By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is being warned to avoid “the populist trap” caused by extending tax breaks to wealthy and higher income Bahamians/residents who do not need such concessions.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, argued to Tribune Business that the Government should have targeted relief from the ongoing cost of living crisis at those who most need it rather than employing a blanket, across-the-board move of cutting the VAT rate by 50 percent on most food items.

Rather than granting tax exemptions to those who can afford to pay, he asserted that the Davis administration should have reverted to the strategy agreed when VAT was first implemented a decade ago and redistribute a portion of the revenues generated by the levy to lower income Bahamian households so as to counter the increased cost of goods that resulted.

Nevertheless Mr Bowe, who headed the private sector’s Coalition for Responsible Taxation when VAT was first introduced in 2015, told this newspaper that the food-based VAT slash unveiled by the Prime Minister last week was unlikely “to cause a tremendous amount of disruption” to either the food/retail wholesale industry or the Government’s fiscal targets.

Michael Halkitis, minister of economic affairs, last week said the Government will forego around $30m in annual revenues as a result of the announced tax break. Given that it only takes effect from April 1, 2025, around just $7.5m will likely be relinquished for the 2024-2025 fiscal full year as the relief covers just its final quarter.

And Mr Bowe said “the exceptional inflation of the last three years” will have given the Government sufficient fiscal headroom to make the food-based VAT cut because, as a consumption-based levy, the Public Treasury’s revenue intake or yields increase as the cost of goods rises.

“My take on it is at least there’s an appreciation by the Government that it really doesn’t control prices,” the Fidelity Bank (Bahamas) chief told Tribune Business. “We import 90 percent of what we consume, so all it can control is the tax imposed on those goods.

“If prices are elevated, there’s room for tax reductions because of the consumption-based tax system. If the price of goods has generally gone up by 10 percent, you can reduce the rate because the amount of tax you are getting is based on a higher price per item.

“They’ve [the Government] benefited from exceptional inflation for the best part of three years. Reducing what they charge on items that have gone up significantly, like food and gasoline, there is the fiscal headroom to make adjustments.”

Mr Bowe, though, argued that redistributing some VAT revenue to lower income Bahamians and those struggling to cover their daily living costs would have been a more efficient, targeted method for achieving the Davis administration’s relief goals rather than providing a tax break to all. And he added that the measure did not appear to form part of any long-term fiscal and economic strategy.

“My question is: What is the objective?” Mr Bowe asked. “I think the general objective is to assist those finding it difficult to meet their obligations at the food store. Do higher income earners need these tax concessions? The answer is ‘no’.

“To me, I feel the most appropriate is to introduce the tax redistribution system and the RISE programme... [to] redistribute tax income to those whose earnings need to be supplemented to live in a dignified manner. I have no objection to the reduction of tax on those items, but I think they’re falling into what I call ‘the populist trap’.

“Persons are saying the way we provide relief is by reducing taxes. The true way we provide relief while maintaining our fiscal standing is to actually tax those who can afford the applicable rate and redistribute the excess; maintain the higher rate to those who need support.”

Mr Bowe, though, said he was not worried about the fiscal ramifications from the food-based VAT cut - the details of which were still awaited by food retailers and wholesalers as The Bahamas prepared for the Majority Rule Day celebrations and long weekend. 

Suggesting that, from the Public Treasury’s perspective, it “won’t cost you”, he added: “I have no concern about the action taken. I believe it will not achieve the level of assistance to those who most need it, and give unneeded assistance to those who do need it. 

“I don’t think it’s going to cause a tremendous amount of disruption to businesses. Clarity over which items are included will be needed. I don’t see this as a move that’s going to cause any fiscal disruption. I see this as a move that’s more populist driven than one that is a long-term solution. 

“Ultimately, we have to get back to a wider fiscal strategy and plan that takes us out ten years to allow us to see advances on a progressive basis.” Mr Bowe also urged both the Government and Opposition to follow the studies and empirical evidence as it relates to VAT and any proposed reforms rather than be driven by emotion or perceived populist political gain. 

The Prime Minister, in unveiling the food-based 50 percent VAT rate cut, said: “Beginning April 1, the rate will be cut in half from 10 percent to 5 percent. This new 5 percent rate will apply to all food in the food stores, including fresh fruits and vegetables, baby food, lunch snacks and frozen foods. However, it will not apply to prepared foods in the deli..

“This rate reduction will also apply to the importation of all items previously mentioned. The effective date is April 1 in order to give merchants and food stores time to make the necessary adjustments. VAT is not the cause of the high price of food, but for those with the tightest disposable income, reducing VAT by 50 percent will make a difference. This reduction will not impact our fiscal targets for this year.”