The value added tax has been used in many growing economies as means to collect revenue for government operations. The replacement of the consumption tax by the St. Lucia government has seen its tax structure shift which has various implications on the citizens of St. Lucia. Much controversy arose as to whether the government was fully prepared to enact the VAT bill at the time when it did. This prompts one to wonder whether the VAT will solve the St. Lucian’s problems. Value added tax has many attributes that make it more desirable to many governments. Its ability to achieve the intended results may however be dependent on the implementation. This paper seeks to find out the likely implications that the St. Lucians are likely to suffer under this tax system.
The one clear advantage of the value added tax is that it considerably raises the tax base of a country. By effectively using the value added tax structure, it ensures that even those in the informal sector are taxed. This is because the tax enables the taxman to collect tax revenue from different stages of production. For most producers who buy raw materials from informal sector, for instance from small scale farmers, the fact that the producers are registered will mean that they have to get the tax invoice from the farmer unless the farmer is exempted from the tax. By incorporating the final sale tax, it also ensures that all the consumers pay taxes on the commodities they consume. This tax structure is advantageous because as it ensures that evasion by one of the participants in the product’s production and distribution process only results to partial loss of the tax revenue as the taxman had collected more from the other stages (Toder and Rosenberg 2).
The tax revenue collected from VAT may also be more than in other tax structures. The VAT ensures that the products are taxed in every stage of their production which implies that there would be less tax evasion. This has the advantage of expanding the government’s expenditure in an economy. Given the St. Lucian economy that was facing threats of an incoming recession; the increased revenues to the government would simply go a long way in stabilizing the economy thereby being able to avoid the full glare of such a scenario. The expanded government revenue base will also help the government to provide amenities and utilities that raise the people’s welfare with more ease. This should however be run efficiently and thoroughly audited to ensure that the people get the full benefits without some funds being embezzled.
The VAT system enables a detailed account of the tax collected as it is systematic. The process itself ensures that there is a higher level of transparency on the collection of taxes. The refunds that are applied for can be clearly ascertained as the process is staged. The exemption of the tax to some parties has to be carried out with care. There studies that show the implication of exempting one party without consideration of the impact on the tax levied on the other players. For instance, the final retailer of a commodity can be exempted from the tax easily where the final price will reflect the tax levied on the other initial players. However, if you wish to exempt the consumer off the VAT but not the producers, then the tax has to be levied to the point of the retailer without adding an amount from what their profit allows (Toder and Rosenberg 3).
There have been many debates on the effectiveness of the VAT. Many scholars have varied views of the topic of its justification. VAT has been viewed as an overrated tax system. There has been many reasons not believe it to be as effective a money machine that many of its proponents portray it to be. The effectiveness of the VAT to generate huge amounts of revenues than other tax structures is criticized by Keen where it is compared to other tax systems like the corporate tax which also generates sizeable revenues. He does not attribute it to the higher incomes generated in the economies that adopt it but rather proposes that it is wise to question whether the tax achieved what its proponents had aimed to achieve. According to him, it is the effectiveness of the tax structure that will result in an increased government size even though the revenue collected through VAT is significant (Keen 7).
The major undoing of the VAT system is the huge administrative costs required to maintain it. The government has to invest a lot of resources in order to ensure the tax system will work efficiently. These costs are mainly due to the expertise needed to develop the right system that will both be simple to use as well as be efficient in its operations. In most developing nations that are characterized by high illiteracy levels, such a model may not work well due to their little knowledge about the way it works. In order for it to work efficiently, such respective governments need to spend on highly qualified personnel to both develop the model as well as to offer guidance to the various people who will be directly linked in its operation. This does not however, mean that the developing nations have not been using it. On the contrary, a majority of the developing nations use the VAT as it gives them a chance to collect sizeable tax revenues.
The other contentious issue that has been raised is whether the tax really improves the people’s welfare. This has been argued from different angles with scholars trying to decipher the net impact of the tax on the society well being. The basis of such concern is mostly the fact that this method mostly employs a uniform rate of taxation. If this is the case, the people with lower incomes are bound to give up higher proportions of their incomes than those on a higher income bracket. Although this is still the case with other taxes like sales taxes, it is still a problem that needs consideration by the government. When citing community welfare as the motivating power in seeking to widen the tax base, the government should ensure that the tax impact on the different individuals in the economy is not very diverse (Toder and Rosenberg 8).
Additionally, the fact that taxes are aimed at extracting an amount from the value of the product means that consumers have to pay more for a product, or producers have to settle for less profit levels. The extent to which the tax impacts on the citizens requires serious consideration by the government before enacting any tax laws in the economy. The harder the tax impact on the particular individuals, the higher will be their incentives towards tax evasion and tax avoidance. Individuals, after viewing the tax structure as being unfair, will find ways to either avoid the taxes or just evade them. According to various evidence, tax evasion is one the most rampant causes of lost revenues by the government. While the only measures to curb this phenomenon is auditing, it can only detect evasion but cannot prevent the acts. This means that in a good tax system, that incorporates well determined tax rates that are perceived as fair by the majority of the citizens of a country, would go a long way in preventing these cases of tax evasion (Das-Gupta and Gang 1).
Another factor that the St. Lucian government needs to put into consideration is how the VAT will combine with the other existing tax structures in the country. The tax implementers need to consider it important to know how to incorporate VAT in an economy that already had tariffs as well withholding taxes. Charging the value added tax on imports is seen as double taxation and he goes ahead to argue that when there tariffs charged on imports, the importer should claim a refund on the tax charged on the point of sale. This however, he points out that it is possible only for those registered for the VAT and for the ones not registered, they will have to take the tax as a form of a tariff. The government will, as a result of such conflicts, be expected to uphold efficiency in how it deals with such issues by maximizing revenues collected while at the same time being fair to the international trade (Keen 13).
Indeed the St. Lucian government needs to ensure that the tax is implemented in an efficient manner in order for it to achieve the desired results. The use of distorting tax instruments has been linked to the scenario whereby good tax systems are failing to culminate in the intended results. Possible loopholes in the VAT structure may enable tax frauds as well as evasion. The most serious setback that the tax may encounter is in mismanagement of the tax system implementation and transition process, as well as corruption in its execution. The government will be able to achieve its objectives plus much more if it ensures that the tax system is professionally implemented.
Works Cited
Das-Gupta, A. & Gang, I.N. Value Added Tax Evasion, Auditing and Transactions Matching,
JEL Codes H25, H26, 1996. Department of Economics, Rutgers University, New
Brunswick.
Keen, M. VAT Attacks; IMF Working Paper 07/142r, Fiscal Affair Department, 2007. Web. 16th
March. 2013
Toder, E. & Rosenberg, J. Effects of imposing a Value Added Tax to replace payroll taxes or
corporate taxes, 2010. Research Associates Urban-Brookings Institute.
