Preparing to tackle VAT

By Brian Murphy

INTRODUCTION of Fiji’s Value Added Tax (VAT) on July 1 next year will represent the most far reaching change in taxation in Fiji, and will require considerable advance plan ning by all suppliers or traders of goods and services if they are to be ready to cope with the new tax system from July 1, 1992.

Draft legislation is expected to be made available at the May Economic Summit, legislation is expected to be enacted in September, and registration of businesses is expected to start in Novem ber.

The day that more than 100,000 businesses become unpaid indirect tax collectors for the first time is not one they will look forward to, particularly when the full realisation takes place that they will be expected to furnish regular information concerning income and ex penditure to the Inland Revenue De partment.

Some existing (sales) taxpayers will be concerned well before the changeover with how sales of their highly taxed goods will be affected during the run up period by anticipation of a sudden drop in tax rates on July 1 next year.

This is a problem that will need to be addressed without delay if serious distor tions in trading patterns are to be avoided.

Conversely, if food is to be taxed, hoarding of food prior to the change could develop into a monumental prob lem.

A changeover problem likely to con cern the revenue authorities as much as taxpayers is the likely requirement for retailers to claim back sales tax paid on stock on hand at June'3o, 1991.

Customs already are concerned that retailers will regard this as an oppor tunity not to be missed to take their

revenge at being saddled with the goods and services tax.

What is VAT?

VAT is a tax on domestic consumption, which will apply to all production and imports with minimum exemptions, at an expected rate of 10 per cent. Some items such as commodity exports will be “zero rated”, so that export goods are free from taxes on inputs.

Every business will be affected especi ally in relation to invoicing and report ing. Very few business transactions carried out in Fiji will not be liable, and exceptions will mainly be due to non

registration of business people supplying

goods or services.

VAT is a tax on domestic consumption

which will replace existing major indirect

taxes (customs duty, excise duty, miscel laneous services and hotel turnover tax).

Specific excises on luxury items (al coholic drinks and tobacco products) will remain.

Exemption

Exemption from VAT would apply to all farming income, businesses with a turn over of less than SIO,OOO, financial services, domestic rents, non-processed foods (such as fruit, vegetables, live animals, raw fish, and meat and food grains in their natural state) and unpro cessed farm produce, public transport and buses, second hand goods (unless sold by dealers).

Exempted sectors will not qualify for a rebate on VAT paid on inputs. The

supplier and importer (“registered per

sons”) are liable to pay VAT. However, all VAT paid by registered people is recoverable, because those who ultimately bear VAT are the final consumers. If supply of goods or services is not in the course of a person’s business, such as where a lawyer (registered for VAT) had a garage sale at his home, then supplies are not liable for VAT.

How does it work?

VAT is essentially added to every charge made by a trader or supplier of services (“outputs”). Because he may claim back VAT charged to him (“inputs”), in theory the trader only pays over (on a periodical basis) tax on the “value added” by him. In the short term, this theory does not work in practice. For one thing, much of the value added may be represented by an increase in trading stock on which tax is not payable until it is sold: conversely, comparatively more tax will be paid when stocks are run down. For another, the value added by inputs such as plant extend over a long

period. As goods (services are usually only taxed once) progress through the various stages of manufacture and distri bution, the government gradually ac cumulates the tax on those goods accord ing to the stage they have reached. By the time the goods are sold at retail, tax on the whole of the retail price will have accrued. It will be evident that VAT on the imported component of goods must be collected, and it is. VAT is paid, at the same time as any duty, on the landed price of materials or finished goods.

VAT affects overhead expenses which, by their nature, are spread over pro duction. A typical business will incur a variety of costs including such things as

plant and equipment purchases, factory

repairs, vehicle running expenses, print ing and stationery and legal and ac counting fees. All of these costs (it is proposed) will carry VAT and all of the VAT may be claimed back by a trader who himself charges VAT. This system has distinct advantages over the sales tax system for exporters; under that system sales tax on overhead costs has to be recovered in the price of goods sold for export.

VAT is never borne on goods sold exclusively to other registered traders or suppliers of services. So there is little

point in manufacturers (or importers) of

industrial plant, for example, making a

case for exemption of their goods, other than for the universal reason of “un necessary” administrative burden.

Small business Where a small business supplies services or makes goods itself, it will tend to be at an advantage if it is not registered.

This is because it incurs relatively small amounts of input VAT and its all-up prices will be cheaper to domestic customers by up to the full amount of the VAT it would otherwise have to charge on its sales.

Why charge VAT?

Apart from the cash flow advantages to the government of taxing right from the start of the chain, the government takes the (probably correct) view that the best time to capture goods and services for taxing is when they are supplied by “reliable” taxpayers. Once the initial transaction is noted, the authorities are in a position to trace the goods forwards.

Collection of the VAT would be carried out by both the Customs and Inland Revenue Departments. It is expected to yield 6 per cent of Gross Domestic Product. □ * Brian Murphy has a Bachelor of Business and a Master of Economics. He is Partner in Charge of Private Business and Taxation Services for KPMG Peat Marwick Chartered Accountants, Suva.