THE GOVERNMENT MUST tighten up more of public sector expenditures before we can begin to think of introducing Income Taxing in Vanuatu.

As the consultation process continues on this bold government initiative that has got a lot of heads turning we think it is our duty to put something forth on what we think are some necessary steps to take before this ideas becomes a part of Vanuatu’s legal framework.

First of all, if the income tax is going to become a reality then the government, especially the public service sector, needs to effectively manage its collections and spending’s otherwise corruption, or lack of proper management, will reduce the peoples trust in the system.

According to the estimates provided by the Revenue Review Team who are doing the consultation, if the income tax was introduced a huge surplus of revenue will be added into the national treasury.

This will, of course, add surplus to the national budget. But how well will the surplus be managed? That is the challenge that needs to be solved. Because, if we have two to three billion more extra cash then there needs to be a transparent and better management system in place so that people can trust and know that their monies are spend the promised way.

It is of deep concern that tax money, because it is in the billions, could be siphoned away in small amounts into someone’s pocket, or towards unnecessary spending’s.

The administration of the tax system should be fully equipped to fight corruption because such systems are vulnerable. For instance, just this month in Sierra Leone, West Africa, an assessment was made on their tax system by the Budget Advocacy Network (BAN) “with a view to highlight key areas of concerns, reform and opportunities to light the darkened shadows that clouded tax regime in Sierra Leone.”

The BAN is a united front of several NGO’s including Transparency International Sierra Leone (TISL) and its purpose is to ensure “a greater inclusiveness in the budget process, increase access to information and improved responsiveness geared towards achieving gender sensitive and poor budget and programs”.

And in light of this ‘darkened shadows’, this is what their Commissioner of the Anti-Corruption Commission said; “The absence of a fair and equitable tax system breeds corruption…tax management is an attractive sector for corruption to take place as the opportunities and incentives to engage in illicit activities are abundant”.

Moreover, in 2014 the International Monetary Fund (IMF) collaborated with other organizations to address tax administration through an initiative called the Tax Administration Diagnostic Assessment Tool (TADAT) because tax collection “is a central function of government, and weak tax administration can compromise development, growth, and trust in government. Like all government agencies, tax administration face strong public demands for efficient service delivery, operational accountability, and transparency”.

Convincingly, if the tax income is implemented then the administration of those taxes should be corruption-proof.

Furthermore, there are several things that are on the list that needs to be tightened, and one of them is the effectiveness of internal control for non-salary expenditure of which the Vanuatu Public Financial Management Performance (VPFMP) Reports of 2009 and 2013 simultaneously rated a ‘C+’.

In 2014 an economics expert from the University of the South Pacific estimated that approximately over 50 million of unbudgeted vatu are spend on fuel, maintenance, and the purchase of G-vehicles annually.

In that same year, about three months after the 50 million vatu estimation by the economics expert, the Ministry of Finance recorded an increase of expenditure “due to the intrusion of unbudgeted items during the beginning of this year” – Vehicle-replacement cost VT 21.7 million (or 185 per cent) more than what was budgeted for at VT 11.7million, according to the 2014 Half Year Report.

CLICK HERE to visit the Vanuatu Ministry of Finance website.

Strategically, was the unbudgeted VT 10 million spend on the vehicles constructive? Or should that money been used to pay hundreds of students school fees?

The government needs to show more commitment if it wants to tax working citizens by effectively controlling its expenditures, especially those that are not budgeted for. This also means that it is important to avoid political gratuity payments, which according to a Transparency Vanuatu report in 2015, increased by a staggering 18% since 2002.

Furthermore, the VPFMP Report identified that “increased payroll costs and unbudgeted expenditure have raised expenditure levels. In 2009 and 2010, actual revenues were also significantly less than anticipated due to a combination of ambitious forecasts, changes in trade agreements and weak enforcement”.

But it must also be noted that those were reports that reflected the works of previous government, and must not reflect the current government. However, according to national financial information gathered for the 2016 half year report several services have already exceeded their budget limits by a high thousand percent.

The big question to ask ourselves is; if we are trying to raise revenue to upgrade public services and to pay off loans then why are we spending more than what we budgeted?

According to information from the Ministry of Finance the government of Vanuatu has actually spent over VT190 million vatu of unbudgeted funds in the first half of this year on additional vehicles, vehicle hire, acting allowances, court costs, official entertainments and several more.

To conclude, there are mechanisms that needs to be tightened up and unnecessary spending must be stopped because these are the monies that should be used to increase access to areas like the education, communications, health and other services.

It is also important to be mindful of corruption in this sector. In a Working Paper (Tax System: A Channel for Corruption – Or a Way to Fight It?) published by Transparency International in 2015 several main entry points for corruption in taxation were pointed out;

Reporting taxes: This can happen with or without the involvement of tax collectors and through the use of incentives and resources to exert influence (legal and illegal) to allow for inaccurate reporting (e.g. of company turnover and/or expenditures and/or individual earnings).

Collusion: Tax officials take advantage of their authority to issue tax exemptions or levy lower tax rates for individuals or companies, creating a context of policy capture.

Patronage: Ties of community or kinship may favour or penalise certain constituencies, such as by lifting certain exemptions, imposing additional levies, or unevenly enforcing tax compliance.

International tax fraud and evasion schemes: Opaque global financial systems exacerbate the problem through legal and illegal channels and often use tax havens as part of the process. Weak legislation, legal loopholes and the breaking of laws often permit companies not to pay taxes where the profits are made, and instead shift these monies to other jurisdictions with lower tax rates. As the World Bank President recently stated, such company actions are a form of corruption.

All of these issues can be classified, either directly or indirectly, as forms of tax evasion.

Overall, Transparency Vanuatu recommends that existing policies need to be tightened to protect national revenue and enforce better management of public assets because they cost a lot of money. And if we are to pay taxes we would want to know that our monies will be put into raising the quality of life in Vanuatu and not to pay off unnecessary subjects, and for this to happen the government has the important task of convincing the people to trust that this proposed system will work.

Lastly, Transparency Vanuatu wishes to commend on the string of public consultations that has been undertaken by the Revenue Review Project Team, it is a challenging task, it consumes energy and time, but it must be done. Everything that will go through parliament must go through a participatory consultation process so that everyone is aware of, and participates, in shaping Vanuatu’s future.

 

 

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