PM Anthony
After the government failed in its bid to reduce public sector salaries and wages by five percent to contain public expenditure, it had to find alternative ways to help reduce the fiscal gap, Prime Minister Dr. Kenny Anthony has explained in his 2015 Budget Statement.
The prime minister explained: “Mr. Speaker, it is widely known that the Government of Saint Lucia failed in its attempt to secure agreement from our Public Sector Unions to reduce wages and salaries by 5 percent in a bid to contain public expenditure. The Trade Union Federation countered government’s proposal with several measures, including the imposition of VAT on electricity to make up the shortfall to help to reduce the fiscal gap.
“For reasons which I will explain below, the Government does not believe it is advisable to impose VAT on electricity at this time. Other revenue options will, therefore, have to be explored. The Government remains deeply grateful to those Unions that accepted a wage freeze for the current triennium. As I have explained, the moratorium on increases in salaries and wages will help to contain expenditure in the future, but it does not immediately resolve our fiscal imbalances.”
He said this this year’s Budget includes revenue reforms geared towards “increasing revenue, further titling the tax system towards indirect taxes, enhancing the operational efficiency of several government departments and engendering a greater degree of fairness in the tax system”.
The prime minister have describe these alternative measures as “reforms”. They are as follows:
1. Changes to the VAT regime, including an increase in the VAT threshold to $400,000;
2. Raising the Customs Service Charge rate on imports from 5 percent to 6 percent;
3. Raising the charge on fuel purchased by LUCELEC by fifty cents;
4. Reform of the annual vehicle license fees regime; and
5. Overhaul of the Personal Income Tax system to increase the progressiveness of the system and reduce the tax burden of low and middle income earners.
He said these measures were assessed within the context of “regional and international best practices”. The proposed changes, he said, are also designed to allow for “minimal disruptions to the public, while allowing Saint Lucia’s tax system to remain competitive and buoyant”.
BELOW IS THE PM’S DETAILED EXPLANATION
PROPOSED AMENDMENTS TO THE VALUE ADDED TAX SYSTEM
Mr. Speaker, as stated in the Budget Address of 2013, the implementation of the Value Added Tax (VAT) in October 2012 was a fundamental change in tax policy and the way we do business. There were significant concerns regarding the refund policy that was established by the Inland Revenue Department. I am happy to report that there is general satisfaction with the current mechanism for refunds. By and large, refunds are handled in a speedy and efficient manner.
The Government continues to review the VAT Act to identify areas where changes would redound to the overall good of the economy. As I have indicated on many occasions, once VAT has stabilised, further legislative adjustments will be made, where needed, to ensure the continued improvements in the Value Added Tax System. Mr. Speaker, the Government proposes to make four adjustments this financial year.
9.3.1 Raising the Threshold to $400,000
First, the VAT threshold will be raised to $400,000 from the previous threshold of $180,000. This would mean that over six hundred (600) VAT registrants will not be required to collect VAT on behalf of the government. We have recognized that these smaller registrants are continuously seeking filing assistance from the Inland Revenue Department and some have even requested de-registration. We have listened to their concerns. Requests for voluntary registration will continue to receive appropriate consideration. This will ensure that small manufacturers and other sensitive businesses (falling below this threshold) are not disadvantaged. Voluntary registration will, however, be subject to adherence to the provisions of any enactment administered by the Inland Revenue Department.
9.3.2 A Deferred Tax System for the Importation of Capital Goods
Mr. Speaker, the Value Added Tax Act states that the Comptroller may exempt capital goods once the importer has not commenced taxable activity or has a valid license under specific Incentives Acts or other legislation. Many businesses, however, have requested an exemption of large capital items although they have already commenced taxable activity. In order to ease some of the difficulties that have arisen, the Government plans to introduce what is called a Deferred Tax System for these capital goods.
Under a Deferred Tax Payment System, registered and existing businesses can request a deferred payment to eliminate the possible cash flow problems resulting from investment in large capital goods. Taxpayers who meet the required conditions will be allowed to defer payment of VAT on the importation of selected goods. Accounting for the VAT will be a book entry, and as such no cash payment is required. This new system will give rise to the following benefits:
(1) Improved cash flow as companies will not be required to pay VAT upfront upon importation of capital goods;
(2) The required funding and the cost of financing these capital goods will be lower; and
(3) Better perception of the island as it pertains to the “Ease of Doing Business.”
9.3.3 Exemption of Unconditional Gift of Service and Importation of Replacement Goods
The VAT Act currently makes provision for the exemption of an unconditional gift of a good to the State. Mr. Speaker, I propose that this exemption be extended to an unconditional gift of “service” to the State. I propose also, to exempt replacement goods which are re-imported to the state.
If someone returns a faulty good to an exporter and the good is replaced with a similar item of the same value, there is no provision to exempt that replacement item from VAT. For example, if someone imported a car part, paid all the necessary taxes and then realized that the part is defective, that person should not be burdened with paying VAT upon re-importation of that replacement part.
For this reason, I am proposing an amendment to Schedule Three of the VAT Act to also exempt the importation of replacement goods.
9.3.4 Ease of Refunds to Zero Rated Businesses
The VAT Act currently requires a business dealing in zero rated supplies to apply for a monthly refund on a prescribed application form. We will now ensure that these refunds are paid automatically, provided that all necessary criteria are met. Essentially, zero rated businesses will no longer need to apply for a refund. This will minimize the administrative burden on the Department and the business and further confirms that we have an efficient VAT refund system in Saint Lucia.
9.4 CUSTOMS SERVICE CHARGE
Mr Speaker, one of the big challenges facing the Governments of the OECS is to meet the cost of financing regional organizations. The OECS and its associated institutions have struggled to meet their obligations because regional governments are often very tardy in the provision of their subventions to the institutions in question. Everywhere one turns, there are outstanding liabilities, compromising the existence of the very institutions we created to serve our collective needs. To safeguard the operations of these institutions and to provide a direct mechanism for member countries to finance their regional obligations, the OECS Authority, after years of debate and discussion, finally agreed to introduce a small charge on imports to finance the OECS Secretariat and other regional institutions.
Currently the Government of Saint Lucia requires $11 million annually to finance its regional obligations.
The current rate of Customs Service Charge is 5 percent. The Government, in line with the agreement with other OECS countries, proposes to increase it by 1 percent to 6 per cent. It is estimated that this measure will yield an additional $10.2 million and be on par with two OECS peers, namely Grenada and St Kitts and Nevis.
However, at the new rate it will remain below the Antigua and Barbuda’s “Revenue Recovery Charge” of 10 per cent. The Government of Saint Vincent and the Grenadines has already increased its Service Charge to meet this obligation. Other countries are expected to follow