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SINCE 1989, Value Added Tax or VAT has been taken for granted as a permanent feature of the fiscal landscape.
So, Davendranath Tancoo’s budget announcement of a plan to review the VAT regime to replace it with a sales tax is a revolutionary shift.
But care must be taken to ensure any changes truly simplify the system, preserve revenue and achieve equity so that low-income households are protected.
The Finance Minister’s idea isn’t new. Before VAT was ever introduced, successive governments considered a sales tax instead.
Former prime minister George Chambers, who was also minister of finance, told Parliament in the 1983 budget, "We have been giving consideration for some time to the introduction of a general sales tax. I am advised that there are numerous problems in the administration of such a tax. I therefore propose to seek the assistance of the International Monetary Fund (IMF) as to the form which would be most appropriate."
The IMF advised the PNM government to introduce a sales tax in its report that year, but this was not done because it was felt there was a conflict with existing charges. Still, Mr Chambers kept the idea alive.
In 1986, a committee was constituted to plan for the tax’s introduction.
When the PNM was voted out, the NAR administration appointed a similar committee in 1987 to implement the same tax.
Experts felt that a country with no experience handling VAT might do better with a sales tax.
But businesses favoured VAT, and that is the direction things went.
No concrete proposal to scrap VAT has been made; what Mr Tancoo has announced is a review. Nor has any timeline been set, though the review will be started in the current fiscal year. The minister has noted that any transition will need legal amendments, administrative restructuring, IT reconfiguration and consultation. All of this will take time. The budget’s gesture of making some food items zero-rated acknowledges that VAT will be around for a while.
Notable nonetheless is the signal sent. There is an obvious need to tackle the current system. Not a year seems to pass without businesses complaining about late VAT refunds. The two-month filing and reconciliation framework, coupled with the build-up of this backlog, creates a situation prone to delinquency, undermined confidence, strain and audit inefficiency.
Yet, the risk is that the government replaces one set of problems with others.
A sales tax applicable only at the ultimate point of transaction would not only be simpler, but it could also allow the focus to shift from what is being purchased to who is purchasing it.
At stake is a huge chunk of annual revenue. The current VAT system has been netting handsome returns in recent years: $6.6 billion in 2023, $9.5 billion in 2024 and an estimated $8.3 billion in 2025, according to finance ministry documents. That’s almost as much as total projected oil revenue for 2026.
Such figures underline the need for only the most careful planning moving forward.
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