Value Added Tax (Vat) – some issues clarified |24 September 2012

Vat will be charged at the rate of 15% on most good and services
The following are clarifications to some pertinent questions that some businesses and the public in general have been asking about.

(1) Is implementation of Vat simple?
Experience shows that compliance burden and costs involved (by performing tax calculations, issuing invoices, record-keeping, filing returns and making tax payments) have a disproportionate impact on small businesses as stated in the World Bank ”doing business” report and OECD working papers. This is the reason why most of the governments that have adopted the Vat have introduced a registration threshold to exclude small businesses from the Vat system and reduce their administrative burden. It does not mean that Vat itself is a complex tax that governments want to limit as possible useless complexity for small businesses.

(2) Does the Seychelles Vat Act avoid double taxation?
Vat is not a tax on tax because unlike GST or other taxes on turnover, the Vat system has a credit deduction mechanism.

The credit deduction mechanism allows a Vat registered business to offset its input tax credit (meaning the Vat paid on its purchases, which is directly related to the making of taxable supplies) against the output tax (the Vat collected from its customers) so that it has only to remit the difference (output tax– input tax) to the Seychelles Revenue Commission (SRC).

Most of the countries across the world that have introduced Vat have excluded a very limited number of goods and services from the deduction mechanism (typically cars, accommodation and entertainment) for the simple reasons that in most of the cases cars and entertainment are not directly connected to the making of taxable supplies but are used in a large proportion for private purposes. Of course, for businesses that directly use the cars for the making of taxable supplies, such as car hirers, Vat on these vehicles is 100% deductible. 

It is also important to note that Vat is NOT charged on levy (there is no Vat on levy) just like under GST today.  Vat will be calculated on the same basis as GST is being calculated today (CIF + Trades Tax + Excise). 

(3) Is Vat not a charge on businesses?
For Vat-registered businesses, Vat is not an expense (charge) thanks to the deduction mechanism (described above). It remains a charge for non-registered businesses, as the GST is today. Vat does not aggravate their situation to the extent that the rate is still the same at 15 percent.
It is important to note also that businesses can voluntary register for Vat provided it feels comfortable to comply with the Vat-related requirements.

(4) Is Vat fair, transparent and neutral?
Vat - Fair
Unlike the current tax regimes only certain businesses are entitled to concessions e.g. the TIA certificate holders but under Vat any registered businesses can benefit (even those below the Vat threshold can always opt in voluntarily).

Between Vat-registered and non Vat-registered businesses, those that are registered will have to charge Vat on their sales but at the same time will be able to claim Vat credit or refund. On the other hand non Vat-registered businesses will have to absorb the Vat as a cost, (just like businesses are doing today under the GST), however they will not charge Vat on their sale. So at the end of the day there should not be any major difference between the two groups.

For international and domestic goods and services both are treated the same. It is important to note that professional services supplied by overseas firms will be subject to Vat just like professional services supplied by local firms (Vat registered firms. These services supplied by overseas (accountants, architects, engineers) to local Vat-registered businesses will be subject to Vat through the reverse charge mechanism. The recipients of these services will report the Vat on their Vat return as an output tax (Vat is collected on themselves) and as an input tax (this Vat is claimable as a credit). Vat is charged but remains neutral for the recipient. 
Vat - Transparent
Vat is transparent because it removes the need for concessions, which some believe have a level of discretionary. There is also an audit trail with Vat as Vat is an invoice-based tax system.
Vat - Neutral
Vat provides for the credit mechanism which means that businesses do not have to bear the burden of Vat itself. Vat registered businesses have a right to deduct the input tax.

(5) Will consumers be able to absorb the increases in prices?
There might be a one-off increase in price. But to reduce the burden on consumers, for households there will be no direct impact of Vat on most of their consumption since basic commodities and services are exempted under Vat. In fact there are more exemptions under Vat than under the current GST:

Goods considered as ‘basic necessities’ such as (meat, fish, poultry, milk, bread, wheat, rice, lentils, oil, vegetables, fruits, infant formulae, medicines, and educational materials, etc.) are exempted. Fuel is exempted, water and electricity supplied by PUC are Vat free.
The following services are also Vat free:
• Educational services supplied by public and private schools
• Health and dental services supplied by government hospital
• Life and health insurance
• Financial services supplied by banks and money changers
• Construction of residential dwellings
• SPTC public transportation
• International travel
In addition, the Vat threshold of R5 million will leave most of the small retailers and service providers out of the Vat scope. Unless voluntarily registered, none of them would be entitled to charge Vat on their sale prices.

(6) Is Vat therefore the way forward?
So far there are 160 countries that have already implemented Vat, some of them since 1954.  Where Vat has been introduced, there is no example of step back (except in two countries where Vat initially suffered from major design weaknesses). However, later Vat was introduced in those countries.

Extract from the ITD OECD Report, the VAT experience and issues, 2005)...
“While the net benefits depend to some degree on individual country circumstances,
experience indicates that the Vat has proved to be appropriate for developing
countries. It has been a core component in the broad trend toward tax reform evident in
many developing and transition countries; while much remains to be done, the Vat has
served to stabilise and bolster revenue mobilisation in many countries while contributing to
enhanced economic efficiency. Moreover, the complexity of the indirect taxes that the Vat
has typically replaced belies the concern that the Vat is inherently “too complex” for
developing countries. Empirical analysis indicates that the importance of international trade, high literacy, and the length of time the Vat has been in place enhance Vat revenues. While the latter two factors imply that the tax is “more successful” in the more developed countries, there is empirical evidence that it has also been “successful” in many developing countries.”

Countries that do not have a Vat — even the USA (see United States Government Accountability Office GAO -08-566, April 2008,)— seriously consider the introduction of the Vat. See notably extract from KPMG tax note October 2009: ‘If the federal government adopts a Vat, developing a coordinated federal-state consumption tax system could pay substantial rewards by improving the policy under-pinning of state consumption taxes and reducing the compliance burden imposed on U.S. businesses”.

For more clarification about the implementation of Vat please send your query to vat@src.gov.sc

Contributed by the Seychelles Revenue Commission