Next govt urged: Initiate VAT rate, exemption review

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The next government has been urged to review both the VAT rate and associated exemptions in a bid to maximise revenue yields and lower the burden on struggling Bahamians post-COVID-19.

Rupert Pinder, a Bahamian economist who lectures at the University of the Bahamas (UoB), told Tribune Business that “more analysis is required” to determine whether the multiple VAT exemptions introduced by the Minnis administration in the 2018-2019 budget had increased the costs and complexity associated with administering the tax as well as creating the potential for revenue leakages.

He was backed by James Smith, the former Central Bank governor and ex-finance minister, who questioned whether the government may have enjoyed greater income from its leading revenue source via a lower VAT rate with fewer exemptions as opposed to the present 12 percent.

However, they and private sector executives also urged Philip Davis, the official opposition leader, to provide more clarity on his party’s tax reform plans should it win the government in the upcoming general election following his pledge to determine whether VAT is still a “viable” or “appropriate” revenue-raising mechanism in COVID-19’s aftermath.

Mr Pinder, suggesting that Mr Davis’ comments were “not necessarily definitive one way or another”, and insufficient to provide guidance as to which direction a PLP government may take, nevertheless said: “One of the things this administration did, and it surprised me people didn’t call it out more, was that they increased the VAT rate and introduced a number of exemptions.

“In introducing the exemptions I’m not sure if they diluted the increase and created a lot of leakages. There’s more analysis required, but what they’ve done is create a level of complexity with the VAT by introducing a number of exemptions.... You can perhaps increase the revenue yield and overall efficiency with a lower rate. That could very well be an argument.”

Mr Pinder argued that the jump to 12 percent, which represented a 60 percent hike on the previous 7.5 percent rate, as well as the exemptions for items such as food, medical and insurance services, merited an assessment by the next administration - whether PLP or FNM - to determine if they were producing the desired results.

The Minnis administration argued that the VAT rate hike was necessary to pay-off some $360m in past due government arrears for which no funding had been set aside to meet. This sum was supposed to be paid off in three years, with ex-deputy prime minister, K Peter Turnquest, pledging that the Government would seek $100m in import duty cuts when this objective was achieved.

Those cuts will not now occur due to the debt blow-out produced by the combination of Hurricane Dorian and COVID-19. And the Minnis administration’s decision to increase the VAT rate, as well as implement numerous exemptions, resulted in The Bahamas moving away from the ‘low rate, broad-based’ tax model it had been praised for introducing.

The Bahamas had been warned against doing this by former Barbadian prime minister Owen Arthur, who on a visit to Nassau revealed that the southern Caribbean nation, by giving into industry and special interest requests for ‘exemptions’, had been forced to raise its own VAT ‘rate’ into the high double digits.

Exempting products and services from VAT has knock-on consequences for both businesses and consumers. Companies are unable to recover the VAT they pay on their ‘inputs’ when products they sell are exempt, meaning that this merely increases their costs.

A broadening of VAT exemptions also prompts businesses to increase prices on non-exempt items to compensate for their higher costs, thereby hurting the consumer who was the very person that the Minnis administration wanted to help. And the Government also has to ‘make up’ for the VAT revenue foregone elsewhere in its tax structure.

Mr Smith, too, echoed Mr Pinder in arguing that the VAT rate and exemptions need to be assessed more closely. “They may have lost on the rate going so high from 7.5 percent to 12 percent as it’s a big jump,” he told Tribune Business.

“One needs to determine the elasticity, meaning that if you increase the price of something there will be some impact on demand that is not necessarily one-to-one. Sometimes you can raise taxes too high and end up with less receipts because you reduce the spending power of the nation and aggregate demand.

“If you raise the rate from 7.5 percent to 10 percent you may get more money, but if you raise it to 12 percent you may get less. I thought that would be the kind of review that should manifest itself with the VAT.”

Meanwhile Rupert Roberts, Super Value’s president, said he wanted more clarity from Mr Davis on what he meant by his comments regarding a VAT review.

“He has got to say if he wants to eliminate it or if he wants to decrease it or if he wants to increase it. I can’t comment on just a review. I think we need more information from Mr Davis on what he means,” Mr Roberts said.

“What’s the purpose of just reviewing? That is just political nonsense. Mr Davis is just campaigning. That’s not saying anything, at least not to me.”

Dwayne Higgs, WHIM Automotive’s general manager, said: “What does he mean: An increase or a decrease? This is typically what governments do: Stop, review and cancel, right? That’s nothing new.

“You’re really in a catch-22 when you come in, because if you increase it, people are going to bellyache and complain, which they should, and if you decrease it, the Government has even less revenue than they had before. So you may be better off leaving it as it is.

“Everybody has all the great, wonderful ideas on what you should do until they get in the driver’s seat and they see what a mess it is. Then, you know, you’re very limited in what you can do because of the style of government.”

Mr Davis, speaking at a press conference on Friday, had said: “Tax reform is on our agenda and it does not necessarily mean that we are going to … but tax reform in the sense that we alleviate the burden of taxes on the Bahamian people, which may necessarily mean revisiting whether VAT is the appropriate [tax].”

Mr Davis added: “We did it before. [We will determine] whether in today’s Bahamas, following what has happened to the economy since we were last in office, whether VAT is still a viable means of taxation or whether we should move to something else, and so those will be on the table when you talk about reform.

“We don’t know what we’re going to meet when we get there, but we know what we have to do is review our tax structures and determine which route we go from there.”