CET - FIRST YEAR OF OPERATION

The new system of indirect taxation, known as CET, introduced on 1st July 1997 by virtue  of the Customs and Excise Tax Act, 1997, has now been in operation for a year.  It would be appropriate therefore to give a cursory review on its operation from  the administrative, legal and revenue aspects.

Administration  of  the  CET  System

No tax system can yield positive results unless the administrative structures required to implement the system are geared to ensure a smooth, efficient and effective operation of the particular tax system.  With this aim in view, even before the coming into force of the new tax system, the Department made all the necessary preparations to ensure a smooth changeover from VAT to CET.  This included changes and enhancements to the Department’s software and training of its personnel on the various aspects of the CET law.  

Any indirect tax system which involves the participation of business operators in its implementation, makes it imperative on the Department entrusted with its operation to ensure that the core elements of the system are well understood.

To this end, an extensive educational campaign was launched by the Department regarding the CET system.  As a result, all queries raised by taxpayers and the general public at the initial stage of its introduction were answered.  This campaign included educational meetings with taxpayers, information meetings with the general public, educational visits to taxpayers, television interviews, the publication of educational leaflets and other publicity material on the media.

This campaign focused mainly on the correct filling of tax returns, proper use of the cash register and the issuing of tax invoices as well as on the importance of keeping proper records and other documents by business operators.

Besides, other meetings were held with the constituted bodies, bankers, accountants, insurance companies, property agents either on the initiative of the CET Department or at the request of the aforementioned bodies or groups of persons whenever it was found necessary to clarify certain difficulties which cropped up as regards the correct interpretation of particular provisions of the CET Act.

These initiatives helped in no small measure to ensure, despite some initial difficulties inherent in the introduction of any new tax system, a relatively trouble-free changeover and a very stable and normal first year of operation.  

As a matter of fact, there was a gradual decrease in the number of calls and queries on the CET system by business operators and the general public to the level of normality.

A comprehensive enforcement strategy plan to ensure compliance as well as the timely collection of dues under the CET Act was followed with very good results.  As a matter of fact, the compliance rate of the submission of tax returns exceeded 90% and the collection rate of the tax declared reached a level of 99%.

Legal aspect of CET

The legal implications of the CET Act were generally well understood by all.  However, one would expect that certain difficulties with regard to the interpretation of particular provisions of the CET Act were bound to arise as normally happens with all forms of tax legislation.  It comes as no surprise that the CET Act was not an exception.

However, to ensure as far as possible uniformity of interpretation, the Department published guidelines in the Government Gazette to clarify certain provisions of the CET Act.  Besides, a Departmental Interpretation Committee was set up to examine queries made by business operators on certain provisions of the CET Act and make recommendations thereon.  Such interpretations are eventually communicated to the business operators concerned to be complied with.

A tax system has to be dynamic if it is to be effective and to respond to particular exigencies that emerge from time to time.  With this aim in view, the Department has already prepared amendments to the CET Act to smoothen particular provisions of the Act to make it more user-friendly on the one hand and more operationally effective on the other.

Moreover, the Department has set in train procedures leading to the amendment of the CET Act in the context of the policy of the Government of Malta with regard to the setting up of a Free Trade Zone with the European Union.  These amendments will be effected at the appropriate time.

Revenue from CET

The effectiveness of any indirect tax system is bound to be measured by the level of revenue it generates.  In so far as CET is concerned, one may say that the revenue targets set for the first year of operation were in line with the Budget estimates and have been achieved.  In this regard, it is pertinent to explain that of the three bands of taxes of CET, only ETI became fully operational from 1st July 1997 in the sense that ETI, being collected at the point of entry, yielded revenue from the very first day of the introduction of CET.

The other types of taxes, that is ETP and ETS, started yielding results in September 1997 and approached fully operational levels towards December 1997 and January 1998.  Statistically speaking, the following were the results achieved.

ETI

From 01.07.97 to 31.12.97 - Lm17.0m

From 01.01.98 to 30.06.98 - Lm18.9m

ETP/ETS

From 01.09.97 to 31.02.97 - Lm  9.1m

From 01.01.98 to 30.06.98 - Lm15.9m

Refunds on Stocks - Lm10.6m

The above figures are provisional since actual revenue for June 1998 has not yet been recorded by the Treasury Department.

Impact of CET on Department’s operations and business operators

Being a single stage tax, CET has had a positive impact on the operations of both the Department and the business operators.

The CET Act, besides stipulating a wide range of industrial machinery, equipment and materials to be imported free of tax, also enables MDC to issue certificates to manufacturing firms and hotels, among others, exempting them from paying tax on imports which are otherwise liable to tax.  This system, besides relieving small businesses of undue pressure on their cash flow, has made it less difficult to the Department to exercise control and verify exemption.

CET has also automatically eliminated the need for the refund mechanism of input tax which was an essential element in the previous tax system.  Although a mechanism of refund of tax exists under CET, such refunds are very limited and do not constitute a heavy drain on revenue collected since they could be more effectively verified and controlled.

The threshold mechanism under CET has also relieved thousands of businesses from their obligation to charge and collect tax on behalf of the Department.  Retailers have been likewise exempted from collecting tax irrespective of their annual turnover.  Such businesses are therefore allowed to submit their tax returns on an annual basis, relieving them from the previous obligation to submit their returns on a quarterly basis.

This resulted in a significant drop in the number of returns to the Department as well as in significant savings in compliance costs on the part of such businesses.

The CET system also brought about a reduction in the volume of taxable transactions.  This has enabled the Department to deploy its limited human resources in areas where the exercise of stricter control on tax evasion is paramount.  Such controls, coupled with other measures which the Department was obliged to take in terms of the CET Act to ensure compliance through enforcement of the various provisions of the Act, seem to have contributed to a very positive outcome on the operations of the CET Department since its introduction on 1st July 1997.