More VAT exemptions call is ‘fool’s argument’

Friday, April 7, 2017

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Chamber’s chairman yesterday described calls for increased Value-Added Tax (VAT) exemptions as “a fool’s argument”, warning it would not reduce the taxation burden for poor Bahamians as intended.

Gowon Bowe told Tribune Business that the Chamber, its Coalition for Responsible Taxation (CRT) and all private sector representatives involved with VAT’s implementation would be “very concerned” if election campaign rhetoric on VAT became reality.

He explained that while ‘exempting’ electricity bills, health and education from VAT sounded good, such policy action would not reduce taxation costs for low income Bahamians.

For industries whose products are treated as VAT ‘exempt’ are unable to recover the 7.5 per cent levy paid on their ‘input’ (factors of production) costs, since they cannot charge the tax to their consumers.

As a result, ‘exempt’ businesses are left to ‘absorb’ the VAT, increasing their costs, which are inevitably passed on to consumers in the form of higher prices.

Mr Bowe said “individuals in great need” would thus end up paying VAT either way, either as a 7.5 per cent levy added to their bill, or embedded in increased prices for goods and services.

The Chamber chairman’s comments came before last night’s Free National Movement (FNM) rally, at which the party’s leader, Dr Hubert Minnis, again repeated his pledge to eliminate VAT on key services and products.

Those targeted for VAT ‘exempt’ status by Dr Minnis include so-called ‘breadbasket’ items, likely meaning food products that are already price controlled.

The FNM leader is also promising to exempt electricity and water bills; education; and health from VAT, despite warnings from the likes of the International Monetary Fund (IMF) - as well as the Bahamian private sector - not to do so.

Addressing last night’s FNM rally at Christie Park, Dr Minnis said: “An uncaring PLP put VAT on breadbasket items, making things worse for poor people. The FNM will remove VAT on breadbasket items.

“ It is unconscionable that the PLP put VAT on health care. When you or your children, or your parents, get sick, the last thing you need is VAT on your health bill. This is especially so considering the hundreds of millions of VAT money and other revenue the PLP wasted.”

Dr Minnis’s position is contrary to the latest IMF report, which describes the Bahamas as having the “most productive” and efficient VAT in the Caribbean - and one that is also better-performing than the average for OECD, European and Asian countries.

The Fund said the Bahamas’ performance stemmed directly from its ‘low-rate, broad-based’ model that contained few exemptions, with this nation’s VAT structure held up as something for the rest of the Caribbean to emulate.

Warning against the exact same policies being promoted by Dr Minnis, an IMF paper on tax administration reforms in the Caribbean, said: “Initially, Caribbean countries intended to introduce VATs with very broad bases, limited schedules for exemptions, and zero ratings.

“However, the scopes of these schedules were expanded at the time, or since the passage of the VAT legislations in several countries, thereby reducing VAT potential.”

Mr Bowe acknowledged that Bahamians had “already heard” talk of increased VAT exemptions “on the campaign trail”.

While the Chamber and private sector “are less concerned right now because it is all political talk”, they would become “very concerned if [politicians] actually seek to implement it”.

Mr Bowe said the Chamber and private sector had “offered to sit down and explain the merits of a simple” VAT system to Opposition politicians and others, but not say whether there had been any takers.

Taking education, Mr Bowe said “it sounds good not to have VAT” on the sector. While tuition fees are already treated as ‘exempt’, the Chamber chairman urged Bahamians to consider the impact if schools and colleges were unable to recover the VAT paid on electricity, maintenance and other services.

“If they’re unable to charge VAT on their auxiliary fees [to consumers] to offset that, those auxiliary fees will have to go up,” Mr Bowe explained.

He added that it would be the same with medical fees, if the likes of doctors and hospitals had to absorb VAT on their inputs, thereby increasing their costs.

“You’ll pay VAT either way; either upfront or embedded in the price,” Mr Bowe told Tribune Business.

“Creating exemptions from VAT is only a shifting of the cost, and individuals in great need will pay it in some form or fashion. In a blunt way, it’s a fool’s argument effectively.”

The Chamber chairman said the Bahamas should instead focus on ensuring its VAT system remains relatively simple, and retaining the ‘low rate, broad base’ model.

To achieve this, Mr Bowe said administrative efficiency needed to be maximised, as this would keep public sector costs low when overseeing VAT collections and filings.

He also called for social assistance programmes to mitigate VAT’s impact on lower income Bahamians in “a more effective way”, urging that they: “Teach a man to fish, give a man a fish.”

Dr Minnis’s policy promises, while likely striking a populist chord with some Bahamians, could be especially problematic for food stores as they would increase the proportion of inventory treated as VAT ‘exempt’.

For example, if 60 per cent of a food store’s inventory was VAT-able, and 40 per cent ‘exempt’, that business would be unable to reclaim 40 per cent of the VAT paid on its ‘input’ costs - such as rent and utilities.

This, in turn, increases that business’s operating costs, forcing it to increase prices to compensate. These price increases might encompass a broader base of goods, and greater rises, than if all goods had been VAT-able.

Backing Mr Bowe’s arguments, the latest IMF paper advised the whole Caribbean: “Simplifying the system and broadening the tax base are among the main directions to take.

“Initially intended to be a broad-based, single rate tax, the VAT’s legislation has deviated from these objectives. Zero-rating of domestic supplies, generous exemptions, lower rating of tourism activities, and low registration thresholds have affected its performance negatively and compromised administrative efforts.

“This paper argues that, instead of eliminating the VAT, the objective should be to strengthen it.”

Comments

Well_mudda_take_sic says...

Re-post: Bowe and others like him suffer from myopia when it comes to basic economics. Unchecked government spending slows the velocity of money in an economy, especially an economy where monetary policy is subject to an exchange control regime and national debt has reached critical levels. Add to that slowing the slowing effect of a VAT regime and you have a recipe for fiscal disaster. The IMF knows all about this but nevertheless has been insisting countries throughout the Caribbean impose this form of taxation on the citizenry after helping their irresponsible governments take on enormous amounts of unsustainable external (foreign) debt! Bowe and the other idiots like him fail to appreciate why the IMF pushes regressive rather than progressive tax regimes on economies like ours that the IMF itself has already made fragile. The IMF does it to create instability as a part of the fulfillment of their greater mandate explained in more detail in my separate posting below. Please wake up Mr. Bowe!

Posted 7 April 2017, 4:52 p.m. Suggest removal

The IMF is strongly encouraging our government to increase the VAT rate from 7.50% to the originally proposed 15%. What most Bahamians fail to realize is that the IMF is a U.S. government controlled agency charged with the mandate of effectively bankrupting third world countries so that U.S. corporate interests can acquire their natural resources, utility enterprises and prime real estate, etc., for pennies on the dollar. If the government of the third world country refuses to co-operate with the IMF after being bankrupted (as was the case when the Venezuelan government under Chavez refused to turn over the bulk of the profits from its oil fields to U.S. corporate interests like Exxon Mobile and Chevron), the heavy arm of the U.S. government teaches the third world country a horrible lesson by shutting it down and relegating it to failed statehood. The average Venezuelan has lost 28 pounds over the past 18 months due to serious food shortages and has seen their currency debased to worthlessness. As for tooth paste, washing soap and detergent, electricity, toilet paper, etc.....these are now all luxuries well beyond the reach of the average Venezuelan. As for the Bahamas, our time is drawing near because our governments are much too stupid to realize what the end game is all about when it comes to taking on unsustainable levels of external (foreign) debt and taxing the private sector out of business.

Posted 7 April 2017, 4:57 p.m. Suggest removal

Reality_Check says...

Repost - Unfortunately what you say here seems to be true even though the IMF has for years casually dismissed such revelations as unwarranted conspiracy theories raised by quacks. But neither the IMF nor Mr. Bowe can point to a single country that the IMF has actually helped rather than destroyed!

Posted 7 April 2017, 5:25 p.m. Suggest removal

empathy says...

Mr. Gowon Bowe, who is a very successful accountant and financial expert, has gotten his facts exactly right. His succinct arguments make perfect sense and is backed up by empirical evidence from the IMF paper and more importantly from our own Bahamian experience: VAT is a good idea and has been successful for what it was intended to do: collect taxes in a fair and honest way. It seems to me that VAT is victim of its own efficiency and success?!

Now that is not to say the there aren't things that need to be tweaked. Any policy put into practice needs to "adjust on the fly", and for it to be truly successful, needs to correct itself once put into action. The authorities need to make those adjustments to our VAT for it to be even fairer and better.

Those blaming the irrational excessive spending habits of "government" on VAT have misplaced their understandable anger. It would be like blaming your boss because you got drunk and crashed the car celebrating a huge raise. Our frustration needs to be directed at our politicians and those in government doing the spending (and stealing).

Dr. Minnis needs to get the cold facts on VAT and Mr. Bowe is someone without political affiliation who can give it to him. Although one wonders how much influence his very well informed candidates have on him on this point? D'Aguilar, Symonette, Lloyd, Sands et al?!

Posted 7 April 2017, 7:11 p.m. Suggest removal

I suspect you are one of the more wealthy Bahamians quite comfortable with a regressive VAT that is disproportionately burdensome to the poor and oppressed among us.

Posted 7 April 2017, 9:12 p.m. Suggest removal

Socrates says...

a lot of rubbish talk will make headlines in the coming weeks.. pie-in-the-sky talk like wiping out debt, employment for all, cut all taxes, etc. we have a spending problem in this country and every promise made will require more spending, but they will tell you in the same breath they will reduce the tax burden.. figure out how that will happen..

Posted 8 April 2017, 3:35 a.m. Suggest removal

Porcupine says...

The bigger picture would include looking at how many countries have benefited from taking the IMF's advice. And, to expand one's thinking to look outside the box of remedies that simply don't work.
Personally, I see someone's "success" in accounting and being a "financial expert" to be a liability, not something that encourages critical thinking.
If one looks at the realities of the last few decades, it is clear that most all of the economic gains went to the FIRE sector of the economy.
FIRE stands for Finance, Insurance, and Real Estate.
These are the least "productive" parts of the economy.
It is dealing with money for money's sake. Making money on money. Making nothing.
Most people can understand that once you become an expert in anything the chances of you thinking outside the box becomes increasingly difficult.
Therefore, it is a liability to become too focused on any particular methodology, especially when that methodology is clearly a failure.
The IMF has helped impoverish more people globally than most any policy making institution I can think of.
They have replaced democratically elected officials with bankers.
Mr. Bowe is asking us to buy into the idea that if something is not working, just do more of it.
Regressive taxation is not Christian. Who cannot agree with this statement?
It is certainly not fair. Nor is it productive.
The incredible increase in income inequality and wealth disparity in the world is not due to the working people being less productive, it is a direct result of our taxation schemes.
Accountants and financial experts MUST pander to the rich, or they wouldn't do very well.
Once that ball is rolling it is easy to start taking on some of their thinking. Selfish thinking.
The sooner we start using our intellect, instead of relying on entrenched, unimaginative, and politically correct experts, the sooner we will find solutions that actually work.
Given our literacy rate and lack of investment in education, it seems an educated person wouldn't be holding their breath waiting for The Bahamas to come to terms with these issues.
Hell, we can't even figure out how to keep the electric current on and how to stop killing one another.
I went into our local Family Island grocery store yesterday and a gallon of milk was $12,50.
Perhaps our financial experts can speak about how an average Bahamian can make ends meet on what the government and the private sector are paying in wages.
We are in a race to the bottom, and the likes of Mr. Bowe only secure our place in hell.

Posted 8 April 2017, 6:30 a.m. Suggest removal

You will never hear the likes of any of these individuals and their families argue for a simple fair and equitable progressive wealth tax: Brent Symonette, Craig Symonette, Branville McCartney, Loretta Butler-Turner, Allyson Maynard-Gibson, Perry Christie, Dr. Minnis, Sebas Bastian, Craig Flowers, Dionisio D'Aguilar, Bradley Roberts, the Kelly family, the Pritchard family, the Hazelwood family, Marvin Pinder's family, the Holowesko family, the Pyfrom family, B. J. Nottage, Philip Davis, Lady Pindling, the Thompson family, the Alexiou family, the D'Albenas family, the Mortimer family, the Mosko family, Franky and Sharon Wilson, and on and on, including even the less wealthier but nevertheless relatively wealthy Gowon Bowe. Why should they? These people are only too content to have the less fortunate in our society bear a grossly disproportionate share of our country's taxation needs through a very regressive VAT, customs duties, stamp duties, excise taxes and many other government taxes and fees of one kind or another.

Posted 8 April 2017, 11:30 a.m. Suggest removal

sheeprunner12 says...

VAT is being collected by the private sector ............. but only 30% of the public service taxes are being collected by government agencies ......... the country cannot pays its bills even if ALL of the VAT is collected by the private sector (who still has to take a loss in the process).

Posted 8 April 2017, 12:47 p.m. Suggest removal