The islands are now faced with the immediate threat of value added tax (VAT) and from its proposals economic risks for the people. Minister Bellingham indicated on his last visit that once the debt or the guarantee of $260 is released, the proposal to install the chief financial officer (CFO) as the boss of the Minister of Finance and de facto premier will be removed.
It becomes clearer that VAT is designed to “secure” the guarantee, not the UK but the people of the TCI providing the security in higher VAT and taxes. It is also clearer that VAT is designed to keep the loan guarantee from risk. We shall see that what is being proposed will not achieve that ideal but place the loans, the guarantee and the Turks and Caicos (TCI) people at greater risk.
The democratic model is dangerous because they are implementing VAT no matter what people say and the next government is challenged to the point of people removing them from following that model of dictatorship. We have to send the right message to investors and the CFO is sending the wrong one here.
Now that the White Paper on value added tax has come out, it is time to intensify the pressure on the interim government to engage in a greater exercise of tax reform than is currently being envisioned by the CFO. It remains that certain costs are already embedded in current terms of supply to the consumer and there are certain pricing thresholds currently in place.
The CFO has also stated that VAT ought not present any price increase on the consumer. This is where the CFO is wrong. To reach that position where there is no real price increase on the consumer, VAT legislation should accompany a regime where all existing taxes are removed and not just some. To leave “some” taxes in place while removing others will further lead to unplanned and uncontrolled price increases.
The objective must now be to remove all customs duties so that when it comes to prices and imports we start at zero. That would significantly challenge the CFO’s pricing model where it is shown that an imported product may start at $100, CIF may be at $130, import duty would be 20%, CPF would be at 6% or $6 on the import, landed costs would be $156, input VAT at 11% would be $17.16, the retailer’s markup would allowed at 35% of $54.60, Retail price would be $210.60, output VAT would be at 11% of the retailer’s price or $23 and the price to the consumer would be $233.77.
Not only is this pricing regime irresponsible, it is horrendous, ludicrous and tiresome, it does not make any sense at all. We are looking at two bites at VAT for the retailer. The input VAT that the retailer pays and will reclaim and the output VAT that the consumer will be forced to pay. It does not add up and taxes upon taxes will be taxed. More so, this system as proposed will be inflationary and artificially impounded so that revenue will be collected for the sake of collecting revenue.
The rationale here and the objectives are not the same. The CFO is also contemplating that the consumer will ultimately pay $133 on his goods. It is suggested again that all existing taxes be removed that that costs and tax rates overall will go down so that there will be genuine tax reform. People in these islands are suffering and more suffering is to come.
These proposals may also lead to the collapse of the government and the treasury because as planned VAT cannot work and will never work. First of all it will lead to an underground economy. People will start to engage in transactions by cash. There will be fewer and fewer business records so that people will pay less VAT and less revenues will come in. There will also be a further reduction in business activity, hiring, and expansion. So even less revenues will come in. There is less investment, less risks being taken.
The sad fact is that all of this VAT as planned, to create consistent tax revenues, reduce fluctuations in tax, is designed to ensure that the guarantee of $260 million is paid off and that it is “not at risk”. The problem with that is that the whole idea of VAT will place the government at financial risk and the guarantee is doomed. The next government will have to pay off the loans right away to get rid of the guarantee so that the minister of finance can emerge from being the minister’s puppet under the proposed 2011 Constitution to come into effect in November 2012. So once the guarantee is paid off, the UK can breathe again; the people of the TCI can live again, why there is a need for VAT? It was all designed to ensure the guarantee is not at risk.
It would seem that VAT designed to balance the budget and create surpluses will have the oppose effect, the loan guarantee, VAT and the control of the CFO over the minister of finance may be a nightmare and an enduring legacy.