BUSINESS WORLD The Goods and Services Tax (GST)-Policy Implications...Features of Sierra Leone's GST Posted by on Aug 17, 2009, 01:09

The idea of introducing a value added tax in Sierra Leone has been around for some time now in the context of a review of the country's entire tax system. Sierra Leone’s VAT has a number of features that theoretically make it quite straightforward and as painless as possible.

First, it is a single rate tax (15%), which makes it easier to administer. Second, it uses an input-output method, which makes it self-policing. That is, although it is a multiple stage tax, it is expected to have a single effect on consumer prices and should not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid.

Third, all goods and services are ‘GSTable’, with limited and very specific exceptions. All imports are ‘GSTable’, whether imported raw materials or finished goods, and VAT on imports is calculated on the total value of the total cost, insurance and freight; except for imports of rice, fuel and others in the exception category.

Exports are zero-rated, implying that exporters do not collect VAT on exports but they can claim credit for VAT paid on their inputs.The Sierra Leone GST is going to have a very wide base with relatively few exemptions. Moreover, VAT does replace the a number of sales taxes, which have a narrow base and discriminated against locally produced goods and services as it excluded imports.

Sales tax revenue new accrues exclusively to the state governments, while the VAT revenue is shared by all levels of government. Thus it can be assumed that VAT revenue is not sterilized but injected into the economy through increased government final consumption expenditure.

In short, the VAT is paid on virtually all goods and services, but the credit system implies that the VAT revenue received by government should be devoid of cascading. In the absence of cascading effects, the increase in prices of final goods and services should not be more than the GST/VAT rate, since the tax liability of a GSTable organization is the difference between GST on output and GST on inputs.

The complaints about the possible  adverse effects of Sierra Leone's GST suggest that there is a problem with the way GST  organizations are treating their liabilities, especially the VAT they pay on their inputs. Moreover, there may be a problem with the way government is managing the expenditure of the VAT revenues.

It is the official view that the VAT should have no cumulative effect whatever. To ensure the sustainability of the tax and its beneficial effects, government needs to know its possible macroeconomic impact on prices, output, income and consumption. Concern over the economy-wide effects of GST is important because of the possibility that the tax may cause consumers to cut consumption of certain commodities, hence affecting labour productivity.

Implications for Policy Makers

Sierra Leonean companies treat their VAT expenses as input costs and pass these on to the consumer. For its part, the government injects the VAT revenue back into the system as consumption expenditures. Because this combination results in a serious negative impact on the economy, it is necessary to consider strategies for ensuring both that companies treat GST/VAT properly and that government directs its expenditure toward sectors that are most likely to lessen the adverse effects of GST/VAT on consumer welfare, production, employment and income.

As a first step it is necessary to secure appropriate treatment of GST/VAT by the ‘GSTable’ organizations (organizations registered for GST) in the country. This will require a massive public awareness campaign targeted at these organizations and their customers. The VATable organizations could be reached through the media, as well as through various private sector organizations and associations such as chambers of commerce, production associations and others.

Moreover, GSTable organizations should be required to publicize the recommended retail prices for their products or services and clearly indicate the pre-GST and GST-inclusive retail prices. External auditors should be required to verify and report on the treatment of GST by the GSTable organizations. The Sierra Leone consumer protection council and civil society organizations should monitor costs and prices and ensure that GSTable organizations are treating GST/VAT appropriately.

In addition, at the government expenditure level and local governments should target their GST induced increases in expenditures at activities that will reduce operational constraints to the agricultural sector (including livestock and fishing), as well as manufacturing, especially food, drinks and beverages. These are the sectors that are most likely to suffer setbacks if the GST revenue is indiscriminately injected into the system.

This approach to expenditure of GST/VAT revenue will lessen the effects of the unavoidable price increases on consumer welfare, the nutritional status of the people, production, employment and income. Failure to address these inadvertent adverse effects of VAT will ultimately decimate the overall benefits of the tax to the economy, and will indeed threaten its sustainability especially if an increase in the tax rate is contemplated.

Probably it is the low initial tax rate that would obscure the adverse effects; without remedial measures, at a higher GST/VAT rate they will be much more visible and much more damaging.