IMF: Reduce VAT exemptions (with CNC3 video)

The International Monetary Fund in June this year advised the Government to strengthen non-energy revenues by reducing value added tax (VAT) exemptions and reforming property taxes, according to the 2012 Article IV consultation. On Saturday, Prime Minister Kamla Persad-Bissessar announced that the Government intended to remove the 15 per cent VAT on all food items effective November 15, which means that the Government would effectively be increasing VAT exemptions.

In the Article IV consultation, the IMF said that T&T needed to implement a “major shift in the fiscal trajectory” in the medium term, given the fact central government spending has remained at pre-2009 levels although “the large 2009 decline in nominal GDP put the economy on a lower trajectory.”

According to the IMF: “Expenditures are significantly higher relative to GDP, but revenues have not recovered. The prospective decline in energy output and related revenues will further undermine public finances eventually requiring an abrupt adjustment.”

Budget Focus 30-09-2012

As a result, the IMF mission, which was headed by Judith Gold, recommended to the Government that it set forth a “credible medium-term framework that smoothes consumption and accommodates investment to support development and diversification.” What the IMF described as the “active scenario” would require the Government to reduce total expenditure from 35.1 per cent of GDP in 2012 to 31.5 per cent in 2015.

This strategy is based on:
• Holding subsidies and transfer constant in nominal terms, which would involve rolling back some of the large increases in the past decade;
• Allowing other non-interest components of current spending to grow in line with GDP;
• Strengthening non-energy revenues by improving tax administration and broadening the tax base, including by reducing exemptions under the VAT and reforming property taxes.

The IMF acknowledged that the reduction in spending in the medium term could reduce the growth of the non-energy sector, but said that the “improved confidence in the sustainability of the fiscal framework may largely mitigate this risk. The Government told the IMF that “planned reforms to eliminate wasteful expenditure and strengthen the tax revenue efforts will restore public finances back to a balance position or even surpluses.

In the budget document Draft Estimates of Revenue for the 2012 Fiscal Year, the Government estimated that it would collect a total of $45.6 billion. Of that amount, approximately 40 per cent comes from the energy sector—that’s about $18 billion.

As the total collection of taxes from income and profits was projected to be $29 billion in 2012,it is estimated that non-energy companies and individuals contributed about $11 billion in tax revenue…that’s about 24 per cent of the total revenue collected. The Government projected that it would receive $6.5 billion in VAT in 2012, which was about 41 per cent more than in 2011. In the scheme of things, VAT brings in a sizable chunk of money…about 14 per cent of the total revenue collected by the Government.