A Foreword by The Commissioner General of the Guyana Revenue Authority

No­one enjoys paying tax ­ but taxes are necessary to provide for education, hospitals, welfare services, roads and national security.

It is right therefore that every citizen should make a contribution to the running of the State.

At the same time, every citizen should expect to pay only a fair and proper share and should not have to contribute more than is necessary as a result of administrative inefficiencies, or because others have cheated by avoiding the payment of their taxes.

For this reason, taxes should raise the maximum amount of revenue for the minimum cost and be protected against fraud ­ without placing unnecessary burdens on the taxpayer, or interfering with the free flow of legitimate trade.

That is why the Guyana Government decided modernise the tax system by adopting a Value Added Tax (VAT) to replace some existing out­dated taxes. In fact, six taxes, including Consumption Tax, will disappear when VAT is introduced on 1 January 2007.

The Guyana Revenue Authority has been given the task of implementing and operating VAT and we are committed to ensure that it is fairly and efficiently administered.

It is my intention that VAT will be administered effectively, fairly and in a business­ friendly manner and I am pleased to give an assurance that the Guyana Revenue Authority will provide all necessary help and information to enable taxpayers to meet their legal obligations.

We will be responsive to the needs of the public and the business community. In return, we seek your co­operation and compliance.

Details of how you can access more information or receive further advice and help are included in this leaflet. We hope you will find it useful and informative.

Kurshid Sattaur

Commissioner General 1st December 2006 Guyana Revenue Authority

AN INTRODUCTION TOGUYANA’S VALUE ADDED TAX

From 1st January 2007, Value Added Tax (VAT), together with an Excise Tax on motor vehicles, petroleum and tobacco products and alcoholic beverages, will replace six existing taxes, including Consumption Tax.

This leaflet is one of a series produced by the Guyana Revenue Authority to explain why this new tax is being introduced, how it will operate and how it will affect businesses and consumers. It also provides a short summary of the VAT legislation.

As such, it is not legally binding. Whilst care has been taken in preparing this leaflet, readers are advised to consult the Guyana VAT Act # 10, 2005 and VAT Regulations for authoritative text. In cases of conflicting interpretation, the legislation takes precedence.

What is VAT?

Value Added Tax is a tax on the domestic consumption of imported and locally produced goods and/or services (not exports), paid as a percentage of their value at the time they are sold or acquired.

The Tax is chargeable at every stage of production, distribution and supply (as value is added to the product or service) and is collected by VAT­registered businesses from their customers when they sell goods and/or services that have been defined by law as taxable (known as 'taxable supplies').

Registered businesses must account for the tax they collect and must make regular payments to the Guyana Revenue Authority.

However, VAT is a tax on consumer spending ­ not a tax on business. In fact, registered businesses actually gain under a VAT system because they are allowed to deduct any VAT they incur on their business expenses, subject to certain conditions, thereby reducing their overhead costs. This also benefits the consumer since, in this way, a 'tax cascade' effect is avoided. You don't pay VAT on VAT, as happens with some other forms of consumption taxes.

(Note: Business expenses include the legitimate costs incurred in running a business ­ such as raw materials, tools, processing costs and sub contractors' fees ­ but not employees' wages, private expenses or motor cars, unless motor cars form an essential part of a transport business, such as a taxi or car hire company).

Why do we need VAT in Guyana?

VAT is successfully in use, in various forms, in more than 120 countries around the world and, in addition to avoiding a tax­on­tax situation, it has many features that make it an attractive revenue­raising option for Guyana. ­

• It is a more stable revenue source than many other taxes. It avoids the economic uncertainties and fluctuations of direct taxation.

• It provides an immediate cash flow benefit to the Government.

• Substantial amounts of revenue can be generated, even at relatively low tax rates, and the revenue accrues steadily throughout the supply chain.

• It is a fair system because it affects a broad range of taxpayers ­ ensuring that more people who benefit from public services also contribute to paying for them.

• Because it applies to most goods and services it does not unfairly discriminate against a few goods, as do some forms of Sales Tax.

• It is an efficient and relatively inexpensive tax to administer. • The compulsory issue of tax receipts and invoices provides an audit trail that

makes it easier for the tax authority to uncover fraud and evasion.

• The system fits in well with the normal procedures that traders adopt for their routine accounting and, because the system is largely self­monitoring, there is the added benefit for the honest trader of minimum interference by tax officials.

• Unlike corporation and personal income taxes, VAT does not tax investments and savings. It encourages saving rather than spending.

• The tax incurred in the production of exports can be refunded, assisting exporters to be competitive in the world market.

• Visitors to Guyana will contribute to the country's revenue when they purchase goods and services for domestic consumption.

• VAT is effective in controlling the growth of overall consumption.

It is not surprising, therefore, that since the mid­1980s, many advanced countries of Europe and Asia have tried to rebalance their tax systems away from a heavy reliance on direct taxes and towards the taxation of consumption under a VAT­type regime.

A typical VAT transaction

This is how a typical VAT transaction works.

Let us take the example of three registered traders involved in the manufacture and sale of a chair ­ a timber merchant, a furniture maker and a shopkeeper ­ where the rate of tax is 16 per cent.

First the furniture maker buys wood from the timber merchant. If the value of the wood is $1,000 the timber merchant charges the furniture maker $1,000 plus 16 per cent VAT, making the total cost $1,160.

The timber merchant must give a receipt for the transaction and keep a record of the sale. He is then responsible for paying the $160 of VAT to the tax authority.

Having made the chair, the furniture maker then sells it to a shopkeeper for $2,000. In doing so, $1,000 of value has been added to the original item. The furniture maker must therefore charge the shopkeeper $2,000 plus $320 ­ representing 16 per cent VAT ­ making the total cost of the chair so far $2,320.

Again the furniture maker must give a receipt for the transaction and must keep a record of the sale. He then pays $320 to the tax authority, minus the $160 VAT he paid on his raw materials. So the tax authority receives another $160.

Finally the shopkeeper sells the chair to a customer for $3,000. More value has been added to the chair. The shopkeeper therefore charges his customer $3,000 plus 16 per cent VAT of $480 ­ a total of $3,480.

Again, he must give the customer a receipt and keep a record of the transaction. He then pays to the tax authority $480 minus the $320 VAT he has already paid to the furniture maker.

So, as the sale of the chair has progressed, the tax authority has received $160 from the timber merchant, $160 from the furniture maker and $160 from the shopkeeper ­ making a total of $480, or 16 per cent of the final cost of $3,480.

However, at the end of the chain, it was the consumer, not the businesses, who eventually bore the whole VAT of $480, representing 16 per cent of tax on the final value of the product.

How will VAT work in Guyana?

The Guyana Revenue Authority (GRA), which manages the administration and collection of all direct and indirect taxes, customs duties and other Government revenues, such as licences and fees, will be responsible for the implementation and operation of VAT in Guyana.

From 1st January 2007, VAT will be applied on most goods and services that are supplied for domestic consumption, at a standard rate of 16 per cent of their value at the

time of sale or acquisition. Taxable supplies will include both goods and services provided locally and imported goods, if they are for use in Guyana.

As mentioned above, VAT will be collected by registered VAT businesses from their customers when they make sales of gods and services that are prescribed in law as taxable.

The value of these taxable supplies will be determined in terms of their value in money, or money's worth, according to the fair market value, where there is a benefit or 'consideration' other than money, charged to the customer, such as an exchange of goods and services.

With regard to imports, VAT will be charged on their total value (packaging and any Customs duties or Excise Tax will be deemed to be part of the value) and will be collected by the Customs Department of the GRA in much the same way that Customs duties are currently collected.

There is provision in the Guyana VAT legislation for some relief from VAT by means of zero­rating or exempting certain items. Zero­rated supplies are those goods and services that are classed as 'taxable' but, for mainly economic reasons, are taxed at a zero rate. Exempt supplies are those that, for social or difficult­to­tax reasons, are not taxed.

Zero­rated supplies will include basic food items, medical services and supplies (including prescription and 'over­the­counter' drugs), education services and materials (including books), electricity supplied under the Electricity Sector Reform Act, water and sewage services, some locally­produced building materials, motor vehicles older than four years, computers, sports gear (subject to the Customs Act), fertilisers and pesticides, small gift parcels (subject to the Customs Act), Government projects, goods for export, international travel, coins and banknotes imported on behalf of the Bank of Guyana, the sale of a going­concern and incentive schemes for the purchase of large capital items.

'Exempt supplies' are those that, for social or difficult­to­tax reasons, are not taxed. Examples of exempt supplies are kerosene, liquid propane gas (cooking gas), gasoline and diesel, residential rent, insurance and financial services (such as loans, currency exchange, money transfers, deposits, savings accounts and the management of investment, annuity, pension and preservation funds) and locally­mined raw gold and diamonds.

For further details of zero­rated and exempt supplies, see the VAT Act # 10 of 2005 and the Guyana Revenue Authority's information leaflet, “What is taxable under VAT?”

Although no VAT is charged on zero­rated or exempt supplies, there is an important difference between them. Businesses supplying zero­rated supplies are able to reclaim, or offset, the majority of VAT incurred on their business expenses. Businesses making only exempt supplies must not charge VAT and cannot reclaim any VAT on their overheads.

The new tax will replace six existing taxes ­ Consumption Tax on imported and locally produced goods, Service Tax, Hotel Accommodation Tax, Entertainment Tax, Purchase Tax and Telephone Tax ­ thereby simplifying and streamlining the present system of indirect taxation.

As a result, a few goods and services may be more expensive under VAT, because they are not subject to tax under the present system. However, many others will cost less, since they will be taxed at a lower rate and, overall, taxpayers should not pay any more tax than they do at present.

Indeed, there is the potential under VAT for registered businesses to pass on some of the savings they have made on their overhead costs, as a result of being able to reclaim the majority of the VAT they incur on their business expenses.

Responsibilities of businesses

Businesses will be required to register for VAT before 1st January 2007, if their annual turnover, or projected turnover, of taxable supplies (i.e. those goods and services subject to the standard or zero­rate of tax), exceeds, or is likely to exceed a limit, or threshold, of $ 10 million, or at any time thereafter when their taxable supplies exceed or are likely to exceed the threshold in any period of 12 months or less.

From 1st January 2007, these registered businesses must charge VAT to their customers on all standard­rated goods and services.

Those businesses below the statutory threshold will not be required to register, although voluntary registration will allowed for suitable businesses operating below the threshold at the discretion of the Commissioner General. Normally, this dispensation will be for businesses whose ability to comply with the VAT Law is not in doubt and which have good grounds for registration, e.g. supplying bigger businesses which choose to deal only with other VAT­registered businesses.

Businesses providing only exempt supplies will not be eligible to register for VAT, since exempt supplies are not taxable. Those providing a mixture of taxable and exempt supplies will be required to distinguish between them and only their taxable supplies will count in meeting the registration threshold.

Non VAT­registered businesses (whether as a result of being below the registration threshold or because they supply only exempt goods and/or services), will not be able to obtain relief on any VAT incurred in the course of their business and will be prohibited from charging VAT to their customers. They will be classed as 'final consumers' and any VAT they pay in the course of their business will 'stick' with them. The prices they charge to customers will, of course, reflect their higher overhead costs.

Before registering, businesses, or 'taxable persons,' must obtain a Tax Identification Number (TIN) from the Guyana Revenue Authority. After registration they will be issued

with a registration certificate. This certificate, or an authorised copy, must be prominently displayed at the main place of business and the TIN must be recorded on all sales invoices.

Note: A failure to register renders a person liable for any tax that is due, from the date that registration should have commenced in addition to financial penalties and a possible term of imprisonment.

The VAT Law also requires that the amount of VAT charged must be included, or shown separately, in the displayed or advertised price of goods and/or services. It must not be added 'at the till.'

VAT­registered business will have to issue invoices for each taxable supply they make and keep records of their sales and the amount of VAT they have collected. Within 15 days of the end of the monthly tax period they will have to make returns to the Guyana Revenue Authority and pay the tax they have collected from their customers, less any allowable VAT incurred in their business costs. VAT returns must include a declaration of the value of any imports and the related VAT; the value of exports; and the value of exempt supplies.

In VAT parlance, sales and their related VAT are referred to as 'outputs' and 'output tax' and purchases, expenses and their related VAT as 'inputs' and 'input tax'.

If during any monthly tax period the amount of input tax is greater than the output tax, a credit will be carried forward to the next tax period.

Although VAT is largely a self­regulating tax, registered businesses will be visited from time to time by VAT officers to check on the accuracy of records, returns and payments. They will be legally required to co­operate with the officers and to provide any information necessary for verification.

Responsibilities of the Guyana Revenue Authority (GRA)

The Commissioner General of the GRA will have legal powers to enforce the VAT Law and Regulations and to protect the Revenue. This will include the authority to enter, search and seal premises and to initiate prosecutions ­ but not the power of arrest.

He will exercise these powers and administer the tax through the VAT and Excise Tax Department of the GRA, with the Customs Department collecting the VAT on imports on his behalf.

(Note: The power of search and entry may require the presence of the Guyana Police to enforce the Commissioner General's authority and to make any necessary arrests of persons).

Fraudulent attempts to evade the payment of VAT, or to divert tax monies for unlawful personal use, work against the whole of society. Therefore, the penalty for fraud will be severe ­ a prison sentence, a heavy fine, or both. There will also be a system of administrative financial penalties for failure to register, late declarations and payments etc. and interest may be charged on late payments.

However, it is not the intention to persecute legitimate businesses who make genuine mistakes ­ rather to encourage and assist their voluntary compliance.

To this end, VAT will be managed in a 'business­friendly' and flexible manner. The GRA will be responsive to business needs and, as far as possible, will accommodate business practices in order to minimise the cost of compliance.

All businesses will receive an educational visit from VAT officers as soon as they register to ensure that they are fully prepared to meet their VAT obligations and the GRA has produced a comprehensive series of easy­to­read tax education notices and leaflets dealing with various aspects of VAT. (See 'How can I find out more about VAT?' Below).

In addition a 'Help Desk' has been established to respond to enquiries from the business community and the public. Details of how to contact the Help Desk are printed at the end of this leaflet.

If the Commissioner General fails to pay a refund, he is liable to pay interest to the taxable person.

An independent Review Board has been appointed to adjudicate appeals against decisions made by the Commissioner General. Decisions of the Review Board can be appealed to the High Court on a point of law.

Consumer Protection

Only those businesses that are registered for VAT are allowed to charge the tax to their customers. In fact, it is likely that only larger businesses will be registered.

Therefore, in order to assist consumers in identifying bona fide registered businesses and to ensure that the correct amount of tax is paid, certain safeguards have been incorporated in the Law.

Registered businesses will be required to display their certificate of registration prominently at their place of business. They will have to give receipts to their customers, which must include a description of the goods, the amount of VAT paid and their VAT number.

This will provide an audit trail that will make fraud easier to detect.

For their part, customers who are charged VAT on their purchases should ask for a receipt from the supplier, showing the amount of VAT that has been charged. This will be an important means of helping to prevent tax fraud.

If customers suspect that they have been improperly charged VAT, they should report the matter to the GRA. There are severe penalties for VAT fraud.

Finally, the Government has undertaken to keep the provisions of the VAT legislation under continuing review and to make changes where it identifies cases of undue hardship.

How can I find out more about VAT?

Copies of the VAT Act and VAT Regulations may be obtained from The Parliament Office, Brickdam, Stabroek, Georgetown, or viewed on the Guyana Revenue Authority website www.revenuegy.org

The Guyana Revenue Authority has also published a series of information leaflets to assist the business community and the general public. Among those that might be of particular interest are:

• A guide to the Guyana VAT legislation

• A guide to the Guyana Excise Tax legislation

• A beginner's guide to VAT for businesses

• VAT and Excise Tax registration

• Keeping records and accounts (This leaflet contains a suggested accounting method)

• Partial exemption

• Filling in your VAT return

• The Taxpayer Identification Number

• VAT and the consumer

• What is taxable under VAT

• Visits by VAT officers

These can be obtained from: The VAT Department, Guyana Revenue Authority, 210E Albert and Charlotte Streets, Bourda, Georgetown, or your local VAT office, or they can be viewed and downloaded from our website www.revenuegy.org

How can I get further help?

The GRA welcomes direct approaches from the business community and the general public. We have therefore established a VAT Help Desk to provide an information service for everyone. It is available from 8.00 am to 5.00 pmMonday to Friday.

You can contact our Help Desk officers by letter, e­mail, telephone, or by visiting the VAT Department Headquarters at the above address in Georgetown. They will be pleased to answer any general questions you may have about any aspect of VAT, or arrange for an official response to be provided on a specific issue. They will also be able to arrange for an individual appointment, during office hours, if necessary, to give you the opportunity to discuss your particular business query with a specialist tax official.

The dedicated Help Desk telephone number is 227 7929

In addition, the GRA also offers seminars for various sections of the business community, both during and outside normal office hours, which include a basic introduction to VAT.

You do not need to be registered, or liable to be registered, to take advantage of these services.

GRA Public Info VAT & ET 006/Dec 06