in the exempt list (Schedule II), but whole ranges of medical supplies appeared on the zero-rated list (Schedule I). Continue reading Government applied different standards to VAT on medical services from those on education services

The case for VAT on education is weak to non-existent

The decision by Dr Rupert Roopnaraine, Minister of Education, to meet five parents and Swami Aksharananda, educator, as representatives of the group protesting outside of his ministry against VAT on education services on April 5 was commendable. Coming on top of the Cabinet decision to hold a consultation with the public at the National Cultural Centre today Friday, April 7 at 11 am, there is some hope that the government is finally ready to reverse the decision to impose VAT on education.

Why it has taken the government over four months to do the right thing is baffling. Almost every argument by the government has been met with cogent, rational and compelling responses. Here are some of those arguments and the responses. Continue reading The case for VAT on education is weak to non-existent

Until there is a change in the law UG should register for VAT

I have hesitated to engage in the ongoing debate in the print media on whether the VAT being imposed on educational services extends to fees charged by the University of Guyana. However, because even the media seems unsure, I do not think further hesitation helps.

VAT is not a particularly complex tax and has a few basic principles. Section 9 of the VAT Act imposes VAT on (a), every taxable supply by a taxable person; and (b), on every import of goods or import of services, other than an exempt import. We are here concerned with (a) and can disregard (b). Because the section dealing with taxable person also refers to taxable activity, it seems preferable to look at the definition of “taxable person” before going on to examine taxable activity.

A taxable person is a person who is registered, or who is required to register under section 11 of the Act. “Person” is defined in the Act to include the State, an agency of the State, a local authority, board, natural person, trust, company, and partnership. In other words, there is no automatic or definitional exception of the state or, by extension, educational institutions funded by the State. Continue reading Until there is a change in the law UG should register for VAT

VAT no burden: A different perspective (Conclusion)

Business Page of October 31 had referred to statements both by President Jagdeo and Finance Minister Dr Ashni Singh that the Value-Added Tax and the Excise Tax introduced in 2007 would have been revenue neutral. In 2007 alone, the excess of over the prior year – the basis for revenue-neutrality – was $12.6 billion, or 49%, of which VAT by itself had exceeded the taxes it was supposed to replace by a staggering 76%. Over a four year period the combined excess would therefore be approximately $50 billion. The question then is whether or not a reduction of taxes would have hurt or helped the economy and more importantly, whether the government has been honest with the VAT rate of 16%. And here a distinction needs to be made between the economy and important segments of the economy. Two women’s interests organisations, Red Thread and Grassroots Women across Race are under no illusion and from their own experiences are convinced that VAT for many, many (women) is a burden that is beyond bearing.

The government and its economists remind the country that the women miss the bigger picture of the “macro-economic fundamentals” and that the women ignore the benefits which taxation brings to the country as a whole such as the availability of accessible and free education, health care, better roads and other infrastructure. Those who make these arguments for the government often ignore the questionable quality of the public services and might never have gone to the Admissions Unit of any of our public hospitals to see the hours of waiting before receiving attention, nor are they likely to have been aware of the state of the Den Amstel or Cane Grove Primary Schools. They ignore too that however good the roads which the poor and the rich alike enjoy, the Guyana economy – whether in the hinterland or on the coastland – is a cash economy. The stallholder or the minibus conductor will only accept money and if you do not have money to pay, neither the availability of the goods nor the quality of the roads makes any difference.

The rent which the single mother is asked to pay for the most modest accommodation in the most working class of areas is often more than the gross pay of the nurse or the teacher in the public school system. Yet the more fortunate among us would carp about the nurses for their inattention to patients or the teachers for supplementing their income with “lessons.”

Jagdeo has closed the VAT rate debate
The problem in the discussion about the economy and taxation is that those two sides are speaking from very different perspectives and interests. The Minister of Finance is engaged in an abstract argument of which he may have no personal experience and speaks from the top. The Red Thread and Grassroots Women Across Race on the other hand speak of their daily experiences from the bottom. It is not hard to see the real issues from the theoretical arguments.

The problem for the poor is that the strength and logic of their argument count for nothing and since they have neither the time nor the inclination to wage a sustained and effective campaign, change in their favour is almost impossible. Jagdeo has already said that VAT is no burden which means that for all intents and purposes the matter is closed. Of course no one expects the government to admit that as an expenditure tax, VAT is borne only by consumers. Since women bear the predominant role in equipping the children for school and putting food on the table, they feel the pain of the VAT more than the menfolk.

Favouring the better off
Nor will the government wish to admit that the tax system is skewed in favour of the better off; that all tax changes since 1992 have effectively shifted the burden to the poor and in favour of the better off. Guyana has effectively abolished Estate Duty which used to capture in death the taxes which were avoided in life. A capital gains tax which already favours the shareholding class over the working class has been abolished on the gains made from trading in shares in public companies. Just ask yourselves which is the dominant shareholding class and you will see the bias in the tax system. And as the column has consistently pointed out the perquisites, expense allowances and benefits received by the managerial and entrepreneurial class including chauffeur-driven expensive vehicles, 24 hour security and meals at the most expensive restaurants are generally tax free, while the travel allowance paid to the ordinary to get to work on the minibus is taxed at the rate of 33⅓%. For the poor a meal out is a cheap Chinese while the managerial class enjoys business paid nights out at the expense of the taxpayers.

Even in tax administration, the die is loaded against the poor. They are at best employees who are sitting ducks under the PAYE system and neither need nor can afford an accountant to represent them at the GRA. Contrast that with the self-employed who decide how much tax they will pay and often pay the equally dishonest accountant to aid and abet them in manufacturing accounts to suit.

The solution in my view lies both in the income as well as the expenditure side of the accounts. In fact I think it is necessary first to decide what is the expenditure that the government needs to incur and then consider how best to finance that expenditure. Let us use as an example the Ministry of Health for which there are two ministers. With little understanding of what their roles are and not enough work for them to do, the two ministers dabble in the day-to-day affairs of the ministry and the hospitals in a manner that creates confusion rather than solutions.

In my discussion on the recent maternal and child deaths with two leading doctors I was shocked to learn that while many hospitals have modern buildings and state of the art equipment the experts and technicians to operate them are not available; that we seem to pay more attention to AIDS than to women’s health issues; that basic information on ante-natal care and nutrition is not disseminated. And pointedly, that in what appears to be a matter of policy, we underpay the caregivers.

Drugs and money for friends
This is the same ministry which along with the Georgetown Public Hospital Corporation has been paying hundreds of millions of dollars annually by way of advance payments to a friend of the government to buy generic drugs from India. These same drugs can be purchased direct or by way of tender through other suppliers at reduced cost. In 2009 the payments by the Ministry of Health and the GHPC amounted to $2.135 billion! That the government persists in this reckless arrogance suggests that instead of attempting to reduce cost, the government is more concerned about enriching its friends.

Excluding the expenditure on health by the regions, the GPHC and the Ministry of Health spent $7.3 billion in 2009 in the recurrent budget. This means that the dubious drug purchases alone accounted for 30% of the expenditure of those two agencies. If we add capital expenditure, the total expenditure in 2009 by these two agencies was approximately $10 billion. In 2010 the budgeted current expenditure of the GHPC is $3.5 billion while the expenditure for the Ministry of Health is $4.5 billion.

Reduced expenditure does not mean reduced value and it is my view is that with better policy formulation, efficient execution, reduced waste and corruption and enhanced cost management, the annual expenditure allocation on the Ministry of Health can be reduced by at least a couple of several hundred millions of dollars, if not billions.

Ministry of Local Government
Now, take the Ministry of Local Government that has overseen the destruction of democracy at the local government level. This ministry that operates like the Wild West has a Minister and two former ministers paid exorbitant salaries and benefits for doing mainly party work. If this ministry was scrapped, we could very well save much of the $250 million in the recurrent budget and $1.250 billion in capital budget.

Then we can look at the Ministry of Public Works and Communication which in 2009 had a capital budget (including supplementaries) of $10.2 billion but did not even keep a contract register to record details of financial transactions of projects undertaken by the ministry. On roads and bridges alone some $5.9 billion was spent in 2009, no doubt much of it completely wasted.

The Office of the President and NICIL which are the havens of non-accountability, non-transparency and favouritism control funds that are so secret and mismanaged they are beyond the reach of any auditor or accountant. In fact nothing less than a forensic auditor by a trained fraud investigator could unravel what has taken place around these entities.

The bigger picture
What is a safe bet is that included in the total recurrent and capital expenditure in 2009 of $128 billion, must conservatively, be at least 15% ($19.2 billion) of avoidable, unnecessary expenditure that could be cut without any loss of efficiency. If say 60% of those savings ($11.52 billion) are applied to improved salaries to government employees and payments to our senior citizens, the remaining 40% ($7.68 billion) can be applied to a reduction of the VAT which is budgeted in 2010 to bring in $25 billion. That means that instead of VAT having to bring in $25 billion in 2010 it need only to bring in $17.4 billion. The VAT rate can therefore be comfortably set at 12%, bringing a boost to the economy and relief to the poorer sections of our society.

The evidence from economic research around the world indicates that tax rates have a direct influence on saving, entrepreneurship, lower rates of economic growth, reduced rates of personal income growth, lower rates of capital formation and lower than expected aggregate labour supply. In the case of Guyana, high tax rates may also cause outward migration and the brain drain.

Just as I am sure that both the President and the Finance Minister know that 12% is what the VAT rate should have been in the first place, they also know the economic arguments for lower rates. But then from the government’s point of view that would reduce the pool of funds for whimsical spending.

Of course a more detailed examination of the current revenue and expenditure structure will necessarily reveal other possibilities. Meaningful tax reform will suggest variations of the existing tax structure, the way revenue is raised between the central and regional governments, and possibly new means of collecting taxes from those who do not currently pay. Organisational changes could see the restructuring and reduction of the number of ministries and departments, number of ministers and advisers, resulting in the reduction and re-prioritisation of expenditure.

While it would be nice for the Economic Services Committee of the National Assembly to take on such an exercise, I am not optimistic that this or the reduction of the VAT rate will happen any time soon.

VAT no burden: A different perspective

Last week’s column addressed President Jagdeo’s astonishing, unfounded and uninformed statement that VAT was no burden and therefore in no need of revision. For a newspaper column, it provided an exhaustive and hopefully convincing case of President Jagdeo and Dr Ashni Singh’s broken promise to make VAT revenue-neutral. And so I did not think it was necessary or useful to return to this topic this week.

Let us not be naive. The President could not possibly admit that VAT is a burden. If he did, then being the considerate leader he claims to be, he would have had to do something about easing the burden on “his people” by reducing taxes, something he has never done across the board.

He has found it easier to grant vast sums in concessions to friends, without regard for the laws of the land, than to honour a commitment to the nation. To change the law to pay emoluments to the Chancellor, the Chief Justice and the Auditor General tax free, making some more equal than others. And yes too, to increasing presidential benefits with no limits and no taxation, defying Benjamin Franklin who wrote more than 200 years ago, “In this world nothing can be said to be certain, except death and taxes.” But to the poor, the only yes is to the insensitivity of their plight.

Too poor to ‘pay’ attention
My reason for returning to the question of the VAT is because of the level of feedback on the column, including the wag who said that after paying income tax at 33⅓% and VAT at 16%, the ordinary person cannot afford even to “pay” attention to their own plight. Another asked me whether there was nothing that could be done to ease the burden of the high rate of VAT. I had to say that I could not be optimistic. Given the unlawful and increasingly outlandish things the Jagdeo administration does without any hint of embarrassment, there must be few things that it would not do. But another reason for the absence of any optimism is because others who might be expected to challenge, are themselves challenged, emasculated and supine. The consumer movement and the TUC, effectively leaderless and non-existent, have lost both their appetite and capacity to advocate, let alone to protest and defy. The first for fear of losing its government subsidy; the other having lost its credibility. The private sector has chosen the path of least resistance; the rest of society that of apathy.

And of course, everyone wants to be a president, even if they, like Jagdeo, do not know and care whether VAT at 16% on top of a very low threshold income tax rate of 33⅓% is indeed burdensome. Apparently knowledge of such mundane matters is neither an asset nor a requirement for the job of president.

The promise and the reality
In 1992 the PPP/C came to power on a promise of socialism and social justice. Then in the face of the IMF it made an about turn, adopting free market economics, the essence of capitalism. Ever since the IMF programme came to an end, the economy has had no central theme or philosophy. The President may have been educated in Russia but he seems to have an antipathy to both the word and the philosophy of socialism. Even the area in which this government has had its greatest success, housing, contrast the policy of land distribution between the poor and the powerful. Compare Pradoville 1 with Plastic City, or Eccles with Bare Root.

And consider the more blatant, in your face Pradoville 2, at Sparendaam, East Coast Demerara, where the elite are setting up one of the most exclusive communities in Guyana.

What would the Norwegians think of his much touted fear of rising sea levels submerging our coast when there is building right on the banks of the Atlantic Ocean?

The taxpayers of the country would like to know how the land was advertised, allocated and valued; who approved the community and the housing plans; who the money is being paid to; whether there are any conditions and covenants?

If our Audit Office was not so unqualified and compromised, these are the questions it would seek answers to, not whether a few hundred dollars a day spent on the residents of the Palms is value for money.

New brand of economic policy
In a country increasingly run not for a class as capitalism or socialism does, but rather for a handful of individuals, nepotism becomes too charitable a label to describe the economy’s direction. Under this new dispensation, the assets of the state are at the disposal of a few, in which no less than the President adds to the debate about evasion and avoidance, even as a covenant about the period of ownership prior to sale is dispensed with. Another word that comes to mind is oligarchy, a term that is favoured by Dr Tarron Khemraj.

If we were serious about running a national economy, our Finance Minister would not be publishing a statutorily required mid-year of so little moment and equally little practical use.

And this is not criticising simply for its own sake. Where does the Minister tell us, as he is required to do, about the impact on the country’s finances of the delay in the receipt of the Norwegian funds, or where further sums will come from to buy additional generating capacity for GPL? In 2009, GPL received more than three billion dollars from the state, Guysuco many times more, offering in return, blackouts and excuses respectively.

Instead the mid-year report was replete with national income data which could, with more authority and authenticity, have been published by the Bureau of Statistics. And in the process of that delay, the Bank of Guyana, like the Bureau of Statistics, withholds its highly useful half-year report so as not to steal someone else’s squib-like thunder. Under current economic policy and management, it is so much more necessary to satisfy the ego of one or two than the needs of the nation.

Is tax reform dead?
Now that the President has spoken on the tax system all the talk about tax reform might be considered academic and meaningless. A couple of weeks ago I declined an invitation to meet with a consultant ostensibly retained to advise on tax reform.

When the appointment of a consultant to carry out the same or a similar study came up at the level of the Private Sector Commission some time ago, the clear inference was that the appointee must be ‘anyone but Ram.’ I wish the study well even as I recognise that for eighteen years this government has promised tax reform in one breath while delivering regressivity of the tax system that causes the poor to flee into the underground economy or abroad, in another. Nothing will happen before elections 2011, since according to Jagdeo’s thinking it ‘ain’t broken,’ what is there to fix?

Perhaps the consultant can do with some numbers and statistics. Between 1992 and 2009, tax revenues have climbed from seventeen billion dollars to ninety billion dollars. The employed category has seen its contribution to those revenues increase by 860%, from $1.3 billion to $13.2 billion. For companies, their contribution to tax revenues has declined from 26% in 1992 to 20% in 2009, with most of the taxes coming from the commercial banks, GT&T and Banks DIH and DDL. The self-employed that now dominate the country’s economy contribute less than 2.5% of its tax revenues.

And in the invoice example I gave last week, some businesspersons actually benefit by stealing VAT under a system that puts the cat to mind the milk. An economy in which the illegal and criminal are major components must by definition have elements in its tax system that are also illegal and criminal.

And as we think of the tax system and its components, consider that VAT and excise taxes alone contribute more than 50% of total tax revenues.

It is trite to state that VAT and Excise Taxes are borne by consumers including the employed, retired and unemployed. While I have never subscribed to the straight maths of adding the rate of income tax (33⅓%) and VAT (16%) to arrive at the tax burden on the poor, the tax revenue data suggest that the 50% tax burden on the working and non-working poor is not too far fetched.

Reducing the personal allowance
Even before 1994 when I presented a paper Tax Reform – A Vehicle for Economic Recovery, I was convinced that our tax system badly needed reforming. Yes, we have taken some major actions such as the unification of the revenue collection agencies and sporadically have increased one element of the personal allowance.

But what we are asked to forget is that overall we have reduced the personal allowance from the high of a dollar value and one third of taxable income, which prevailed under the late Desmond Hoyte. This means that if a person’s salary was $150,000 per month, their personal allowance was $50,000. It is now only $35,000.

So does tax reform really mean lowering taxes? The answer is an unambiguous “not necessarily.” It is not something that can be easily dealt with in these columns, but I will try to do so. When the father of modern economics Adam Smith set out the four cardinal principles of a good tax system – equity, certainty, inconvenience and economy in collection costs, the question of big, bloated and wasteful governments was not an issue. It is very much so in the Guyana context. Of Adam Smith’s four principles, equity is the single largest question for us. But in a more practical way, it is the level of taxation that is stifling our economy, or sections of it, as some pay and others do not.

We will explore this further in the next fortnight since next week’s Business Page will take a brief look at the 2009 Auditor General’s Report that really tells us nothing that we do not already know.