By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian Contractors Association’s (BCA) president yesterday argued that VAT reforms effectively amount to a new tax on business expansion that will also “shrink” construction activity in that area.

Leonard Sands told Tribune Business that restrictions preventing Bahamian companies from recovering VAT paid on the building materials and supplies purchased for expanding their physical premises, which are due to take effect from next Tuesday, July 1, will turn the globally-established mechanism for how the tax works on its head.

VAT is ultimately to be fully paid by the end-user or consumer, with businesses allowed to offset the tax paid on their inputs against this sum. However, in this case, the BCA president argued that these curbs - contained in the VAT (Amendment) (No.2) Bill - will bar companies from recovering VAT on their legitimate expenses, thus in effect creating a “direct tax” on business expansion without saying so.

Ryan Pinder KC, the attorney general, in his Wednesday Budget debate contribution in the Senate, confirmed that “the Bill restricts input VAT deductions on major construction projects” and signalled that the Government has no plans to alter course over this. Kwasi Thompson, the Opposition’s finance spokesman, also previously told this newspaper that no changes were made to this provision in the House.

Mr Sands, though, yesterday told this newspaper that “the proof will be in the pudding” as he predicted that it will cause many Bahamian companies mulling physical expansion projects to either review, pause or abandon construction plans due to the increased costs they will incur from being unable to reclaim the associated input VAT.

On a $1m project, this would amount to $100,000 in extra costs - a “significant” sum to absorb for Bahamian small and medium-sized enterprises (SMEs). Mr Sands reiterated his argument that the $1m threshold, above which companies will be unable to reclaim VAT, was “an incredibly low ceiling” that will catch almost every possible commercial construction development.

The BCA president, asserting that he knew of several companies currently assessing physical expansions, with some already putting work out to tender, also warned that the move could have negative consequences for the already-high cost of living. Rather than absorb the increased VAT-related costs themselves, he predicted companies would pass these on to consumers in higher prices.

The Government has not explained the rationale for curbing VAT recoveries on construction inputs. However, Gowon Bowe, Fidelity Bank (Bahamas) chief executive, previously told Tribune Businesshe understood it was designed to crack down on wealthy home owners using companies as “fronts” for multi-million residential projects to enable them to obtain VAT recoveries they are not entitled to.

Mr Sands, though, in warning that the change will likely deter, or slow down, job-creating business expansion and increased economic activity, both for the firms and contractors themselves, said the proposed VAT Act reform amounts to a new direct tax on the Bahamian private sector.

“In this instance, VAT is now a tax to the business and is not something they can offset,” he told Tribune Business. “It’s a direct tax and non-recoverable. To say there is no tax is now kind of an untrue statement. I spend $1m, and the VAT is now non-recoverable, so the Government will tax me $100,000 on the expense of my new plant. It’s a tax that is non-recoverable.”

Pointing out that this is contrary to the whole concept and design of VAT taxation systems, Mr Sands said: “I know there are a number of companies considering physical plant expansion, and have work out to tender. And the few I know of, it’s not the whole market. If I know of two, three or four, there could be 40.

“One million dollars is a very low threshold. You’re talking about anyone in light industry, food processing, the restaurant business. One million dollars is a very low ceiling; an incredibly low ceiling. If one of the main car dealerships wanted to add another bay, that’s $1m in work. If Super Value decided to add additional storage for five 40-foot containers that’s another $1m

“The threshold is so low that it affects almost every kind of expansion. It’s really so low. They really have to look at it. If a business decides to go forward with it, and their expansion is $1.5m, that’s $150,000 in VAT. They’re going to pass that tax on to the consumer. Whatever products or services that business supplies, the consumer will feel that after the expansion happens.

Mr Sands also questioned why the Government has seemingly created a “caveat” in the legislation that might allow businesses to reclaim the 10 percent levy paid on their building supplies and materials. The reforms are designed to “restrict VAT input deductions for major construction unless involved in taxable property supply”.

This means that the likes of resort and subdivision developers, or anyone constructing property for resale, is exempt from the Bill’s provisions and will be able to reclaim VAT on their inputs. The Government also appears to have selected the $1m threshold in a bid to ensure it does not impact middle class and lower income Bahamians.

However, the Bill 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.

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.

Mr Sands, though, questioned why companies would be permitted to apply to the VAT comptroller for permission to reclaim the tax given that this would seemingly undermine the reform’s whole intent. And, if one company was granted the exemption, then it would likely have to be made available to many more.

“Why would they give an exemption?” he asked. “Why create that legislation with that caveat? What would be the considerations for you to exempt a business from paying that tax? If granted to every business expansion, what would be the point of changing the legislation?”

As to the impact of this measure, which is set to go into effect on July 1, Mr Sands said: “We’ll see in the next quarter what it does. Certainly it’s going to shrink the amount of property construction.... It’s a really clear, significant impact that will reduce that type of project. Say I want to spend $1m on a new facility. Anything over that threshold now, persons may decide they do not want to do it.

“What I don’t understand is that, on one end, the Government is saying they are trying to improve the ease of doing business and, on the other end, it is shrinking business by taxing directly the expenses of the business. It doesn’t make sense. I’m not a financial analyst, but I dare say they are going to see a decline in construction activity for businesses. We said it here first. We’ll wait and see.”