After 17 years in place, there still seems to be lingering doubts as to the appropriateness of the value added tax (VAT) system as a fit indirect tax to guide the revenue-raising strategy of this country.
Some persons remain implacably opposed to it and are not prepared to allow it a place in an imperfect world of imperfect peoples and systems. In addition there are certain misconceptions being articulated by usually well-informed persons.
In the circumstances I feel obliged to offer an opinion.
My experience with indirect tax commenced in 1966 when I entered the civil service and was placed in the Customs and Excise Department where I spent the succeeding thirty four years, thus becoming exposed to the principal indirect tax system in the country.
To some extent the 1960s were formative years as the United Nations declared the sixties the decade of development. Indeed, Barbados was in the throes of rapid social and economic development and the civil service was beginning to burgeon as it imbibed a significant number of the new middle class among whom people like me were numbered.
In the circumstances, the Government of Barbados was compelled to enhance its ability to manage the demands of the time. It can be appreciated that the expansion of free secondary education, creation of a community college, a university campus, a free school meals service, to mention a few of the social initiatives, called for a significant consumption of money.
This country’s industrial base was also receiving attention with industrial sites like Pelican and Newton under construction. It is obvious also that government’s renewed excursion into housing development such as Paradise Heights, Wanstead and Husbands added to the needs. In the circumstances, demands on Government became enormous and might have contributed to a new look at taxation as a source of revenue.
Prior to the introduction of VAT very few services were taxed, while there was heavy emphasis on taxing imported goods. I recall that import duties on goods were applied on two bases though at different rates. Goods from British Commonwealth countries attracted a preferential tariff whereas extra-Commonwealth goods attracted a general rate which was normally higher than the former. In addition, there was a stamp duty.
The importer would place a ten cent stamp on the entry no matter how big the value of the imports. Thus, an importation of $100 attracted a stamp duty of ten cents.
As I recall, consumption tax became an initiative of the late 1960s or early 1970s with low rates of about three to five per cent on a limited range of goods. Over time, the rates were increased and the list of goods expanded.
The stamp duty became a percentage of the value of imported goods. By the 1980s these rates had become quite high. Thus, the $100 import which attracted ten cents in the mid 1960s was attracting $20 in the 1980s. The consumption tax had also become swollen and mushroomed. There were at least seventeen rates, some as high as 45 per cent.
The advent of CARICOM brought teething problems, principally in determining origins of some commodities or even the percentage of regional inputs. It was not always that these problems were solved immediately and when such occurred investigations of a technical nature and even occasioning visits to the exporting country could drag on for long periods. Such difficulties sometimes held implications for consumption tax and stamp duty imposition.
Perhaps this convoluted set of problems contributed to the decision of the then prime minister and minister of finance in 1979 to take a look at the VAT. However, history records that he did not introduce it then.
But the perceived need did not abate and complaints by the manufacturing sector that stamp duty made their exports uncompetitive led to an initiative called the Stamp Duty Rebate Scheme, the formula for which was drafted by this writer.
This was an accounts-based formula that had the objective of extracting the stamp duty presumed paid on imported raw material consumed in the manufacturing process and offering it as a refund to the manufacturing exporter.
This regime lasted from 1984 to 1986. By 1989 the Barbados economy was in trouble and by 1991 the International Monetary Fund was in our sitting room. The need for radical modernisation of the indirect tax system in this country had arrived and confirmed by the IMF.
It was also around this time that the globalisation fever picked up apace. The idea of high import duties was considered inappropriate. It was felt that the world should move in a direction in which this perceived discrimination became a thing of the past.
The VAT had become an acceptable indirect tax. Countries like Barbados began gradually reducing their high import duty rates. A comparison of today’s customs tariff with that of the 1980s would demonstrate that several high rates have been generally reduced. In this milieu, a suitable form of tax became necessary.
At this time several countries across the globe turned to the Value Added Tax which had become prominent only in the 1950s. Today, in excess of 120 countries employ the VAT.
