Shall we simplify sales tax?

The presidential candidate and former mayor of Barranquilla, Alejandro Char Chaljub, removed the talks on tax policy a few days ago, by raising the former proposal of the Colombian Liberal Party to change the value added tax (VAT) for a consumption tax, something similar to “The Taxes” in nations like the United States.

In this regard, portals such as Pulzo (link HERE) and Infobae (link HERE) highlighted the proposal to eliminate VAT, a sales tax that has deductible characteristics, for a slightly flatter sales tax, such as the consumption tax. , currently applied to meals and drinks served at the table and at home; that is, to simplify the tax.

To better understand the impact of these changes, let's review basic concepts of sales taxes and their impact on the cost structures of the productive sector.

What is a sales tax?

A sales tax is the value recognized in favor of the public treasury for the celebration of the sale of goods and services in the Colombian market; it is calculated according to a rate or percentage stipulated by the Congress of the Republic or the National Government in special situations on the price of a good and/or service –the above as a generic notion–. Now, in Colombia there are two types of sales tax: the value added tax (VAT) and the national consumption tax (impoconsumo).

The value added tax (VAT)

VAT, as it is commonly known, is a tax with a general rate of 19% (varies for some stipulated goods and/or services) on the sale of all goods and/or services to any legal entity (commercial companies or entities). non-profit) or natural person who is in the common regime –today called the Responsible VAT Regime (for more information, click HERE)–, established according to the volume of income from annual ordinary activities.

It is established as a tax rate that seeks to tax the value added or added to the sale of goods and services, thus being able to discount the costs and expenses generated in the development of the operation prior to the sale.

The web portal of the renowned accounting software developer, Siigo (link HERE), brings us a simple definition:

For example, if we buy 1 chair at COP$20,000, COP$23,800 VAT included, and sell it at COP$30,000, COP$35,700 VAT included, we would be paying the tax administration $1,900 COP, which is the difference between the VAT invoiced as a buyer of COP$ 5,700 and the VAT paid as a buyer COP$ 3,800, that is, VAT in theory falls on the final consumer.

When we refer to the economic sector of services, we find VAT as one more expense in the general cost structure of a company and that makes life more expensive for consumers in general. The magnitude of what is expressed must be understood from a sector that has a participation of around 70% of the National GDP (source HERE).

Then we have the case of the industrial sector, in which we find a productive chain that is provided with inputs in the informal sector many times or extracted by the same industrialist in other cases. In both scenarios, VAT becomes one more expense in the production chain. This is the example of those items in the family basket that are not excluded by tax regulations.

It is necessary to highlight that the Commission of tax experts of the OECD has recommended simplifying the Colombian tax scheme, especially aspects related to VAT, which has a legal labyrinth between exemptions, discounts and special rates; for the criteria of this server, suggesting a flat tax rate similar to The Taxes in the US (link of interest, HERE).

consumption tax

The consumption tax is a special type of sales tax in Colombia that seeks to tax the sale at the table, to pick up or at home, of food and drinks. That is the most well-known generating fact with a rate of 8%; however, there are other types of activities with different rates:

1. Sale of motorcycles, cars, campers, trucks and pick up, among others;
2. ships (luxury, passenger or cargo) and aircraft (luxury, passenger or cargo); Y
3. telephony, data and internet.

NOTE: For more information, we recommend this article from the Gerencie.com portal (link HERE).

It should be noted that the consumption tax for bars and restaurants is only applicable to those merchants who, with a maximum of one (1) point of sale, have not had an annual sales volume equal to or greater than 3,500 UVT -about 127 million Colombian pesos- if the year 2021 is taken as reference. In addition to this, it can be unified with the income, industry and commerce tax under the simple tax regime (you can find more information about this by clicking HERE).

Now, the crucial difference between the consumption tax and the VAT, both as a sales tax (seen generically), is that in the first one, the VAT caused in goods and services that have generated costs and expenses of the operation and in the second yes, because it is a tax that seeks to tax the added value. But one question we ask ourselves is: isn't the rate of 19% generated in the first link of the production chain very high?

The old proposal of the Liberal Party

The Colombian Liberal Party has for several years proposed (link HERE) to change the VAT for a simplified sales tax like the consumption tax. In this regard, they highlight the complexity and unreliability of the VAT discount scheme, where a very large focus of evasion is reflected. The case of restaurants is taken as an example of success, however, in the opinion of the author of this article, the change should be reviewed independently by sectors, given that some are going to benefit and others are going to suffer slight increases, this not counting the debate on collection expectations.

A sector that is destined to become much more competitive is the service sector, which moves most of the national GDP, however, for the sake of responsibility for the figures, it is clarified that many of these movements are not subject to VAT, such as most providers of professional services, part of financial services, medical services, education services and home public services, among others (source HERE).

Despite the above, the great opportunity that the country has to become a hub for services such as logistics, BPO and Back Office due to its privileged position in the region is highlighted; this, due to the reduction of an expense such as the tax rate from 19% to 8%, from which before it had little to be discounted (we highlight this in a related article HERE).

Entering the world of commerce, we have a scenario simplified by globalization and the Internet, whereby distribution chains are eliminated and the producer (the factory) approaches the retailer (the seller). This being the case, the consumer would only be assuming a 19.2% consumption tax, taking into account the 8% generated by the producer or in the process of being imported (in the example of the so-called department stores such as Alkosto, Éxito, Olímpica and Falabella, among others) and 8% of a product to which a gross profit of 40% was added (very common in these business schemes), conceiving an 11.2% tax related to the base price of the product.

It must be taken into account that the third links: the microentrepreneurs, should not be considered in the discussion, because most of them are not liable for sales tax on their registered and/or reported sales volume. In addition, a formal distribution chain that makes use of three links for the current years is considered inefficient, and any case will be a perfect example that the tariff system must be subjected to a diet that facilitates the task for SMEs.

In the case of the industrial sector, there is a stage similar to the commercial sector, with the variant that those production units that directly market their manufactured products will become more competitive. There we have an open window for the reindustrialization of the country!

Conclusions

Surely I have fallen short on such a complex issue as the tax on all sales of goods and services in the country; although it could be simpler with a tax rate that lends itself less to evasion via discounts such as VAT and that, in addition, does not require robust administrative and accounting infrastructures to carry out the process, such as not being able to deduct VAT and costs/expenses supported without electronic invoice or support document for acquisitions in order (we wrote something about that HERE).

A scenario is taken into account where the Laffer Curve (link HERE), an econometric exercise where the maximum and minimum collections are estimated with different tax rates, contemplates which profit margins stimulate the entrepreneur to carry out their activities formally and which others they encourage evasion or cessation of activities because their economic activity is not profitable.

In this regard, and unofficially, we have obtained information on a report from a technical commission of the Ministry of Finance in which it is concluded that the proposal would generate a fiscal deficit of more than COP$10 billion, according to what was expressed by various journalists specialized in networks (It is made clear that no official information was found in this regard to present the estimated figures).

And the criticism?: This committee has not estimated the impact of pursuing the evasion produced in the VAT discount process and the possible stimulation of the economy with a simplified sales tax, but it has estimated that it will correct a fiscal deficit of around COP$10 billion to pursue evasion, according to the provisions after the socialization of the last tax reform of the year 2021 (more information HERE).

This article appeared for the first time in our allied medium El Bastión.