We have all become Government Tax Collectors

We have all become Government Tax Collectors

Many welcomed the news last year that the Private Sector will not need to pay any tax on net income or profits below Rs.250,000. However, above that figure the tax rate can reach as high as 40%. But what many did not realize is the fact that we have all become Government tax collectors and are ironically paying more taxes not less, with the introduction of the GST.

The reality is that the unemployed, the sick, the elderly, children all pay taxes to the Government via GST on the goods and services which they buy or use on a daily basis. But the way GST is collected on imported goods, the so-called at-source concept, has conspired to cheat everyone and to make anyone who imports anything a tax collector without any remuneration.

The main drawback of GST is that it is collected on the landed cost of imports marked up by 30%, a figure which is the maximum allowable profit margin under the Trades Tax Act, regardless whether one wishes to mark up that much. Just too bad - to coin a famous phrase from an infamous former president. To take matters from the point of the sublime to the ridiculous, President Michel, in his wisdom, has virtually abolished trades tax on most imports. As a result the Trades Tax Act, for all intents and purposes, exists solely to facilitate the collection of the Goods and Services Tax (GST) on imports. The Act even stipulates how it should be paid and by whom. By abolishing the Trades Tax Act, Mr. Michel can, at a stroke, also remove the ridiculous maximum profit margin or price control and make the Goods and Services Tax do what it is designed to do, taxing the sale of goods and services.

Meanwhile, everyone who imports anything, whether it is for resale or not, is charged GST on the maximum allowable price of the product as if that product has already been sold. This has the perverse effect of making one and all a sundry trader. But bona fide traders come out worse off. While they are restricted to a maximum mark-up of 30% on the declared landed costs, the GST they have paid on goods which they cannot sell or have been damaged while still in their inventory, becomes a business expense. GST is a tax supposedly based on sales and paid for by the purchaser. Consequently, the real mark-up they (importers) enjoy is considerably less than 30%.

The madness of the system cannot get any worse!

But if President Michel were to adopt the VAT system like Mauritius, Kenya, South Africa and all of Europe as well as Australia and New Zealand, all the distortions caused by GST would disappear. Under the VAT, everyone pays the tax – which is marked up on the price of the good or service paid by the purchaser. However, everyone who sets up in business must register for VAT and must charge VAT on their good or service they sell. At the same time, they claim back the VAT which they have paid on any purchase for their enterprise (inputs), whether for goods for resale or services such as telephone, electricity, water etc. In our case this will also apply to any VAT paid at the port on goods imported. In this way, only the final consumer pays the VAT. Furthermore, the more profit margin a trader charges the more government earns. The more a mechanic, plumber, carpenter or lorry charges for their services the more government earns. But VAT is paid only once – by the final consumer.