From the onset of our discussions in regard to the timing of the VAT implementation, the SLHTA clearly expressed their grave concern that given the state of our local hotel industry and the international economic climate, the timing could not have been worse.
The SLHTA appreciated the invitation by the PM to an in-depth discussion of our concerns. Having listened to the PM’s reasoning for having to implement VAT this year, the SLHTA agreed to work together with Government to achieve the implementation date but with the understanding that the impact on St. Lucia’s hotel and tourism industry would need to be kept to an absolute minimum, given the local and international economic circumstances.
It was therefore with great appreciation that SLHTA received the news that a concessionary rate of 8% VAT would apply to the accommodation sub sector until April 30, 2013 with a possibility of extension pending an in depth review. It should be mentioned however that a concessionary VAT rate for the tourism industry is not unusual and has been granted on other islands as well for a prolonged period of time.
Given the fact that hotel contracts and pricing for the 2012/2013 period had already been finalized by March 2011, the SLHTA clearly stated that it would be important to not have these contractual obligations impacted by price increases through VAT. It is important to note that at this time and in most instances, the hotels’ contractual rate obligations are in place until Dec 19, 2013. Also, it needs to be remembered that 60-70% of all hotel reservations are received through tour operators, who receive a NET rate inclusive of tax/service from the hotels. Therefore, the rates who were established in March 2011 for the time period 2012/2013 and which will be used by these 3rd party suppliers are INCLUSIVE of the tax and service charge. The hotel sector’s biggest concern at all times has been to not affect the already weak performance of tourism even further by having to make changes to these established, contracted rates.
By asking for an 8% VAT, the hotel sector sought to facilitate the transition from HAT to VAT without affecting the already weakening performance of tourism even further. While there has been considerable apprehension in the tourism sector in regard to VAT implementation on 1st October 2012, the general consensus was that the situation was manageable were it not for the very last minute confirmation that VAT was now applicable on service charge. It should be stated clearly that the Hotel and Tourism sector was not aware of this interpretation of the VAT application on service charge until 18th September 2012 and therefore could not have calculated its impact earlier.
Many hotels and local businesses with partnerships with the hotel sector now feel that this ruling has brought us back to where we started from. To have VAT applied on service charge will have very serious implications with regard to price increases, competitiveness, cost of operations for all of our tourism businesses and for hotels in particular, even the functionality of our property management computer systems.
What is worse, at this 11th hour, it has to be obvious that hotels cannot simply impose this additional fee within a 3 day window of operations. All hotels will by now have advance reservations in place, none of which could be subjected to a price increase at this late stage. Therefore, hotels will end up having to absorb this additional cost of VAT leading to huge unbudgeted losses.
It is misleading to state that the hotels will simply pass the tax on the end consumer. The reality of the matter is that any type of rate increase at this time cannot be borne by the market.
As the SLHTA has stated all along, our originating markets are extremely price sensitive and very resistant to any price increases. Example: If a US 150 nightly rate was considered to be required to be competitive against other destinations, this amount would still be the final rate expected to remain competitive. Hence, an increased tax would still have to be borne by the hotel as the “competitive rate “ requirement would not alter.
The argument that the VAT will not affect the service charge amount that workers will receive is therefore also misleading. Because hotels now have to absorb this VAT amount on service charge in the existing room rate, further rate reductions will have to be implemented thereby reducing the room rate on which service is based. And most importantly, there is no doubt that some businesses may find it necessary to reduce their staff complement to absorb the new and higher cost of operations.
A brief examination of the VAT/ Service Charge situation on other islands has shown us that VAT on service charge is not common, in Barbados Service Charge for example is zero rated.
What we are hoping to achieve with this detailed explanation is for our Government to understand the necessity to remove VAT on Service Charge until at least April 30, 2013, giving the SLHTA time to prepare a detailed presentation to the relevant Ministries on all aspects of the VAT impact on the tourism industry and at the same time prevent serious repercussions that the implementation of VAT on service charge presents to tourism related businesses and workers alike at this time.