By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Restaurants will likely be the sector that produces the biggest increase in VAT payments due to the elimination of zero ratings and exemptions, the Ministry of Finance’s top official has predicted.

Simon Wilson, the financial secretary, told Tribune Business in a recent interview that this industry had likely been the biggest beneficiary of the tax breaks introduced by the former Minnis administration in 2018 given that it purchased huge quantities of so-called ‘breadbasket’ foods that enjoyed the preferential ‘zero rated’ treatment.

The Davis administration has taken the view that this provided tax concessions to businesses that could afford to contribute more in VAT, with the revenues foregone outweighing any relief provided to low income Bahamian consumers. Mr Wilson said many ‘breadbasket’ items, such as eggs and bread, were used by restaurants and other food vendors as inputs to make the finished product.

“We think the removal of zero ratings on breadbasket items will have a bigger impact than people think because breadbasket items are intermediate goods,” he explained, pointing out how bread is used to make sandwiches and sardines are used for filling.

“Breadbasket items are mostly used for intermediate consumption, and inputs in products that are VAT-able,” Mr Wilson continued. “Restaurants buy a huge amount of eggs. If you look at what is happening, and break it down by sector, you’ll see the biggest increase in VAT payments out there will come from the restaurants and so forth.

“If you account for the [post-COVID] re-opening, VAT rate reduction and normal operating hours, all things being equal you will find restaurants pay more in VAT because of the elimination of zero ratings. What you have to appreciate is most Bahamians spend a very large portion of their budget on cooked foods. This is why this economy can stand on its own; KFC, Wendy’s, Popeyes, Bamboo Shack.”

Mr Wilson acknowledged that soaring inflation, which the International Monetary Fund (IMF) has predicted will this year peak at 7.3 percent in The Bahamas, its highest level for 30 years, will be “a big factor we have to take into account” in crafting the 2022-2023 Budget that is due to be unveiled in a month’s time given the implications it will have for the increased cost of goods and services consumed by the Government, and therefore its spending.

The full impact of the VAT rate reduction to 10 percent, and the effect on government revenues and the wider economy, will not be known until early May when the returns for March - which feature payments and filings from quarterly filers for the first time, as well as their monthly counterparts - will be fully assessed.

“The thing is in this high inflationary environment we have to adjust to it,” Mr Wilson said. He argued that inflation was likely “a very small percentage” of the VAT revenue increase witnessed during the first two months of the 2022 calendar year, as compared to pre-COVID figures from early 2020, because the sustained price rises that it brings typically lag for between three-five months before they kick-in.

Addressing the press conference given by the Prime Minister’s Office earlier this month, the financial secretary said VAT revenues had “increased dramatically” despite the Davis administration cutting the rate from 12 percent to 10 percent with effect from January 1, 2022.

“For the period January and February 2022, total VAT collected was $212.6m,” Mr Wilson said, comparing this to the $165.5m collected during the same two months in 2020. “Even though we had reduced the VAT rate from 12 percent to 10 percent, we experienced a $47.1m or 25.8 percent increase in VAT collections.

“The VAT decrease has not led to an overall decrease in VAT revenue. The VAT performance has actually increased dramatically. Some of that was because of the increase in economic activity because of the economy’s re-opening. Some of that is because of our revenue administration efforts, and some of that is because the lower VAT rate encouraged more consumption.”