The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax (VAT) may pose a bigger threat to Family Island economies than New Providence, a private sector body warning that it might create “unbearable inflation” and defeat social policy objectives.

The Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) Coalition for Responsible Taxation, in an October 28, 2013, document sent to the Government, said the Family Islands would have the added burden of VAT being imposed on logistics and transportation costs,.

Pointing out that Family Islands were recovering at a slower rate than New Providence, the Coalition said: “Operating costs in the Family Islands are higher than those in New Providence.

“The implementation of VAT in the Family Islands may contribute to unbearable inflation that slows the economic recovery of many..... A threat to the recovery of these fragile economies may be counterproductive to increased contributions to government revenues from the Family Islands.”

Indicating that its suggestion for a three-year VAT “phase in” was made particularly with the Family Islands in mind, the Coalition’s ‘Queries and Recommendations’ paper sent to the Government said: “Family Island businesses incur greater transportation and logistics costs which will now be subject to VAT.

“This will, in turn, increase the costs of goods beyond the expected increases in New Providence. The consumers in Family Islands will be burdened with greater taxation than those in New Providence.”

As a result, the Coalition called on the Government to consider eliminating VAT on “shipping by registered mailboats” or other forms of inter-island transportation.

And, noting that VAT’s impact might directly counteract the Government’s stated intent of reducing population flow to New Providence, it added: “Family Island development is integral in alleviating some of the social ills associated with overcrowding in New Providence.

“The attractiveness of relocation to Family Islands is contingent on stimulated economic activity.”

The Coalition also called on the Government to modify its filing and VAT remittance requirements, warning that the current demand for this to occur 21 days from month’s end “may prove onerous to businesses, particularly on initial implementation”.

It said the Bahamas should look at VAT filing occurring on a quarterly basis (every three months), as happened in other countries, including Barbados. The Coalition said that in some countries, small businesses were allowed to file VAT returns on an annual basis.

“The learning curve following initial implementation of VAT is likely to be quite steep,” the Coalition said. “Duties and VAT will continue at the border, which should not result in any decrease in existing monthly cash flows for the Government.

“Given no expected decline in border collections, government cash flows should be able to withstand quarterly filings.”

Elsewhere, the Coalition warned that VAT’s implementation in the Bahamas would likely see this nation follow other countries in creating an ‘informal’ or underground economy structured to avoid taxes.

This concern has been downplayed by government officials, but the Coalition said: “There is an inherent incentive for businesses that start out below the registration threshold to not report when they have exceeded the [$100,000] registration threshold.”

It argued that being able to claim ‘credits’ for VAT paid on inputs may not serve as a sufficient incentive to register, and the lower operating costs and prices, combined with higher profits, “may incentivise” tax avoidance.

“Consumer spending lost to the informal economy deprives VAT-registered businesses of revenues, which in turn reduces government revenues,” the Coalition said.

“Additional consequences are the closure of VAT-registered businesses and increased unemployment, as the informal economy could not absorb the staff of larger businesses.”

Again calling for a partnership between the Government and private sector, the Coalition said businesses had an incentive to “participate in policing” VAT registration and ensuring all economic players played according to the rules.

“Collaboration is the key to designing the most effective compliance regime, which will require innovation and out-of-the-box thinking,” it added.

It also warned that VAT might encourage Bahamian consumers to do more online shopping or travel abroad for this more frequently, evading duties and VAT at the border as happens frequently.

The Coalition said Bahamians might also hire persons operating without Business Licences, such as photographers and engineers, to avoid VAT and cut costs, and rely more on services from outside the Bahamas.