The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Food stores could recover as little as 15-20 per cent of their Value-Added Tax (VAT) ‘input’ costs under existing legislation, a leading retailer yesterday warning this would drive prices “through the roof” plus result in business closures and lay-offs.

Philip Beneby, head of the Retail Grocers Association, told Tribune Business that the Government’s plan to allow grocery retailers to recover ‘input’ VAT in proportion to the ‘taxable’ items they sell would be especially damaging for small and medium-sized stores.

Noting that items deemed VAT ‘exempt’ accounted for 75-80 per cent of such stores’ total inventory, or even higher, Mr Beneby said such a ‘cost recovery’ policy threatened to penalise a sector already subject to price controls.

If the Government stuck to the policy outlined in the draft VAT Bill and regulations, he warned that food stores would have no option to recover their increased costs through price rises on their ‘taxable’ items.

However, Mr Beneby suggested such a move would likely spark a ‘vicious circle’ for food stores, as the increases would naturally drive consumers to ‘exempt’ products - those where no 15 per cent VAT levy is applied. As a result, food stores would find themselves ordering increasing quantities of goods where profit margins were non-existent.

And the Retail Grocers Association chief likened the Government’s plans to impose VAT against the will of most in the private sector to a “shotgun wedding”, and warned: “Forced marriages don’t end well.”

The issues created by VAT ‘input apportionment’ were first identified by the KPMG accounting firm, which in an analysis of the draft Bill and regulations warned that food stores - which sell both ‘exempt’ and taxable products - would only be able to recover input VAT in proportion to the latter aspect of their business.

As an example, KPMG said that if a food store’s total inventory was split into 40 per cent VAT ‘exempt’, and 60 per cent ‘taxable’, the business will be unable to recover 40 per cent of the VAT paid on overheads such as rent, electricity, transportation, imported services and administration costs.

Asked by Tribune Business about the likely effect this will have on the Bahamian food retail industry, Mr Beneby said: “That’s going to have a tremendous impact, especially on the small and medium-sized businesses, and standalone stores.

“When you look at the list of ‘exempt’ goods, stores like my store, they could cover anywhere between 75-80 per cent of my inventory with those items.

“And you would find that the smaller ‘Mom and Pop’ stores, the corner stores, that percentage rate would be even higher. Those [exempt items] are the bulk of their inventory.”

Mr Beneby, of Courtesy Supermarket on Carmichael Road, said the list of VAT ‘exempt’ food and grocery items had been expanded beyond so-called ‘breadbasket’ products and those subjected to price controls.

Included in the ‘exempt’ category are liquid detergents, dish washer liquid, fresh fruit and fresh and frozen vegetables.

Noting that this meant a greater percentage of retail inventories was taken up be ‘exempt’ items, Mr Beneby added: “We don’t have the great variety of inventory to spread this across profit margins, unlike the larger supermarkets.

“We would only be able to claim back a small percentage [of input costs]. In the long run, it’s not going to be good for us. It’s going to hurt us. We’ll begin to lay-off, cut back or even go out of business.

“I think the Government is going to have to look at this. It’s going to drive the cost of food through the roof. It’s going to drive the prices of these items through the roof.”

While it was impossible to predict the nature, and extent, of likely food price increases on taxable products, especially as the Government has yet to release the revised Tariff Schedule to accompany VAT, the Retail Grocers Association chief predicted they might “increase tremendously”.

Mr Beneby said raising the price of ‘taxable’ food items would drive consumers to increasingly purchase VAT ‘exempt’ product, something that would harm both food stores and their profit margins, plus the Government and its revenue take.

Tribune Business understands that the Retail Grocers Association is set to meet John Rolle, the Ministry of Finance’s financial secretary, to discuss the issue - possibly as early as today.

Mr Beneby indicated the Association wanted food products to be treated as ‘zero rated’ for VAT purposes, meaning that while consumers would not be charged a 15 per cent levy, food stores would also be able to claim their ‘input tax’ payments back.

The Government is unlikely to accede to this, given its desire to keep the VAT tax base as broad as possible, but Mr Beneby said he had been informed that all 28 European countries with the tax did not treat food products as ‘exempt’.

Describing the matter as “a dollars and cents issue”, Mr Beneby added that food retail margins were “very small and, in some cases” non-existent, especially on price-controlled products.

The Price Control Act, implemented in 1973, had kept ‘breadbasket’ item margins at 23 per cent despite multiple ‘cost of living’ and utility price rises.

“Price control mark-ups were never increased, and as it is now, we’re losing on sales of price controlled items,” Mr Beneby told Tribune Business.

He added that the present VAT structure, pushing consumers towards ‘exempt’ products, could also deepen the Bahamas’ issues as an “unhealthy society”, as consumers will have to pay extra for premium foods.

Suggesting that the private sector’s Coalition for Responsible Taxation had provided “good alternatives” to VAT, Mr Beneby said the Government seemed “so hard and fast on VAT” that it appeared it was being forced upon them and, in turn, the country.

Arguing that all taxes required ‘buy in’ by consumers and the business community, he added: “It’s more like a marriage between businesses and the Government, and for there to be harmony between businesses and the Government.

“They should sit down with the business community and come to an agreement. I would liken it to a marriage, but the way the Government is going, it seems more like a shotgun wedding.

“The businesses are rejecting VAT, but the Government is saying this is the way to go. This marriage is going to take place no matter what, and if they have to go down the aisle, they’re going to be kicking and screaming.

“That’s not a good way to do it. Forced marriages don’t end well.”