Imbert considers VAT exemption for energy sector

Minister of Finance Colm Imbert said he is considering waiving Value Added Tax (VAT) from the energy industry to help improve the Government’s ability to pay VAT returns to small and medium enterprises (SMEs).

He noted this consideration, along with others to deal with the issue of VAT returns for the business community, during his keynote speech at the TT Manufacturers Association (TTMA) post-budget discussion

It was held at the Hyatt Regency on Tuesday.

Explaining the challenge the government had in paying VAT returns, he told business people the majority of returns owed were to the energy sector – which is zero-rated.

“Let’s say we have $7 billion in VAT refunds. Believe it or not, $6 billion of that is in the energy sector, (and) $1 billion is in the non-energy sector,” he said.

“I thought to myself, how did we get to this stage, where we owe the energy companies $6 million? "And you know what it is? The energy sector is zero-rated. Therefore, for every cent they pay in VAT, they automatically are entitled to a refund. And I can assure you they apply for the refunds religiously, so they pay it and then they apply for it immediately.

"So you're going to have this problem all the time.”

VAT is charged at a rate of 12.5 per cent on all goods and items sold in TT, with the exception of zero-rated items. VAT-registered businesses collect the tax from consumers and pay any VAT earned from sales to the Board of Inland Revenue.

VAT-registered businesses can deduct any VAT that they pay when buying goods and services for businesses from the VAT they collect from customers.

But, since items such as crude oil (as defined in section 2 of the Petroleum Taxes Act), natural gas and iron ore are listed as zero-rated items, VAT isn’t collected on the sale of these items. So the energy industry, when paying VAT for other services and goods, can claim for VAT returns on everything it buys.

Imbert said exempting the sector from paying VAT could eliminate the problem: “They pay no VAT, and we don’t have to refund them.”

He is also considering moving away from VAT altogether and implementing a sales tax instead. But he noted that the transition was easier said than done.

“What you have to do is look at what is the revenue that you would get from a sales tax, as compared to a value-added tax – what would the size of the sales tax be to give you the same quantum of revenue that you get from a value-added tax.”

He added that compliance with a sales tax would present the same problems and maybe more than the VAT regime. He also noted that the collection method for VAT is different from a sales tax.

“The thing about VAT, it's added on to all the stages of the process. So you pay VAT as the goods come in, then as you add value and you sell it to somebody else, there's a VAT element there. Then they may sell it to somebody else (and there) is another VAT element.

"So there are many ways of checking whether that is properly being assessed or not along the way. But a sales tax comes at the end,” he said. “If you have avoidance and evasion in sales tax...you may find yourself, as a government, losing a lot of revenue.

"So we're looking at it very carefully.”