The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Coalition for Responsible Taxation’s head yesterday voiced optimism that the 10 percent VAT slash will generate more revenue than the current structure once zero ratings are eliminated.

Gowon Bowe, who chaired the private sector group immediately prior to VAT’s 2015 implementation, told Tribune Business he had been informed that compliance with the Government’s main revenue source had dropped from “in excess of 95 percent” when the tax was introduced to the “mid-80’s” after the Minnis administration increased it to 12 percent with multiple zero ratings.

Speaking after the Prime Minister, in unveiling the supplemental Budget in the House of Assembly, expressed confidence that “government revenues are protected” despite reverting to a 10 percent rate, he added that the Davis administration was taking VAT back to the original model of a broad-based, simple-to-administer levy with few exemptions and zero ratings.

“By removing the zero ratings and exemptions, they are going to be restoring the simplicity of the system where we had a broad-based model that was successfully implemented in 2015,” Mr Bowe told this newspaper, with the restored conditional cash transfer (CCT) initiative and social services mitigating the tax’s impact on lower income families.

VAT, when initially implemented at 7.5 percent, was intended to be simple to administer. However, the zero-rating of “breadbasket” food products and medicines under the Minnis administration, together with the increase to 12 percent, was viewed by many as introducing a level of administrative complexity that exposed the system to evasion, fraud and other abuses.

Mr Bowe said data obtained from the Department of Inland Revenue (DIR) backed this theory, revealing: “Compliance rates at the time VAT was introduced in 2015 were in excess of 95 percent. They’ve dropped a bit with the exemptions and zero ratings to the mid-80 percents.

“What we’re seeing is the simplicity in the system return, which means no leakages, loopholes and avenues for misinterpretation.” With 10 percent VAT charged on virtually all products, there will be “no ambiguities or errors in filing”.

And Mr Bowe added: “Any movement in the VAT rate downwards could only be done with the reversal of exemptions and zero ratings. Even without seeing the model referenced [by the Prime Minister], the studies done by the Coalition ourselves showed revenues collected at 7.5 percent with zero exemptions will be very comparable to 12 percent with exemptions.

“I know 10 percent without exemptions is going to be at least as equal to 12 percent with exemptions, but I’m confident from the original studies the revenue will be more.” Turning to arguments that making breadbasket items, such as corn beef, VAT-able will hurt lower income families, Mr Bowe said he had done a “back of the envelope” calculation that challenges this.

Taking a hypothetical shopper with $100 to spend, and assuming 40 percent of products are breadbasket items, under a 7.5 percent VAT with no zero ratings that person paid $7.50 in tax. Turning to a 12 percent VAT with zero ratings, Mr Bowe said the same shopper would pay $7.20 in taxes on 60 percent of his goods - a negligible difference.

While a 10 percent VAT with no zero-ratings would go to $10 in taxes, he added that the revenues generated from wealthier people who can afford to pay can now be redistributed to lower income families to assist them in paying their bills and making ends meet.

Clint Watson, the Prime Minister’s press secretary, told this newspaper that while “breadbasket” items will become VAT-able at 10 percent no determination has been made as to whether water and medicines - both currently zero-rated - will be subject to the same treatment.

“The research has shown that the poor man has not benefited in having zero ratings,” he added. “The big businesses and factories benefited from it, but the small man did not gain anything from it.”

Tribune Business was shown excerpts from an International Monetary Fund (IMF) report from September 2021, which said: “Narrowing the base of the VAT through zero ratings and exemptions reduces efficiency, lowers revenue and increases administrative and compliance costs.

“VAT exemptions and zero rating are an inefficient way of achieving redistribution objectives, as the bulk of benefits accrue to high income households. Redistributive goals are best achieved through targeted cash transfers to households.”

It is unclear whether the 10 percent VAT cut will last for more than a year, the Government having previously presented it as something of a trial to test the effects. Mr Davis, though, said it would be implemented by January 1 as businesses will be given time to adjust their systems for the new rate and exemptions/zero ratings elimination.

“The Ministry of Finance team has worked long hours, along with some of the brightest minds at the University of The Bahamas and the Government and Public Policy Institute, as well as with international consultants, to perform extensive modelling and financial analysis to ensure that the VAT reduction does not adversely affect our fiscal position,” the Prime Minister said.

With the reduction in the VAT rate, we are eliminating the zero-rating under VAT on a variety of items. Price controls are in place to ensure breadbasket items will be fairly priced. The VAT exemption for electricity bills and the special economic zones are untouched.”

Hitting at the Minnis administration’s actions, he added: “In recent years, the country’s tax policy has moved far away from the original plan and intent. Indeed, through the actions of the previous administration, the VAT base has been eroded by the implementation of many classes and types of items being zero rated.

“These changes were considered by experts to be ill-advised and poorly executed, who believe zero rating schemes are an ineffective and inefficient way to provide relief to the vulnerable in society.....

“Based on the modelling and analysis conducted by my team, we are confident that with the elimination of zero-rating categories, and the economic uplift to consumers, government revenues are protected.”

However, the VAT reduction strategy was challenged yesterday by two former FNM finance ministers.  Kwasi Thompson, former minister of state for finance, said: “The Prime Minister did not say that VAT will actually increase for breadbasket items. VAT will also increase for all of those zero rated items.

“The FNM took a very deliberate decision that we wanted to ensure that we used the zero-rated process to assess those persons who are most vulnerable. So we made a deliberate decision to reduce and to take away that from breadbasket items, to reduce the cost of food for those most vulnerable.”

Describing the Prime Minister’s statements as “half truths”,, Mr Thompson added: “The cost of food will go up, and the cost of all of those other items that are [presently] zero-rated will go up by 10 percent.”

K Peter Turnquest, Mr Thompson’s predecessor, added: “The PLP says that by reducing the VAT from 12 percent to 10 percent, people with money will start to invest in growing the economy.

“If that is true, one has to wonder why wasn’t there an economic boom when VAT was 7.5 percent under their leadership? As I recall, the economy actually shrank and the debt grew under the last administration, even without a pandemic.”

Mr Turnquest also questioned who will benefit from the VAT reduction, saying: “Under the PLP plan, the rich will get a 2 percentage point tax cut while the poor and marginalised will see very little relief, and quite frankly possibly an increase as they have not said if they will eliminate the exemptions granted by the FNM”.