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Is VAT Inflationary?

A general concern in countries introducing a value-added tax is that this tax would be inflationary. There have been important debates and literature over this issue.

“...Introducing VAT would not necessarily lead to inflation, since inflation is a continuous increase in average prices over time and does not refer to a once-and-for-all increase in prices...” By Syed A. Basher, Special to Gulf News – Published: August 2, 2008.

“...The introduction of VAT, can never, by itself, lead to a sustained increase in the rate of change in the price level...” Published by Economy Watch April 16, 2005.

Economists all over the world have viewed that VAT is not inflationary.

For example: after VAT was first introduced, a survey was conducted by Alan S Tait on its impact in several countries on the basis of International Monetary Fund data. The most important conclusion of the survey is that there seems to be nothing inherently inflationary about the use of VAT. In 29 cases— 83 per cent of the total sample reviewed—the introduction of VAT did not alter the rate of price change.

A uniform VAT would result in a one-time increase in the general price level. However, introducing a VAT may not fully result in a one-time increase in overall level of prices if the VAT is not a supplement but substituting to existing taxes.

In Seychelles, it is critical to notice that VAT will replace the current GST. The taxation rate will remain unchanged (both the GST and the VAT rate are 15%). So, there cannot be any direct impact on the sale prices.

In addition, the high VAT registration threshold (SR 5 Millions) will leave most of the small businesses out of the VAT system. Unless voluntarily registered, none of them would be entitled to charge VAT on their sale prices.

Importation of goods which are ‘basic necessities’ such as (meat, fish, poultry, milk, wheat, rice, lentils, oil, infant formulae, medicines, and educational materials, etc.) will be exempted. Seychellois households should not be affected by any VAT-related impact on the sale price of these goods by retailers.

Most importantly, moving from GST to VAT would have an offsetting price effect because of the elimination of the cascading tax. As a matter of fact, VAT registered businesses will get input credit for the VAT paid on their purchases. This means that—thanks to the off-setting/deduction mechanisms —the VAT effective rate will be lower than those prevailing before.

In certain sectors such as construction and tourism previously exempted from GST either at the point of entry or the point of sale but not exempted or zero-rated under the Value Added Tax Act 2010 however, consumers might experience a minor one-shot and for all increase in prices, if some traders want to adjust their price and pass the charge on to their customers. But this will not be automatic because VAT registered traders will get an input tax credit (reducing the effective tax burden), and in a competitive environment, some of them (registered or not) will prefer to slightly reduce their margin instead of taking the risk to lose customers.

For more information
You can contact Seychelles Revenue Commission on 4293737 or email us at
The Value Added Tax Act, 2010 is available here.

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