Barbados to introduce Value Added Tax

by Wayne Lewis, Bridgetown- Barbados

A New Year's VAT (Value Added Tax)...That is what Barbadians got when Prime Minister, Owen Arthur delivered his second budget on May 21 in the House of Assembly in Bridgetown.

With its introduction on January 1st 1997, there will be a primary charge of 15 percent on goods and services, with the hotel sector getting an ease with a special 7.5 percent rate. With the introduction of VAT, eleven other taxes will be abolished - the consumption tax, stamp duty on imports, luxury tax on goods, entertainment tax, hotel and restaurant tax, service tax on pleasure cruises, tax on quarriable minerals, travel ticket tax, airline business tax, tax on overseas telephone calls and the surcharge on rental income.

When compared with the B$420 million collected in 1994 from these eleven taxes, Arthur noted that VAT, excise taxes and the 7.5 percent surcharge on the hotel sector will yield revenue of approximately $398 million. The implementation of VAT does not affect the agricultural sector, but he says it will lower the price of imported construction materials, and minimally increase electricity and telephone rates.

Also of importance is the retention of the excise taxes on vehicles, alcoholic beverages, tobacco and petroleum products which are major revenue earners for Government. Arthur, whose Barbados Labour Party came to office in September 1994, conceded that VAT could mean increased competition for some local manufacturers, such as those in food processing, since certain extra- regional imports will become cheaper.

As a result, he delayed the removal of the surtax on extra- regional imports and used Articles 29 and 29A of the CARICOM Treaty and other measures, to provide protection for local manufacturers against regional competition during the adjustment period. According to Arthur, since the increase in the price of certain goods could affect consumption patterns of pensioners and the needy, Government will provide them with relief by allocating an additional $150,000 to the Welfare Department.

He also announced that an impact study will be carried out to monitor any inflationary aspects of VAT. There are, however, some goods and services that will be exempted and some zero rated when VAT comes into force. Those exempted are financial services, public transportation, medical services, and services provided by educational institutions. Those zero rated are crude oil, equipment for the Barbados Light and Power Company, duty free goods, goods manufactured locally for export, veterinary services, supply of drugs to certain individuals and establishments, agricultural goods and imports, international freight transportation services, goods used in commercial fishing, and supplies to foreign sales corporations such international business companies, off- shore banks and exempt insurance companies.

Exempted goods and services are those which do not have VAT added to charges and cannot recover any input taxes incurred during production. On the other hand, zero- rated goods and services are subject to VAT, but since the rate will be zero percent no VAT is payable. In addition, the taxes on input costs can be recovered on these goods and services. In a 2 hour and twenty minute presentation in the House of Assembly, Arthur, a trained economist, delivered what his opponents and others felt was a "delayed package" that left many wondering and speculating how the VAT would affect Barbadians.

The Prime Minister also had to contend with accusations from the opposition Democratic Labour Party (DLP) that the implementation of the VAT was one of the conditions for the first draw down of a recently signed US$35 million Investment Sector Loan with the Inter- American Development Bank (IADB). In justifying the wait, Arthur said he wanted to satisfy himself with the true base of the tax, the most appropriate rate to apply, the effect of the tax on consumers and producers and the overall economy. The Prime Minister announced that since the tourism sector was the major foreign exchange earner and the driving force of the economy - amounting to 14.8 percent of the country's GDP in 1995 - he could not have acceded to the wish of the hotel association to have the sector zero rated.

"I have accepted the view that to ask the sector to absorb the additional taxes, could work to its detriment. Instead I have decided to introduce a lower rate on hotel accommodation than that to be applied to other goods and services." He said the seven and a half percent VAT charged on hotel accommodation entitles hotels to offset their input taxes against their output taxes and thereby entitle them to a refund of $7 million, as opposed to having to absorb $35 million if accommodation was exempted.

In outlining the different tax rates that presently exist in Barbados, Arthur noted that consumption tax rate varies from 21 percent to 89 percent; and there is a stamp duty of 20 percent on all extra- regional imports with the exception of potatoes and rice, which are taxed at 10 percent. When they are all added up, he said, some extra- regional commodities pay in excess of 100 percent duty and taxes.

"As a result of these high rates, a large part of our economy has been forced underground since it is now cheaper for persons to travel to Puerto Rico or Miami, shop, pay taxes there and on their return, still sell the items cheaper than those businesses in the formal economy." Saying that our existing system of indirect taxation is "archaic" and "dysfunctional," not to mention a "disservice and a deterrent to economic and social progress," he pointed out that Barbados had changed from an agrarian society to one where services now make up a large part of the national economy.

"It is no longer appropriate, therefore, for us to rely on a tax system which focuses on a narrow range of goods and excludes the large number of services provided, many of which are of high value," Arthur said.

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