The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas will fall back into economic recession if consumers are unable to absorb Value-Added Tax’s (VAT) inflationary impact, a co-chair for the private sector’s Tax Coalition warned yesterday.

Robert Myers emphasised that the 15 per cent VAT was ultimately a consumption tax that would be paid by all Bahamians, and warned: “If the consumer fails, we all fail.”

Pointing out that few, if any, Bahamas-based businesses could afford to absorb even a portion of the VAT, the businessman said the overall economy “could be hard hit” if the new tax slashed consumers’ disposable incomes.

While VAT will create increased administrative costs for businesses, and cause cash flow and profit margin issues (especially for price controlled industries), its structure allows registered firms to ‘net off’ the tax paid on their inputs with what they collect from customers. In other words, a significant chunk of corporate Bahamas will be able to recover the VAT it pays.

Noting that companies would be able recover the 15 per cent VAT they will likely have to pay on their electricity bill, for example, Mr Myers said this would do little to help consumers.

“That there is the $65,000 question now: Can the consumer absorb it?” Mr Myers told Tribune Business of VAT. “If not, we’re going to go into a recession.

“It’s not a business tax, it’s a consumer tax. If the consumer fails, we all fail. It’s our tax; that’s the message. If the consumer catches a cold, we [the private sector] catch the flu.

“What impact is VAT going to have on the economy and, predominantly, that’s what impact is it going to have on the consumer.”

The Government has conceded that VAT is estimated to cause a 5-6 per cent increase in the general price level (inflation), based on the as-yet unpublished results from an Inter-American Development Bank (IDB) study.

It has, though, said the inflationary impact will be mitigated by reducing Customs tariffs by an average 17 per cent simultaneously with VAT’s introduction, ensuring the latter’s 15 per cent levy does not increase the cost of imports at the border.

Critics, though, have suggested this ignores the impact VAT will have on the economy’s largest sector, services, which will not be impacted by the Customs reduction and may take the full 15 per cent brunt.

Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, told Tribune Business earlier this week that VAT was likely to have a 7-8 per cent inflationary for Bahamian consumers, and possibly as high as 10 per cent.

The latter estimate was given by Anwer Sunderji, Fidelity Bank (Bahamas) chief executive, while accountant Ronald Atkinson went as high as an 18-20 per cent impact on prices.

Mr Myers, as co-chair for the Coalition for Responsible Taxation, suggested that as a regressive tax, VAT would further squeeze an already hard-pressed Bahamian middle class and lower income groups.

It is no secret that many Bahamians are having trouble meeting their current obligations, as shown by the fact that more than $1 out of every $5 lent by commercial banks, amounting to $1.2 billion, is either in arrears or non-performing.

In addition, more than 5,000-6,000 Bahamas Electricity Corporation (BEC) customers have their power cut off at any one time for non-payment.

The concern is that if more dollars are taken away from Bahamian incomes to pay taxes, more persons could default on their obligations. And the reduction in disposable income will also reduce consumer spending power throughout the economy, damaging business incomes and living standards.

With the cost of living set to rise, Mr Myers told Tribune Business: “We’re all consumers. If disposable income is cut, we could be hit hard.

“The consumer is already pressed, and having trouble meeting and paying their bills. If they do not have the disposable income, look what happens.

“There are some in the middle class who are going to feel it more than others. It’s a regressive tax. At the bottom end of the middle class, it is likely going to eliminate their disposable income, which is going to have an effect on consumption.”

Work by the College of the Bahamas (COB) School of Business Studies have suggested that consumption/consumer spending accounts for close to two-thirds of Bahamian economic activity, illustrating the impact VAT may have if spending power is cut significantly.

Mr Myers said businesses were ill-placed to absorb any of the VAT increases. “If the business is taxed, the consumer pays,” he added.

“A lot of businesses are not making money now. A lot of businesses are working in single digit profits, and they are in the low single digits. Anything in my businesses will be passed on, as we’re barely making any profit now. If the business can’t absorb it, it’s going to go on to the consumer; that’s the way it works.”

While praising the Government for finally releasing the draft VAT Bill and regulations for public consultation, Mr Myers reiterated that the private sector needed the economic modelling and Tariff Schedule to determine the full impact.

Emphasising that the Coalition would continue to engage the Government, he added: “This is more about fiscal reform than tax reform.

“VAT may have started the discussion, but this is about fiscal reform, not tax reform. It’s the whole kit and caboodle. It’s more encompassing than this one tax or not; it’s enforcing the rule of law, competitiveness.”