By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government was yesterday urged to abandon the "cloak and dagger approach" sparking undue business alarm over reforms such as the VAT deduction restriction for "major" construction projects.

Gowon Bowe, Fidelity Bank (Bahamas), told Tribune Business that he understands proposed VAT Act changes appearing to prevent companies from recovering the 10 percent tax they pay on building materials, equipment and other 'inputs' for physical expansion valued at $1m and above will not impact legitimate corporate projects.

Rather, he explained that the amendments were designed to plug a loophole that has seen some unscrupulous businesses "front" for construction projects actually being undertaken by individual homeowners so that the latter can claim VAT deductions, or refunds, they are not legally entitled to.

But, while asserting that the Bahamian private sector will still be able to claim construction-related VAT refunds on bona fide expansion projects, Mr Bowe told this newspaper that much angst and confusion could have been avoided if the Government had explained the proposed reforms and consulted with the construction industry and other stakeholders in advance.

Acknowledging that the change "wasn't well articulated" in legislation tabled in the House of Assembly last week, the Fidelity Bank (Bahamas) chief said corporate Bahamas had been left to try and determine the basis for, and intent behind, the Government's policy for itself.

Mr Bowe, who headed the private sector's Coalition for Responsible Taxation when VAT was first introduced in 2015, also agreed that the Government's failure to provide a complete explanation made it seem as it was "contradicting the whole concept of VAT" as this is a tax paid by the end-consumer and not the business community.

"With the $1m 'major' construction cap, I know the root cause is a suspicion that some businesses have fronted for development and taken VAT refunds when they are not entitled to do so," he told Tribune Business. "VAT refunds are for capital development, but homeowners were benefiting from a company claiming the refunds when the beneficiaries were actually private individuals.

"This wasn't well-articulated. This is not intended to stop businesses from reclaiming legitimate capital expenses, but it's been done in a vague manner. If you articulate you have found fraudulent VAT claims, and are seeking to close a loophole that allows that, and expect legitimate business expenses for projects above $1m to be approved via an efficient process, there'd be no concern.

"But this has not been communicated, or properly laid out, and businesses are left to determine if there's an actual intent to contradict the whole concept of VAT, which is a consumer tax. If businesses lay out capital for goods and services, they should be able to reclaim that amount" of VAT.

The VAT (Amendment) (No.2) Bill seeks to insert several new sub-sections in the existing Act that “restrict VAT input deductions for major construction unless involved in taxable property supply”, meaning developers of subdivisions and other real estate that will be re-sold to new buyers are exempt. Major construction is defined as projects worth $1m or more.

It clearly states that tax deductions on VAT inputs “shall not be allowed in respect of any goods or services acquired for use in, or connection with” property construction, reconstruction or renovations deemed to be a “major” project unless this is allowed by the VAT comptroller. This concentrates significant power in the comptroller’s hands, and no exemption qualifying criteria was released.

Apart from the $1m threshold, the Bill lists “major construction” criteria as involving dredging or land reclamation activities; the construction of docks, marinas and other waterfront structures; the building, paving and improvement of roads, driveways “or other access infrastructure”, and “any other construction activity as may be prescribed” by rules and regulations that have yet to be published.

Regardless of whether Mr Bowe's explanation for the amendments is accurate, Bahamian businesses are likely to still be concerned that the decision over whether they can claim VAT refunds or not lies in the hands of one person, namely the VAT comptroller, who is Shunda Strachan, the Department of Inland Revenue's chief. It is by no means certain they will be able to recover such an outlay.

The Fidelity Bank (Bahamas) chief, meanwhile, argued that the furore surrounding the $1m-plus "major construction" VAT deduction reforms again highlighted the need for the Government to undertake a more transparent, inclusive and collaborative approach to its Budget processes and wider policy-making in an effort to avoid future angst.

"This cloak and dagger approach is almost like an 'us versus them' where the tax authorities see bad behaviour and get into a 'gotcha' moment by making legislative changes as opposed to being very candid and clear that there have been unscrupulous practices identified, this is intended to close the gap, and there's a consideration to have a process and get feedback," he told Tribune Business.

"I don't think anyone would argue against closing loopholes or ensuring the enforcement of tax laws as intended, but sometimes the sledge hammer approach would be more suitable as a scalpel and surgical approach. Rather than throw the baby out with the bath water, use the scalpel to get the bad apples out."

Leonard Sands, the Bahamian Contractors Association’s (BCA) president, told Tribune Business earlier this week he “did not understand the thought process” behind the proposed VAT Act amendments that seemed to significantly reduce the “deductions” that companies and homeowners can claim on construction project inputs such as building materials and equipment.

Warning that this will act as a deterrent to business expansion, he added that this change - included in the legislative package tabled in the House of Assembly alongside the 2025-2026 Budget - in effect “penalises the sectors that create a lot of work in construction”.

And, should the Government proceed with the amendment as worded despite the potential fall-out, Mr Sands urged it to raise the $1m threshold to a much higher level - suggesting $5m or $10m - as the present figure is “simply too low” for the realities of today’s construction costs and would capture small projects covering just a few thousand feet.

Kwasi Thompson, the east Grand Bahama MP and Opposition finance spokesman, also branded the VAT deduction claw back as a “hidden 10 percent tax” on Bahamian businesses that was buried in the Budget’s legislative package and never disclosed by the Government.

Demanding that the Davis administration “come clean”, he said in a statement: “This amendment quietly strips VAT-registered businesses of their right to recover VAT on major construction projects over $1m unless the project is tied to taxable real estate sales.

“It’s a massive tax on investment, masked as reform, and the Prime Minister said nothing about it in his Budget communication. Why was this kept from the public? Why wasn’t this massive new cost on local businesses disclosed?

“This move will drive up the cost of doing business, delay expansions, kill jobs and raise prices for Bahamian consumers. From contractors and clinics to schools and manufacturers, no sector is spared. The FNM will not support this secretive tax grab. Bahamians deserve transparency, not backdoor taxation. We call for its immediate withdrawal and full public consultation.”