Frequently Asked Questions - Q&A

FAQs - Q&A

Prices may go up slightly while the income tax is being implemented.  The reduction in fees and charges will provide an offset to some of the increased costs to businesses arising from the income tax.  The cost of living will fall when import duties on a broad range of goods are reduced.  Announcements will be made explaining what import duties are to be reduced (and when) so that consumers know what prices they can expect to fall.

Prices would go up substantially more with an increase in the VAT rate.  Businesses collect and submit the VAT from sales to the Department of Customs and Inland Revenue (DCIR).  Businesses do not pay for VAT.  Customers pay the VAT because businesses add the VAT to prices.

There will not be a general increase in salaries and wages because only income earned above the tax-free threshold of 750,000 vatu will be subject to income tax.  Only people who earn about more than twice the minimum wage pay income tax.

Some employers may increase the pre-tax wages and salaries of employees who are subject to income tax.  This will lower business profits and may result in higher prices for goods and services.  The Government Remuneration Tribunal (GRT) is currently reviewing the salaries and wages of public servants, which last increased in 2006.

Introduction of an income tax is expected to lower the cost of borrowing in Vanuatu.  Public debt has been rising rapidly.  Having an income tax will give the Government a cash flow that guarantees debt repayment.  This will reduce the risk premium, which is the additional yield investors demand for the possibility of non-repayment, and lower Vanuatu’s cost of borrowing.  The decline in interest rates is expected to flow on to other interest rates because the rates of interest that financial institutions pay or charge are closely linked to those paid by the Government.

The Department of Customs and Inland Revenue (DCIR) last year implemented a compliance improvement strategy to achieve better outcomes, and modernisation of the tax administration is an important objective of the tax reform to increase tax compliance and collections.  Vanuatu’s VAT system already has minimal exemptions.  Improved VAT compliance by itself will not raise sufficient revenue to fund current and future provision of essential Government services such as health and education.

Vanuatu has a large number of fees and charges that represent a significant burden on businesses and the community.  Often payment of these fees and charges is accompanied by complex bureaucratic processes which requires people to go to more than one agency to pay a fee or charge.  To lower the cost of doing business the Government will reduce many of the fees and charges.  Higher fees and charges would raise the cost of doing business.  They would also be insufficient to fund the necessary Government expenditure to achieve higher living standards.

Excises or ‘sin’ taxes are targeted to reduce the consumption of items that impose social costs on our community.  They are not primarily imposed to raise revenue.

Assets can only be sold once.  The Government would eventually run out of assets to sell to fund its operations.  Asset sales are a one-off source of revenue.  The Government needs an on-going source of revenue to pay the salaries of teachers, health workers, police officers, to pay for road maintenance, the operation of schools and hospitals, make interest and debt re-payments, etc.

No.  Failing to introduce an income tax will reduce Vanuatu’s prospects for economic growth because the Government will not have funding to provide the education, health, infrastructure and security needed for sustainable development.

Lower import duties will reduce the cost of living, provide greater choice in the goods and services available in Vanuatu and lower costs of production inputs for businesses.

Import duties protect from competition.  The costs of this protection are borne by consumers, who pay higher prices because protected sectors have less incentives to innovate and cut production costs to stay competitive.  With reduced import duties businesses will need to become competitive.  With protection from competition resources flow into sectors that are most protected and not necessarily sectors that are most productive and profitable.  People working in less productive and less profitable sectors earn lower incomes.