Balancing act on VAT

AHEAD of Friday’s mid-year budget review, Finance Minister Colm Imbert has announced a plan to issue $3 billion in VAT bonds to assist in reducing an estimated $7.8 billion in outstanding VAT refunds.

In reply to questions from Independent Senator Amrita Deonarine during Tuesday’s Senate sitting, Mr Imbert said these bonds will bring the total amount of VAT refunds for 2023 to over $5 billion, and thus significantly reduce the debt. He suggested the measure would be a short-term one pending full implementation of the Revenue Authority, the advent of which he anticipates will reduce the non-compliance gap.

“It’s a combination of bonds and cash refunds and better administration of the tax system,” the minister said of the overall policy approach.

Mr Imbert’s remarks underline the delicate balancing act currently being undertaken by the Government on the issue of taxation.

On the one hand, it has been seeking to extend tax collection through incentives such as a tax amnesty, as well as broaching the prospect of stronger compliance measures.

On the other hand, it has been gradually trying to improve the situation regarding the seemingly perennial bugbear of VAT refunds, a bugbear that remains ever relevant to businesses and important commercial stakeholders.

During last year’s mid-year review, the Finance Minister announced a $1.6 billion increase in allocations for VAT refunds, in light of improved oil and gas prices.

Non-compliance by the State when it comes to its own duties in terms of disbursing refunds has costs that go beyond the quantifiable. Failing to address VAT refunds deprives businesses of cash needed to stimulate economic activity.

It also exposes the State to moral liability and damages confidence in official institutions – matters which can harm its ability to draw upon entitlements and distort the impact of policy measures. Fiscal control is undermined.

Equally, it is important to note the substantial effects of non-compliance in the other direction.

According to Mr Imbert, measurements of the International Monetary Fund (IMF)’s Fiscal Affairs Department in 2019 suggested the non-compliance VAT gap on the side of collection could have amounted to as much as $4 billion.

That’s a substantial loss at any time, but especially at a precarious, sensitive and unpredictable moment such as this post-pandemic one.

What is unclear, however, are the reasons why, plans to introduce a Revenue Authority notwithstanding, the State has not ever been able to get its house in order under the current systems.

It is concerning that these refunds will have to be effected through bonds, however convenient as a policy tool they may be. It is also concerning that cash collected by the State seems to disappear so irrevocably into a Byzantine system that it has sometimes appeared as though there is a problem with finding funds to address the situation.

Such appearances, of course, can be deceiving, but that does not reduce the extent to which confidence in our official institutions also needs to be shored up one way or another after a long period of complaints.