Tax & Accounting Blog

Fiji’s Proposal to Increase VAT Collection: Lower VAT Rate

Blog, Featured, Indirect Tax, ONESOURCE, Tax Information Reporting November 13, 2015

Fiji’s Minister of Finance, Aiyaz Sayed-Khaiyum, presented his 2016 Budget announcement on November 6, 2015. The announcement has a value-added tax proposal that is noteworthy in two respects; the amount and the rationale.

The Minister has proposed reducing Fiji’s single VAT rate from 15% to 9%. This would place Fiji’s VAT rate below Australia’s 10%, and New Zealand’s 15%. Fiji’s VAT rate was previously 12.5% until January 1 2011, when the current 15% rate came into force. A 40% reduction in a standard VAT rate, particularly in a country without a reduced rate, is rare.

The Minister predicts that reducing the VAT rate is part of VAT reforms that will ultimately lead to a revenue gain for Fiji of $38.5 million. How can this be when the VAT rate is being reduced? (The announcement itself predicts a loss of $316 million based on the rate reduction alone.)

At heart the proposal is driven by a common problem globally, VAT fraud and evasion. Countries and regions address this in different, and increasingly creative ways. Greece has made use of a temporary “Onlookers’ VAT Evasion-Fighting Scheme” using non-professionals to monitor VAT compliance. Taiwan, Malta, the Slovak Republic, and Portugal make use of VAT lotteries, whereby customers save receipts from purchases to be entered into periodic drawings for prizes. Fiji is taking a different approach: removing exemptions on rice, cooking oil, fish, flour, tea, powdered milk and kerosene in order to prevent VAT under-reporting situations where, in the Minister’s words,

“customers pay taxes in good faith to merchants who pocket the money, those merchants are stealing from their customers and the Government.”

 The proposal continues to fund a food and medicine voucher program for individuals earning less than $20,000 annually and a subsidized electricity program for households that earn less than $30,000 annually. The overall gain from VAT on previously-exempt food items is estimated to be $108.6 million, with $120 million coming from improved VAT compliance and monitoring activities. And additional $127.5 million is expected to be raised through the Service Turnover Tax and the Environmental Levy.