The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A prominent businessman has called for a 15 per cent Value-Added Tax (VAT) to be phased-in over six years, warning that implementing it in one go would cause “an enormous shock to the system”.

Dionisio D’Aguilar, Superwash’s president, said VAT’s likely inflationary impact - especially on the cost of services - would send “everybody into convulsions” and lead to rising unemployment and business failures.

Suggesting that there was “a growing movement” against introducing a 15 per cent VAT come July 1, 2014, the former Chamber of Commerce president said the Christie administration appeared “determined to move forward on some fairly unpopular taxes”.

Questioning whether Bahamians fully appreciated how VAT would “affect how we do business”, Mr D’Aguilar told this newspaper: “I wish they would phase it in, because in essence what it’s going to create is 15 per cent inflation.

“On July 1 next year you’re going to flip flop from one system to another system, and the shock is going to be devastating.”

With many services-based businesses, such as attorneys, accountants, electricians and plumbers, having few inputs, Mr D’Aguilar said they would be unable to claim little in the way of VAT credits.

But with 15 per cent VAT being levied on their ‘outputs’, such industries would have little choice but to increase consumer bills by the same amount. This, in turn, created the question of whether consumers would be willing to pay the higher prices, and if sales and demand would slump.

“The Government’s position is that services have been getting away with it for so long, it’s time to pay, but it’s a shock to the system,” Mr D’Aguilar said.

“In my laundromats, my prices are going to have to go up 15 per cent, which is enormous. The amount of money I’m going to have to remit to the Government, compared to what I remit now, is significant.

“The only thing you can do is raise prices 15 per cent. Consumers can afford 3 per cent, 4 per cent increases, but a 15 per cent increase all at once is a bit overambitious.”

He added that with most Bahamas-based companies enjoying profit margins of 15-20 per cent, they had little choice but to pass VAT on to the consumer, particularly if no VAT input credits were on offer.

“This is mostly a service-driven economy, and there are very few costs to offset,” Mr D’Aguilar said. “While I agree that the burden should be shared, and VAT makes sense, the shock of initial implementation is going to drive some businesses out of business.

“I have a pest control business, provide a service, and most of the input is labour, for which there is no VAT deduction. Yes, we have some materials, but that’s a proportionately smaller amount of the bill.

“Labour is the majority of my costs, and I can’t claim exemptions on that, so I have to increase prices by 15 per cent to keep us in the same position that we were. Are consumers going to pay the extra 15 per cent?”

Mr D’Aguilar called on the Government to “phase in” VAT over a six-year period. He suggested that it be introduced at 5 per cent in July 2014, with the rate increased progressively by another 5 per cent after three years and six years, respectively, bringing it to 15 per cent by 2020.

“Phase it in, so the shock is not so enormous,” he told Tribune Business. “It’s very vexing, it’s very worrisome. Is your customer base going to want to pay, in one year, 15 per cent more than they paid the year before, or are they going to say: ‘You know what, I can’t afford it any more.

“It’s a shock to the way we do business, and it’s going to have a significant fall-out. I predict a contraction in the economy when we introduce VAT, everybody will go into convulsions, and I project a significant increase in unemployment.

“If people are not prepared to pay 15 per cent more for services, and can do without, you have to reduce your labour as less people are using your services.”

Given the Bahamas’ commitments to reduce or eliminate up to 85 per cent of import tariffs under the Economic Partnership Agreement (EPA) and other trade liberalisation regimes, a VAT ‘phase in’ may not be an option open to the Government as it seeks replacement revenue sources.

However, Mr D’Aguilar said the Bahamas would be going from a high import duty, 0 per cent VAT regime to one where there were lower duties and a 15 per cent VAT.

Noting that those who made key material and equipment imports under the existing tax regime might be placed at a disadvantage to competitors who brought theirs in under VAT, Mr D’Aguilar called for the Government to implement “some sort of transition mechanism to offset the fact you have contributed what you can to the Treasury”.

He added: “It’s going to be chaos, and the Government has not said how you collect and pay them the VAT.”