The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The draft Value-Added Tax (VAT) Bill and regulations released to the Bahamian people on Friday contain a number of tweaks from the October version, the biggest of which is an abrupt ‘U-turn’ on electricity’s tax treatment.

The Ministry of Finance’s October notes on the draft regulations stated that both commercial and residential customer electricity bills would be VAT ‘exempt’, meaning the 15 per cent levy will not apply to them.

“The Government will also provide an exemption for electricity and water consumption,” the Ministry said then. “Specifically, this will apply to the residential and commercial supply of electricity.”

However, the Christie administration appears to have now reverted back to the position first articulated by John Rolle, the Ministry of Finance’s financial secretary, to Tribune Business back in August.

He said then that the Government’s intention was to exempt low income or low volume electricity consumers from VAT, meaning that private sector/business customers of the Bahamas Electricity Corporation (BEC) and Grand Bahama Power Company, plus big residential consumers, would be liable to pay 15 per cent VAT.

The Government has gone back to this position in the released November draft of the VAT Bill and regulations, the Ministry of Finance’s notes stating: “The Government would also provide an exemption for electricity and water consumption, in accordance with the limits prescribed by regulations.”

Helpfully, the regulations do not specify the consumption threshold above which VAT will be levied, showing a blank space next to ‘kilowatts of electricity’.

However, they appear to indicate that electricity supply will only be VAT ‘exempt’ “where such supply is made to a residential dwelling”. This indicates that all businesses will have to pay VAT on their electricity bill regardless of how much they consume.

However, George Damianos, head of Damianos Sotheby’s International Realty, pointed out the difficulties the Government and the utilities may have in determining who are residential and commercial customers, and therefore VAT tax liabilities.

Pointing out that the electricity bill for his firm’s Marsh Harbour office was in his name, but that for his home was in the name of one of his operating companies, Mr Damianos questioned whether the former would be treated as VAT ‘exempt’ and the latter as ‘taxable’.

The well-known realtor also pointed to Nassau’s Palmdale district, saying that many residential properties had been converted to commercial use as doctors and architects’ offices.

Yet many of these office premises still had residential meters, and Mr Damianos asked: “How do you differentiate between residential and commercial for VAT on electricity?”

The constantly changing VAT position on electricity, and the failure to specify the consumption threshold, indicates the Government has had the greatest difficulty in determining how to treat this area.

This is further evidenced by the administration’s public statements. Michael Halkitis, minister of state for finance, told a Bahamas Association of Compliance Officers (BACO) conference that the Government was having ‘second thoughts’ about levying the tax on electricity bills.

Many households and businesses are struggling to pay their electricity bills as is, and VAT could well have pushed them ‘over the edge’.

And Mr Halkitis agreed that the addition of VAT would also be incompatible with the Government’s ongoing efforts to reform BEC and the wider energy sector, and lower already-high electricity prices for Bahamians.

Yet the Government appears to have gone back to the summer position articulated by Mr Rolle, who said then that the Government would likely structure its 15 per cent VAT to protect low income households and minimal energy users from its inclusion on electricity bills, but not grant an ‘all-encompassing’ exemption.

Confirming that countries with VAT regimes normally set an energy consumption threshold below which VAT was not levied on light bills, Mr Rolle said then: “Typically, you can structure it so the lower income households and those not consuming a lot of energy may get an initial level of consumption that does not attract the tax.

“This is part of our technical thinking and proposal, and is the way VAT has been introduced in many countries.

“What happens is that those households that do not consume large quantities of electricity, which should cover most if not all of the lower income households, they would see an exemption from VAT for some or all the electricity consumed.”

Mr Damianos said it was the ‘fear of the unknown’ with VAT that was causing so much concern among Bahamian businesses and consumers.

“We don’t need an disadvantages,” he added. “It’s the unknowns and what’s going to happen, the extra costs to business and how that comes into play.

“We’d love to know where we’re going. We don’t want to cut, but if we need to, how do we restructure the business? How do we make it more palatable?”

Joining the chorus advocating economic growth above tax increases, Mr Damianos told Tribune Business: “It is amazing that we’re not doing more to encourage businesses, give them breaks and help them to grow and employ more people.

“Instead, we’re coming up with ways to reduce business, levy more costs on business and that does stifle growth.

“It [VAT] is really a nightmare. If they can’t collect the taxes on the books, how are they going to collect VAT? It’s mind boggling to me.”

Another major difference between the October and November drafts is that the latter forecasts inflation, or the “average increase” in prices with VAT’s introduction at 5 per cent.

This is more in line with the 5-6 per cent estimate previously given by John Rolle, the Ministry of Finance’s financial secretary, using an Inter-American Development Bank (IDB) study, yet it represents an increase from the 3 per cent forecast used in the October draft.

The publicly-released draft also confirms that VAT will be levied on the domestic aviation industry, something that will likely have negative implications for the industry, the Family Islands and their hotel/tourism sectors.

It also states that Water & Sewerage Corporation residential customers will be exempt from VAT provided their quarterly (three month) consumption does not exceed 10,000 gallons - again an effort to protect low income Bahamians.