By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A senior government official has confirmed to Tribune Business that the Value-Added Tax (VAT) rate is likely to be increased “in the not too distant future”.

John Rolle, the Ministry of Finance’s financial secretary, acknowledged that the proposed 7.5 per cent rate would have to rise to compensate for the Customs/Excise tax cuts that will be required for full World Trade Organisation (WTO) membership.

While unable to predict the timing, and extent, of any VAT rate increase, Mr Rolle said whether it actually happened would also depend on the success of the Government’s other revenue reforms.

Asked by Tribune Business whether the VAT rate would soon have to be increased, the Financial Secretary said “the experience” with the tax in its initial six months would be another key determinant.

“It’s difficult to put a timeline on when that will happen,” Mr Rolle said of a VAT rate increase. “There is expectation that it will happen in the not too distant future.”

Border tax cuts will be among the commitments the Bahamas has to make to become a full WTO member, as they are viewed as barriers to trade.

The scale of the revenue adjustment that will be be necessary is illustrated by the 2014-2015 Budget, which shows that Customs and Excise taxes are projected to collectively generate more than $714 million in revenue for the Government.

This is equivalent to 43.7 per cent of the forecast $1.633 billion in total tax revenue for the upcoming Budget year, and 36.4 per cent of the $1.963 billion in collective tax and fee income.

Either way, Customs and Excise Tax revenues account for the largest share of government income, and how much has to be replaced will depend heavily on the skills of the Bahamian WTO negotiating team.

“The Government will definitely have to be thinking about how to compensate for this,” Mr Rolle added. “That’s [a VAT rate rise] a possibility, as well as depending on the reforms that we do that improve revenue yields.”

Mr Rolle’s confirmation of a likely VAT rate increase is unlikely to come as a surprise to informed observers aware of the WTO implications for the Bahamian tax system.

Several had predicted that a VAT rate increase would have to come as early as the 2015-2016 Budget, and even the Coalition for Responsible Taxation had accepted that this tax was better than the payroll alternative as a government revenue substitute.

Still, Mr Rolle’s comments are likely to increase concerns among those who had predicted the Government’s first goal was to ‘get the camel’s nose under the tent’ by merely passing VAT on to the statute books. Their fear all along has been that once this was accomplished, the Government would rapidly increase the rate to in line with the original 15 per cent model.

Meanwhile, Mr Rolle predicted that the inflationary (Consumer Price Index) impact from not reducing border taxes in proportion to VAT would be less than 7.5 per cent - and would possibly be better than what was projected under the initial 15 per cent VAT model.

And he confirmed that because of the lower VAT rate, the Government had less flexibility to cut Customs and Excise taxes if it was to meet its revenue targets. Hence the decision to maintain border taxes at their existing levels.

“With a very low VAT, you don’t have the same revenue yield if you make a wholesale adjustment in duty,” Mr Rolle told Tribune Business. “As you lower the VAT rate , you have less and less scope for widespread rebalancing.

“I can say that if you forego duties you typically, like the modelling stated, looking at about two-thirds of revenues being foregone. The majority of the revenue yield, in some cases, is associated with revenue collected at the border.

“When we were talking about the rebalancing, and what the rebalancing did, at least more than half the gross receipts were always being collected at the border.”

Prime Minister Perry Christie in his Budget speech indicated that the Government might consider Customs and Excise Tax reductions in the 2015-2016 Budget, depending on VAT’s performance. That, though, is unlikely to ease the ‘double taxation’ concerns as a result of no proportionate drop in duties.

Mr Rolle, though, echoed Coalition for Responsible Taxation co-chair, Gowon Bowe, in arguing that the CPI impact from the new VAT model would be less than many expected.

“I can say that we fully expect it to be less than 7.5 per cent,” he told Tribune Business. “Under the 15 per cent model, we’d said the inflation would be in the 5-6 per cent range, and it could come in below that.”

Mr Rolle said the Government would release its precise CPI expectations within the next week, as it was just awaiting the final revenue modelling numbers from the International Monetary Fund (IMF) before releasing all the VAT studies conducted on his behalf.

But K P Turnquest, the FNM’s finance spokesman, was one who last week disagreed with Mr Rolle’s inflation/price increase estimate. “It’s going to be at least 7.5 per cent off the top, and you’ve got whatever inflationary effects attend to 7.5 per cent, so it’s going to be somewhere in the 9-10 per cent range by the time you’re finished,” the MP told Tribune Business. “It’s not just 7.5 per cent. There’s inflationary effects on top of that.”

Mr Turnquest suggested the Government had chosen not to drop border taxes in proportion to the 7.5 per cent VAT because it was trying to recover the revenue lost by switching to a lower model, and because it missed its original July 1 implementation date.

“They’re trying to catch up,” he told Tribune Business. “Basically, they wanted VAT for July 1 and can’t get it until January 1, so they’re going to double up in the second half of the year to make up for this year.”

Mr Rolle, though, said that despite the Government’s plan to reduce the number of VAT ‘exemptions’, a policy designed to minimise the tax’s impact on lower income Bahamians, the increase in social security spending should be less than his original $30 million estimate.

While many had been anticipating an increase in social security spending to mitigate the restructured VAT’s impact, the Financial Secretary said reforms underway at the relevant Ministry - especially the conditional cash transfer programme - would more than offset this.

“There are reforms going on in this system that improve how these services are delivered,” Mr Rolle told Tribune Business. “Doing it more efficiently and with less wastage, the reforms will allow the Government to meet its objectives without having as much of the funds leaked away for less than legitimate purposes.”

The Financial Secretary said the Government’s fiscal reform programme remained on track despite the restructured VAT.

“The framework that was announced last year had given a three-four year period for government to be in a position of seeing the deficit at very low levels and to begin to see a debt ratio decrease,” Mr Rolle told Tribune Business.

“That framework is still largely intact. That framework is still an active framework. What shows in the Budget this year is really a huge move in the direction of reducing the expenditure to revenue shortfall. I think it [the Budget] has taken a good few steps in that direction.”

Acknowledging that “execution” was now key for the Government, Mr Rolle emphasised that a ‘twin-track’ solution involving both revenue and expenditure measures remained on the table.

“You should also appreciate that the expenditure effort is still very important, and there is still a lot of work at the Ministry level in terms of making sure the expenditure measures are not beyond levels that can be managed,” he added.

“The advice that has been given to the Government is to still focus on both sides. It’s both sides of the divide, revenue and expenditure. That advice has been very pointed to the Government in terms of the commitment that needs to be evident.”