The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A top economist yesterday reiterated a decade-old call for the Bahamas to introduce a Sales Tax, warning the Government that its Value-Added Tax (VAT) plans were a mistake because “simplicity is key” to reform.

Ralph Massey, the New Providence-based author of numerous studies on the Bahamian economy, told Tribune Business that this nation’s “longstanding problems” in collecting all due government revenues made the “clarity” of proposed reforms even more vital.

Mr Massey, who wrote the 2003 Tourism Taskforce on Trade Liberalisation report, with input from numerous industry professionals, reiterated calls made in that report for the Government to introduce a Sales Tax as its tax reform centrepiece.

This would have been a simple levy paid by purchasers at the final Point-of-Sale, and the report set out a 10-year plan for its implementation and the phase-out of Customs duties, including the new tax’s expansion to cover the services sector.

Yet VAT, which is a tax levied on the ‘value added’ at each stage of the production chain, was rejected by Mr Massey and his fellow report contributors as too complex and an “unnecessary complication” for the Bahamas.

Echoing similar sentiments when contacted by Tribune Business yesterday, Mr Massey said: “The principal thing of any tax system here is that it would be helped by its simplicity.”

While the existing import duties/Excise tax system offered just that, Mr Massey acknowledged that its weakness - apart from being subject to trade liberalisation pressures - was the upfront inventory cost burden it imposed on importers and Bahamian businesses.

Asked whether he felt the Government was making a mistake in choosing to replace import duties with VAT, Mr Massey replied: “I think they are. I thought it [a Sales Tax] was simpler than the VAT.

“That’s it really in a nutshell. If you’re going the route of a VAT, then you get into complications.

“If this country has a difficulty collecting taxes, and they do, and it’s a problem and a longstanding one, the best thing is to avoid increased taxation and the system should be as simple as possible. That’s the way to go.”

Mr Massey added that a Sales Tax could still be imposed on services, which account for the bulk of Bahamian economic activity. And the tax could also be levied on the mark-ups service providers charged their customers, just like merchandise.

And, just like the current VAT proposal, the well-known economist said a Sales Tax could also replace much of the hotel/tourism industry’s tax structure, such as the room tax.

“If all services generated here, including the tourism industry, are included then you get the same degree of coverage that you got before,” Mr Massey told Tribune Business.

“If you introduce a Sales Tax on professional, tourism and medical services, then you pretty much cover the lot of them.”

While “more comprehensive”, Mr Massey added that by its nature VAT was more complex than a Sales Tax.

“Simplicity is the key,” he told Tribune Business. “You’ve got to simplify the collection process, and the country does not have a good record in collecting taxes.

“Honesty and clarity is so important. The country can’t even collect its due real estate taxes on an annual basis.”

Despite being a decade old, the Tourism Taskforce report almost foretold the situation the Bahamas is now facing a decade in advance.

Realising that the Bahamas would be unable to maintain its existing tax structures under domestic fiscal and external pressures, chiefly rules-based trading regimes such as the World Trade Organisation (WTO), it assessed the reform options available to the country.

Yet the work was never picked up by successive FNM and PLP administrations, resulting in the current situation where the Bahamas has to rush change, under the watching eyes of the International Monetary Fund (IMF) and Wall Street rating agencies.

In assessing the VAT option, the Tourism Taskforce report said: “It is more complicated than both the tariff and Sales tax systems, since the tax is paid each time that a product or service is sold and resold, and not only at the time of import or at final retail sale..........

“This is inherently a more complex system, with higher administrative costs for both business and government. This is an unnecessary complication for the Bahamas.”

As for its preferred Sales Tax option, the Tourism Taskforce Report said that by acting as a tax on people’s spending/consumption, it would encourage savings and investments.

And, while the report said it would be more complex than import duties, and could result in increased avoidance if enforcement was not strict, it added that a Sales Tax would give the Government “flexibility”.

“It could be structured with different rates for different categories of goods,” the report said.

“Food and medical supplies could be set at zero, while services could attract another rate. It would have one clear benefit, a ‘deferral’ of tax collection to the point of sale.”

Sketching out how a Sales Tax might work, the Tourism Taskforce suggested grouping imported goods into four categories - necessities (bread basket items); luxury goods; protected goods; and standard goods.

It recommended reducing all protectionist tariffs to the average rate, and setting a 0 per cent Sales Tax rate for breadbasket items. Standard and luxury goods would attract 15 per cent and 25 per cent rates, respectively.

The Tourism Taskforce report then suggested that, in year five of the reforms, a 15 per cent Sales Tax be applied to all services.

“Services would include but would not be limited to legal, accounting and medical. Tourism would be included, but all present taxes on tourism would be revoked,” the Tourism Taskforce report said.

“The exception would be the departure tax, and that would change only to conform to rates charged by other major tourist destinations. A thorough valuation of real estate and insurance transac-tions would also be a part of a Tax Plan.”

The final steps, the Tourism Taskforce report said, would be reducing all petroleum-related taxes to 25 per cent, with the Sales Tax fully installed by year 10 - 2013, or today, had the Taskforce report been adopted.

The Christie government, though, appears wedded to a VAT tax and is unlikely to change course now.

Indicating that a Sales Tax had been considered, the Government’s tax reform ‘White Paper’ explained earlier this year why it had been rejected.

“While relatively simple to administer, a Sales Tax suffers from important drawbacks,” it said.

“For one thing, experience abroad has shown that, as a single stage tax, a Sales Tax is susceptible to evasion if it is imposed at a rate in excess of 10 per cent.

“As well, as a single stage tax, it results in the cascading of the tax burden, whereby tax imposed at one stage of the production and distribution process is subject to Sales Tax at a later stage (i.e. Sales Tax is charged on Sales Tax).

“Finally, under a Sales Tax regime, exporters are disadvantaged, as their selling prices include Sales Tax paid on the materials and sup- plies that they purchase.”