Ex-minister: VAT exemptions are 'disaster recipe' all around

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

An ex-Cabinet minister yesterday said the government was "damned if you do, damned if you don't" over the VAT hike, as he warned that increased exemptions are "a recipe for disaster".

Leslie Miller, the former Tall Pines MP, told Tribune Business he was hopeful the Minnis administration will "settle down" to a ten percent VAT, as opposed to the proposed 12 percent, given the "all around whammy" this threatens to inflict on Bahamian consumers.

Expressing concern that middle and lower income Bahamians have little more to give the Public Treasury, Mr Miller backed warnings that the shift away from the present low-rate, broad-based VAT model would open up tax avoidance loopholes.

He argued that the cost of living in The Bahamas was "incrementally increasing every six months" regardless of whether the VAT rate is increased, with rising global oil prices set to exacerbate this effect just as the Government's fiscal austerity measures take effect.

"I'm hoping the Government settles down and brings the VAT to 10 per cent," Mr Miller told Tribune Business. "I think they threw 12 per cent out just to see what the reaction was. I'm hopeful perhaps they will settle at 10 per cent, and that will ease a lot of the noise in the market.

"It's not the businesspeople that will be hit by VAT; it's the regular consumer. My concern is for the poor people that cannot afford a VAT increase. The Government says it will take VAT off breadbasket foods, but that's not so easy to do.

"It's a hell of a situation to segment that market to such an extent that they actually assist those people who need it. He's [the Prime Minister] between a rock and a hard place."

Several private sector representatives, including Bahamas Institute of Chartered Accountants (BICA) president, Gowon Bowe, have said an increase from the present 7.5 per cent VAT to 10 per cent would be easier for businesses and consumers to swallow.

The Government, though, has shown no signs of backing down from plans to raise the VAT rate by 60 per cent to 12 per cent. It has argued that its internal analyses have shown only the latter rate will generate sufficient revenue to close a $400 million 'funding gap', which is comprised largely of $172 million in unfunded "arrears"; $79 million to end so-called 'under-budgeting'; and $89 million in extra debt servicing (interest) costs.

The Minnis administration is, as Mr Miller said, between "a rock and a hard place" over its fiscal austerity measures, caught between the need to pay-off a total $360 million in unfunded arrears and meeting Fiscal Responsibility Bill targets that require it to deliver a GFS deficit of 0.5 per cent of GDP (around $50 million) by 2020-2021.

It sees the VAT increase as the quickest, and easiest, way to achieve both its 2018-2019 and other short-term objectives, but Mr Miller joined those warning that this Budget's various 'zero ratings' and exemptions opened the doors to greater tax avoidance by Bahamians.

"With people raising the hell they're raising, a lot of individuals are going to duck it as much as they can," the former Cabinet minister told Tribune Business. "This is a recipe for disaster, because people are going to go under the radar.

"You're opening the floodgates for people to do what they should not be doing, but to survive in this tough economy people will do what is necessary to pay the bills and move on with their lives. It's a whammy all around. You're damned if you do and damned if you don't."

Multiple persons, including the likes of Sir Franklyn Wilson, have warned the Government that a 60 per cent VAT rate hike does not automatically translate into a 60 per cent rise in revenues - the very thing its Budget projections appear to be based upon.

Other observers also fear the Government will not realise the $400 million revenue increase forecast, which could immediately throw-off its deficit reduction plans and other fiscal targets.

"I think the consumers are going to get hit so hard," Mr Miller reiterated of the VAT increase. "The cost of living in the Bahamas is going up incrementally every six months, especially on food items, clothing.

"Electricity bills are certainly going up. Oil prices are going up, meaning prices at the gas station pump are going up, but at the same time salaries have not changed one iota. How do you expect me to have this additional burden yet you are not helping me on my pay cheque?

"It's a hell of an uptick for those at the bottom of the ladder. They're catching eternal hell. It's not fair."

The Chamber of Commerce has warned that the VAT increase, and other austerity measures, are especially ill-timed given that the economy was showing signs of improvement amid an initial revival of business and investor confidence.

The concern is that sucking an extra $400 million out the economy via the VAT increase will rob the Bahamas of such momentum, and jeopardise the 2.5 per cent GDP growth projected for 2018.

Mr Miller, meanwhile, argued that it was also "unfair" to increase the web shop industry's taxation burden by such magnitude, pointing to the sector's warning that it will be forced to lay-off 2,000 workers and close 192 locations unless the Government backs down.

"We've got to see how this thing works out, and hope it doesn't crush a middle class that is being depleted every week, and the country going into poverty," he told Tribune Business. "We've got to grin and bear it, I guess, and hope the Government considers it and makes some adjustments based on the feedback they get. All of is have to live with the consequences of their actions. Let's see what happens."