Here’s why reducing VAT is a debate with no clear winner

By Demion McTair. Updated 7:30 p.m., Friday, August 19, 2022, Atlantic Standard Time (GMT-4).

Editorial: Opposition Leader, Dr. Godwin Friday, in his August 11 address to the nation called on the Government to reduce the Value Added Tax – VAT from 16 to 13 percent.

It was not the first time the opposition leader called on the government to reduce VAT as a measure to ease the cost of living.

Dr. Friday, outlining the New Democratic Party’s plan to “immediately help to ease the effects of rising cost of living” and ensure the protection of families said:

“Reduce VAT from 16 percent to 13 percent and ensure that the savings are passed on to ordinary consumers. This will help everyone across the board. Increase the number of zero-rated VAT items. This will reduce grocery bills for everyone”.

In response to this, Prime Minister Dr. Ralph Gonsalves, who introduced VAT in May 2007, as a fixed tax rate to replace the variable consumption tax which ranged from 5 – 65 percent, explained why reducing VAT will be costly for the government and why a reduction could backfire and hurt the country.

See “Why Vat?”

At his August 16 press conference at Cabinet Room, Dr. Gonsalves explained, “that the domestic VAT which you want to reduce, for every percentage point, is approximately 12 million dollars”.

“So, if you want to reduce it by half, which is eight (8) percent, that is $96 million dollars,” Dr. Gonsalves said, referring to an earlier proposal by the opposition New Democratic Party to reduce the VAT by half.

See – SVG opposition party wants VAT reduced to 8 percent

He said if the VAT is reduced by the three percentage points that the opposition is now proposing, from 16 to 13 percent, that will be a revenue loss of “$36 million dollars on an annualized basis”.

Dr. Gonsalves also addressed the proposal by Dr. Friday to “immediately repeal the Customs Service Charge” to what it was several years ago.

“For each percentage point of the Customs Service Charge is eight million dollars, so that will be $16 million dollars,” since its two percentage points, Dr. Gonsalves said.

“So, 36 and 16, [that’s] $52 million dollars on an annualized basis,” Dr. Gonsalves said.

In his August 11 national address, opposition leader, Dr. Godwin Friday urged the government to put people first rather than government revenue, explaining that the higher the cost of living, the more revenue the government will collect from VAT.

“Government’s revenue from VAT is boosted by the higher prices for goods and services. As prices go up, so does government’s revenue from VAT. We must put people first, not government’s revenue first,” Dr. Friday said.

Dr. Friday repeated his call for the government “to put the money where the pain is.” He said that means “helping families who are being squeezed now by the increase in prices,” referring to the rising cost of living and the global increases in fuel prices.

Prime Minister Dr. Gonsalves argued that without the revenue being collected from VAT, the government will not be able to meet its monthly commitments to pay public servants and provide other services.

In a nutshell, the opposition is arguing that in these harsh economic times, VAT should be reduced to ease the cost of living for ordinary Vincentians, but the government is arguing that any such reduction will hit government revenue in such a way that it will not be able to consistently meet its commitments to its workers and provide services to benefit ordinary Vincentians in these already harsh economic times.

What are your thoughts on the issue?