What does VAT have to do with tourism?

The reduction of Value Added Tax (VAT) from 15% to 12.5% which took effect February 1st 2016 in Trinidad and Tobago, was a political election promise to lower cost of living. However, it seems this fiscal measure came with unanticipated adjustments with revised zero rated items.

Very briefly, Value Added Tax (VAT) is a country’s fiscal policy which registered businesses charge on goods or services; and reclaim what they paid on business-related goods or services. In Trinidad and Tobago , we have a standard vat rate on goods and services; and a list of  zero rated commodities which meant that they were still VAT-taxable, but the rate of VAT charged to customers would be 0%.

This recent fiscal plan is a costly and time consuming exercise for any vat registered business operators.Operators in the tourism industry would have to re-adjust entries for purchasing ; revisit modules for food and beverage costing; update pricing on retail /accounting system; and reprint menus with the adjusted prices. This is just one aspect of how registered businesses deal with the change on vat . So what about the impact on the sector? Would the reduction on vat change the behavior of the consumer spend?

The impact of lowering tax for the tourism sector , which is already price sensitive, has its merits, as taxation changes could contribute to competitiveness and fairness. Ideally, the impact of cost savings by the reduction of vat and zero rated items , should allow operators to reinvest in plant and operation, generate employment and improve staff wages. Of course, this impact is achievable if the tax savings is sizable enough to realize change in the industry within 3 to 5 years.

Let me highlight a simple example, a Pizzeria , would purchase raw materials to prepare it’s  pizza; and offer bottled water (zero rated) for resale.  Assuming resale price of the pizza and bottled water are both sold at $10.00 each, then the customer pays $21.50, if vat of 15% was applied.  With the new change on fiscal policy at 12.5% , and the  revision the zero rated item, the customer is now paying $1.00 more, with the assumption that the selling price of the goods remains the same. Is this change working for the sector?

Interestingly,  within the past two weeks of February 2016, there has been a spike in the U.S currency by almost 11 cents on the dollar. What this suggests,is that the cost of imported goods would be sold at higher prices. From my very own experience,  Heinz mustard which was sold at  $38.00 up January 31st ,2016 is now sold at $48.00 by the same supplier. This alludes to the fact that the selling price , using the the initial example would be even higher, which the consumer will have no savings.

It is my perspective that the industry operators would be challenged to be competitive and maintain standards at the same time. Inevitably, cutting quantity and quality for the sake of selling at best price would not be a promising solution for operators. With the  U.S currency increase, and other factors combined, prices is expected to inflate suggesting that consumer spend may change, perhaps becoming budget conscious. On the flip side, business operators would be unable to absorb rising costs and therefore these increases would be passed on to the customer, that is, if the operator wish to maintain quality offering. From an economic perspective of supply and demand, if the customer cutback on spend then the establishments, for instance restaurants, may experience low or no turnovers. This will lead to negative growth in the economy as no monies would trickle downstream. So where does that leave the tourism industry?

Where the reduction of the vat was welcomed , the U.S currency increase will erode competitive advantage for many in the sector. I believe that the sector need to lobby government to stimulate the domestic economy and the destinations competitiveness by: 1.Reverting vat on technology to zero rated, as it is critical business tool for operators in the industry;2. Consider zero rating basic food items produced by local manufacturers; 3. Consider zero rating beverages manufactured by local producers; 4. Consider providing vat refunds for international tourists; and 5. Promote MICE, Cultural Exchange , Sport programs both large and small that can stimulate demand to both island destinations.

Author: Lisa Shandilya, MBA.(Specialized), CEM., B.Sc., 20 years Practitioner in the Hospitality and Service Sector, Member of THRTA, Speaker on International Hospitality and Service Industry Seminars.
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