Friday, November 2, 2012

Commentary: A question about that VAT

I am not in the supermarket business or any business for that matter. And since I don't have an MBA or other fancy business credentials I must confess I am no expert on business. 

That is why I have ask what might be a stupid question about the whole Value Added Tax (VAT) business and how supermarkets might react to the changes that will take effect in two weeks.

Legal Affairs Minister Prakash Ramadhar told reporters Thursday he has heard concerns about price gouging by food stores in anticipation of a loss of profit when the VAT is taken off 7,000 items.

So this is the question: How will your profit diminish if VAT is no longer paid on thousands of items? I would guess that profits may actually go up because consumers would have an extra 15 per cent to spend, which is the value of the tax.

The only way I can see a "loss" is if the supermarket folks have been stealing from the government by collecting the VAT from consumers and not forwarding the tax to the government. 

In reality the price of food won't change. If a commodity is $10 today it should be the same on November 15. The only difference is that $1.50 in VAT would not be added. 

If everything is working right, that $10 item and VAT should be marked $11.50 today but it would go down to $10 on November 15 and the supermarket will not lose a penny. And the consumer would benefit.

But that is assuming that no one has been stealing the tax and pocketing the money. 

My suspicion is that the supermarket owners want to keep the VAT because every day they collect thousands of dollars in tax and bank that money in short term investments and pay the government later. Now they won't be collecting the VAT so they'll lose the investment interest. And that's the real issue.

Here's an example. 

I know of one small supermarket that had average sales of $4 million per month.  (I have seen the sales record for this very small grocery, so just imagine what the really big ones sell every month.)

For simple calculation, let us assume all the items carry VAT. That means that $600,000 of that money belongs to the government but doesn't reach the government immediately. That $600,000 goes into the business owner's account where it earns money. 

With VAT gone, that little business deal will disappear, which explains why some business people have a problem with taking off VAT.

I have never heard anyone complain about taking off a tax. But this is Trinidad & Tobago ... and in the eyes of some people, anything the government does is wrong. Even if it means cutting your grocery bill by 15 per cent.

Perhaps we really have a money tree in T&T, which explains why there are so many Audis and BMW's on the road. Even Dr Rowley has one of those really fancy X6 that costs between C$66,000 and C$100,000 before tax (depending on the model) in Ontario, Canada where I live.

Jai Parasram

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Jai & Sero

Jai & Sero

Our family at home in Toronto 2008

Our family at home in Toronto 2008
Amit, Heather, Fuzz, Aj, Jiv, Shiva, Rampa, Sero, Jai