General Sales Tax: A difficult dilemma? [Archives:2007/1017/Business & Economy]

January 18 2007

By: Raidan Abdulaziz Al-Saqqaf
[email protected]
And Mahyoub Al-Kamali

Away from politics and partisan quarrels, what is the big idea behind General Sales Tax? And what are the secrets behind the unrest associated with the announcement of enforcing this law which was first approved four years ago and has been delayed more than once? While businessmen continue to challenge this law and threaten to go to the streets en mass especially since the public are already concerned about the implications of the tax and expect a price hike once the tax is enforced.

The tax has been enforced in spite of the delay, the delay which was for political reasons according to Mohammed Al-Afandi, director of Center for Strategic Research, reasons seem to be associated with the political support of businessmen for President Saleh as well as funding his elections campaign with YR 1 billion last September.

In line with that, Noman Al-Suhaibi, director of the Tax Authority, indicated that the fuss on the issue of the sales tax is unreasonable, especially since the law was first legislated in 2001 and was delayed on more than one occasion in order to allow the business community to understand the law and prepare to deal with it in a systematic manner. They could get their accounting books up-to-date so taxation can become an organized affair. He also added that there will not be an actual burden as this law is a replacement of the 1991 law for taxing production and consumption, with the fundamental difference being that the new law is highly sophisticated compared to the 1991 law.

Good for Business

Al-Suhaibi also indicated that the law aims to regulate business transactions and also provide information on the different stages and level of business in such a manner that allows the government to monitor and control prices and availability of commodities in a highly transparent manner, which acts in the favor of the consumer. However, several businessmen see the new law as a cut in their profitability as it will not allow them to play the market and manipulate prices through controlling the supply of goods, which was possible under the 1991 act as it only taxed goods upon entry to the country or production. It left businessman free to do anything thereafter and price them according to what he sees fit. The new law will keep a constant eye on the movement of goods.

The new law also motivates businessmen to take the lead in the process by being proactive, as business enterprises can voluntary calculate tax and deposit it into bank accounts without having someone from the tax authority visit them and follow their tax payment. This mechanism will not only curb corruption, but it would also save time and resources of both the enterprise and the tax authority while maintaining high levels of transparency and clarity and in turn making business operations run smoothly.

Tax Avoidance

The General Sales Tax law also aims at curbing tax avoidance by forcing business enterprises which annual sales exceed YR 50 million (YR 40 million for service-based enterprises) to maintain sound accounting records and to keep record of all financial transactions. This law will make the amount of tax clear. The law also forces businesses to provide annual statements describing the size of their operations, coupled with the mechanism in place to allow voluntary calculation of tax on the part of the businesses by submitting monthly or annual reports on their operations, while the tax authority would acknowledge receipt of those reports and check for cases of fraud or tax avoidance.

The ironic issue regarding this law is that the government has said that only 1500 businesses will be affected by the law. They are large enterprises which annual sales exceed YR 50 million or YR 40 million for service-based enterprises. Those businessmen say that once this tax law is enforced prices will raise by 5 to 10 percent, in spite of the removal of other taxes from the 1991 tax law. At that time prices of most goods were hiked including several food commodities, which were exempted from taxes under the new law. Therefore the eventual cost of this law is faced by local consumers who are manipulated by the business community with no attention given to their suffering from the authorities.

Al-Suhiabi also indicated that the new law does not provide additional yield for the government, as it comes only as a replacement for the 1991 tax law, with a difference that new taxes will be imposed on the sale of accessories and recreational products which are used by limited numbers of people in the upper segments of the society. The new tax has also allowed 300 goods to be sold tax-free falling within 27 categories including food and agricultural products and medicines, in addition to 17 basic services such as power, water and fixed phone services.

Businessmen Objections

Director of the Sana'a Chamber of Commerce, Mahfoud Shammakh, says that after the court of appeals refused to halt the operation of the General Sales tax law, that it has become government policy to interfere with the legal system and prevent us from explaining to the public how unconstitutional the new tax is. He also added that the Chamber of Commerce tried to discuss the tax law with cabinet ministers and the prime minister but eventually the new tax prevailed and has become a new obstacle to investment and enterprise in the country.

The business community has summed up their objections that the new law allows the Ministry of Finance and Tax Authority unlimited authority which contradicts with several civil laws which does not allow government agencies to such authority without a court order. Additionally, they say that the new tax has a potential to result in uneven pricing strategies of products which would result in the collapse and even bankruptcy of several businesses which operate with thin margins of profitability.

Discussions between government legislators and the business community have resulted in several changes in the General Sales tax, which were approved in the parliament in July 2005 in spite of strong resistance of the opposition. however, Yemeni businessmen still see that the implementation of the law in its current form would eventually result in a price hike, and would potentially hurt the role of business in national economic development as well as increase poverty in the country, counting on President Saleh to interfere and order suitable changes of the law in a manner that maintains current prices and is considered fair to the business community while ensuring transparency in the tax collection mechanism.