Value Added Tax Reform

Value Added Tax Reform

Value added tax is an indirect consumption tax imposed on goods and services at each stage of production, from sales of raw materials to finished product, and levy-able on the final consumer.

There is much speculation in the run up to this year's budget that VAT will rise from 21% to 23%. Originally planned per the National Recovery Plan as a two-stage rate increase to 23% by 2014, Finance Minister, Michael Noonan, has since floated the idea of bringing forward this rate to January 2012. Ireland last tried to increase its VAT rate in 2008 with a 0.5% rise to 21.5%. However, due to lost trade over the Northern Ireland border, which had a much lower VAT rate, we were forced to retract this rate increase by the end of 2009. Exports have grown strongly since 2009 and the last thing we need is to take a step backwards. Exports play a huge role in Ireland's economy, contributing significantly to national income. We propose a year delay in the plan to raise the top rate of VAT in order to ensure that the export sector continues to flourish. Government shouldn't push rates higher while neglecting national competitiveness especially considering the UK Government's current consideration in rebalancing the Northern Ireland economy to allow the North have an even lower rate of corporation tax than the rest of the UK1. Indeed KPMG attests to the global trend for rising VAT/GST in light of world economies dealing with credit crunches, banking sector instability, subprime mortgage crises and the global recession, however also reports that average worldwide indirect tax rates have been relatively stable for the past 3 years, hovering around the 15.47% mark2. A VAT increase to 23%, although capable of revenue raising, is likely to contract economic activity and hamper growth.

We would also propose a review of all the sectors availing of the recently introduced 9% VAT rate.* Although this special rate was introduced to boost consumer spending and aid certain struggling sectors, there is evidence to suggest that not all of these businesses are passing the reduction on to customers. Hot take-away food and admission to cinemas are just two examples of prices that do not appear to have decreased. Although there is no legal obligation on businesses to pass on the tax cuts, it completely undermines the government's attempts to stimulate consumer activity in the sector if they do not. Any businesses found not to be passing on the cuts should be taxed at the old rate of 13.5%.