VAT, tax and debt | Lecturer: Keep poor in mind
8 June, 2023, 10:52 am
If any attempt is made to remove zero-rated VAT (value added tax) on essential items, immediate support must be given to those most affected — the vulnerable and low-income earners.
University of the South Pacific (USP) senior lecturer in economics Dr Neelesh Gounder said this on The Fiji Times online news platform The Lens@177 this week.
He said the onus was on the Government to ensure that any imposition of VAT on essential every day food items or any increase in tax, did not adversely affect the poor.
“It’s up to the Government to decide whether they want to increase the VAT rate or not,” he said.
“At the end of the day, the Government has to ensure the debt to GDP ratio comes down and (if) increasing revenue is the way to bring that down, then tax rates will have to go up.
“Increasing revenue then will take care of ensuring that the Government is able to reduce the debt at a faster rate than what would have been if it does not increase the tax rate.
“But if it does increase the VAT rate, one option is to use some of the revenue collected to make direct (cash) transfers to the poor.” Dr Gounder also said having a single VAT rate was more efficient for the Government.
“Say if we have a single VAT rate of nine per cent on all items and remove the zero-rated VAT items, then the price of zero-rated VAT items will go up by nine per cent.
“In that case, one option for the Government is to make direct (cash) transfers to households impacted by the increase in the VAT rate.
“The Government can do that through the revenue that’s collected because at the moment, there is a lot of leakage when there’s zero per cent VAT rate.
“Zero per cent is there to help the low-income earners. But everybody benefits from the zero rate. Even the high-income earners benefit.
“So, the Government has to decide on a system which is going to take care of the leakage in terms of having a zero-rated VAT but at the same time ensuring that the burden or the impact on low-income earners is reduced.
“I think this has to be taken at the same time because if the Government does increase the VAT rate, I’m not sure whether they’re going to do that or not, to increase the VAT on zero rated items to nine per cent, then they must immediately also support low-income households through direct transfers.
“This is so they don’t feel the impact of the increase of prices of zero rated items. Support has to be given simultaneously as costs go up so households are able to deal with the increasing in the cost of living.”