To
The department of banking and finance, Management Development Institute. In partial fulfillment of the requirements for the award of diploma 2 in banking & finance.
JUNE 2013
2.I. Review
Taxation plays an important role in the development of a country, for which The Gambia is no exception. This is because the country is a tax-based economy and solely depends on domestic revenue mobilization to meet its current and future development needs. The Value Added Tax Act was enacted in the Gambia by parliament in June 2012 and it came into effect on January 2013. As from January 2013, The Gambia Revenue Authority implemented the Valued Added Tax into taxation system .VAT is a tax base on value added productive distribution charge. When consumers buy taxable supplies, they will be required to pay Valued Added Tax to the business providing the supplies that have registered for VAT. The business concern will, in their turn over, charge, collect and recoup the revenue to GRA. This type of tax system does not apply to all, noting that some are exempted from it and others are not affected at all. VAT is not a tax that will increase the business cost or competitive businesses; instead it will only affect supply. As a member state of ECOWAS, the Gambia is required to implement VAT. The Government of the Gambia has undertaken several public financial management reforms some of which have been ongoing. The most important one is the introduction of VAT which goes with a lot of processes including the introduction of VAT into law. The income and sales taxes have been modeled to accommodate VAT. Revenue administration in the Gambia has undergone major reform and the formation of GRA in 2006 provided a solid foundation for introducing best practices.
2.2. Definition
A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs. VAT is a modern
indirect tax levied on the consumption of taxable supplies of goods and services at various stages of their production, distribution and import. Officials revealed that VAT is a more broadbased consumption tax than the current sales tax; it has no cascading effect and is good for the promotion of both domestic and international competition. The VAT rate is set at 15%, the same rate as that of sales tax, which it is replacing, Within the current sales tax system, most items have set a rate of 15% tax, with the exception of the telecommunications industry, where the sales tax is set at 20%. The VAT is a destination-based tax on consumption. Under this destination principle, exports are not taxed while imports are subject to tax. VAT is currently imposed at two rates: 0% and a standard rate of 15%. The Purchase Tax and other indirect taxes have been replaced by the VAT which is levied on all sales of goods, services, rentals and imports of goods and services. However, there are a number of exceptions that are either zero rated or exempted under the VAT system. The threshold for a business to register under VAT law is currently GMD1000, 000. The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end
consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products. 2.3. Historical Background Maurice Laur, Joint Director of the France Tax Authority, the Direction gnrale des impts, was first to introduce VAT on 10 April 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors. Value added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer a mechanism to avoid or evade the taxpersuade the seller that the buyer is not really an end consumer, and therefore the seller is not legally required to collect it. In the Gambia, the Value Added Tax Act was enacted by parliament on June 27th 2012 and it came into effect on January 1st 2013. As from January 2013, The Gambia Revenue Authority implemented the Valued Added Tax into the tax system.
2.4. Comparison with sales tax Value added tax (VAT) in theory avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favor over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.
In the present Sales tax system, tax liability of a dealer for a particular period is determined using the multiplication method i.e. The taxable turnover of a dealer for a particular period is multiplied by the rate of tax applicable to that turnover. In VAT, the method adopted is Input Tax Credit method as stated above.
With the VAT rate to be set at 15% this will likely lead to losses in revenue towards the purchase of telecommunication credits (scratch cards credits), whereby government was previously earning 20% Sales Tax on every scratch card purchased,
In theory sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers. A general economic idea is that if sales taxes are high enough, people start engaging in widespread tax evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer etc.). On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism. However, because of its particular mechanism of collection, VAT becomes quite easily the target of specific frauds like carousel fraud, which can be very expensive in terms of loss of tax incomes for states. 2.5 Registration
The VAT should be charged by businesses registered and issued with a VAT registration certificate by the Gambia Revenue Authority and that the registration certificate must be prominently displayed at the business premises. A VAT-registered person must keep full and true records of all business transactions which affect his or her liability to VAT. The records must be kept up to date and must be sufficiently detailed to enable that person to accurately calculate liability or repayment and to enable the Revenue to check the calculation, if necessary. Businesses that earned over D1,000,000(One million Dalasi) are required by law to register and those who earned D500,000(Five hundred thousand Dalasi) registration is optional. Businesses that are not registered for VAT are not required by law to charge VAT on their supplies of goods and services. Registered businesses are required to issue VAT invoices every time there is a sale of goods and services to VAT registered businesses. If that is not provided, customers should ask for their invoices. The VAT invoices must clearly state the amount of VAT that has been included in the total sales price and the VAT registration number
Sales Tax, and lead to the broadening of the tax base, ensure the collection of the optimum tax from sources thereby increasing tax revenues. VAT is a key component of the tax system of over 120 countries worldwide, raising one-fourth of the worlds tax revenues. Its introduction would address issues regarding the non-maintenance of a standardised record keeping system, as we have today.
2.7 Implementation
The standard way to implement a value added tax involves assuming a business owes some fraction on the price of the product minus all taxes previously paid on the good. By the method of collection, VAT can be accounts-based or invoice-based. Under the invoice method of collection, each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to VAT on their own sales (output tax), consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. The difference between output tax and input tax is paid to the government (or a refund is claimed, in the case of negative liability). Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method. By the timing of collection, VAT (as well as accounting in general) can be either accrual or cash based. Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of fundsno matter when the sale had been made. Cheques are written when funds are available to pay bills, and the expense is recorded as of the cheque dateregardless of when the expense had been incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred. Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports. 2.8 VAT ON BANK PRODUCTS AND SERVICES This research assume that any new federal tax on consumption will be a credit-invoice value added tax (VAT) called a Goods and Services Tax (GST) in some countries -- similar to the VATs used by about 150 countries around the world. Financial services warrant a separate attention in this research both because these industries pose unique challenges for the design of a VAT and because they are significant sectors of the economy.
VAT generally is imposed on explicit prices charged in market transactions. When a bank charges explicit fees for its services, such as services from one of its 24-hour banker machines, the value of those services is the fees charged, and the fees fit into the VAT system. A bank, however, renders many of its services as an intermediary, such as; (a) In bringing together depositors and borrowers; and (b) In conducting foreign exchange transactions. The value of these intermediation services is implicit in the margin between the interest charged on loans and interest paid for borrowed funds, or in the margin between the buying and selling rates for a foreign currency. A credit-invoice VAT system, as currently designed around the world, is not well equipped to handle many supplies of financial services, where the value of the supply is buried in interest rates. In part for this reason, under early VAT systems, supplies of financial services and insurance were exempt from VAT. While housing, medical care, education, and other services5 commonly are exempt as well, the exemption for financial services and insurance is different. It is the only exempt service that is rendered in significant amounts in business-to-business (BTB) transactions. In fact, under those early VAT regimes, the exemption results in the undertaxation of financial services and insurance in business-to-consumer (BTC) transactions and the over-taxation of these services in BTB transactions. It is the combination of the fact that (a) The value of many financial and insurance services is buried in interest rates or measurable by a margin, and (b) Financial services and insurance are exempt or partially exempt under most VAT systems, that the taxation of financial services and insurance are as complex as they are under the VATs around the world. Applying to VAT the principle of neutrality with respect to consumer choices, the tax should be imposed on supplies of financial and insurance services to the extent that these services belong in a consumption tax base and the taxation of those services is administratively feasible, whether the supplier charges an explicit fee or the charge is implicit in the margin between separate supplies. A. Financial Services A bank provide[s] an intermediation service to both depositors and borrowers by channel ing funds of persons with certain preferences regarding risk and liquidity to other persons with different preferences. For those intermediation services, the bank receives the margin between the amount the bank pays in interest to depositors and the amount it receives in interest from borrowers. The principal transactions (the amount deposited or lent ) do not represent consumption. According to traditional economic thought, the pure cost of funds, which can be represented by the short-term rate on government securities, is payment to postpone consumption and should not be included in a consumption tax base either. The
residual is the value of the intermediation services rendered to depositors and borrowers (including the risk premium). This value is includible in a consumption tax base. While the core services for many financial institutions remain intermediation services, many have expanded their range of financial services, and have even crossed -over into providing services that resemble insurance products. These institutions and their professional advisors developed derivatives and other innovative financial instruments. The instruments take so many different forms that it may be difficult to develop VAT rules to clearly identify the value of the services rendered to each party to an instrument that should be included in the VAT base. The global movements of money, internet banking, and global business have added to the complexity of international financial services. All of these activities are combined by financial institutions in a complex structure reflecting a sophisticated mix of traditional and innovative activities, of short and long term positions as well as other dynamic variables. This paper separates insurance from other financial services, concentrating on the latter. I use a bank as a surrogate for all suppliers of financial services, although the supplier may, for example, be an investment banker, a micro-finance institute, , or a lending unit of a business that is not regulated as a financial institution. Banks in The Gambia charge significant explicit fees for services related to checking and savings accounts, use of ATM machines, bounced checks, and many other services. VAT can be imposed as a percentage of fees and listed on VAT invoices. While there is some controversy as to whether broker and other services related to the acquisition and disposition of investment assets belong in a consumption tax base, the taxation of fee-based financial services can fit within the structure of a traditional credit-invoice VAT system. In the next chapter, our study will focus on how Gambian banks respond to these complexities in integrating VAT to their system.