The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A leading auto dealer yesterday told Tribune Business that while Value-Added Tax (VAT) would increase the Government’s revenue take on its cheapest vehicle by between 21-32 per cent, price controls would slash its gross profit margins.

While not disclosing how much the margin cut will be, Rick Lowe, Nassau Motor Company’s (NMC) director/operations manager, told Tribune Business that depending on how VAT was applied, the Government’s likely tax earnings on its cheapest model would be 67 per cent, or two-thirds, of the CIF (cost, insurance, freight) costs to land the vehicle in the Bahamas.

Given that the auto industry is price controlled, Mr Lowe described the implications of this as “devastating”, as dealers would need to raise their mark-up percentage to maintain the gross profit margins essential for their survival.

“It’s very, very discouraging,” Mr Lowe said of the tax reform implications for the auto industry. While it be able to claim ‘refunds’ for VAT paid on vehicle imports ‘at the border, it will still have to levy the 15 per cent tax on the final purchase price paid by consumers.

Pointing out that vehicle prices would inevitably increase, the NMC director added: “The VAT at the port, if we’re not allowed to mark up on that, our margins will reduce, so in effect we’ll be losing money.

“You need the margins to remain profitable, not matter what the taxation is. You need a margin to survive, and that’s the biggest point most people are not getting.”

Mr Lowe explained: “If you can’t mark-up on the VAT portion at the port, your gross profit margin that you mark-up, while it might remain the same as a percentage, your dollars will be less because you’re marking up on less value.

“If your gross profit puts you on the edge as a business, then you have to raise your mark-up percentage so you can get the same dollar amount per sale. That’s where the penny has not dropped for most people. The price will be higher at the end of the day, but the gross margin will be less.

“We won’t be able to compete with Florida, and are being taxed into oblivion, unable to raise prices to compensate.”

Mr Lowe warned that with VAT likely to be levied on input costs such as phone bills and insurance, with electricity still a possibility, businesses faced “really being backed into a corner. You’re not going to remain profitable”.

Mr Lowe added his voice calling for the Government to abolish price controls, given the implications they - combined with VAT - had for industries subject to them.

“Are they going to abolish price controls, as they probably should,” Mr Lowe asked of the Government. “Price controls are not useful. Studies prove they are not worth the piece of paper they are written on as far as serving the consumer.”

The Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) Coalition for Responsible Taxation identified the impact of VAT on goods under price controls as one of its 12 key issues in the ‘Queries and Recommendations’ submitted to the Government on October 28.

The Coalition, echoing Mr Lowe’s remarks, warned that the new tax “will lead to further pressures on gross profit margins, which in turn may result in certain goods being sold at losses to businesses”.

This, it added, might cause the private sector to cease selling price-controlled goods; increase the prices of other goods to compensate; or see companies absorb the increase and reduce other operating expenses.

The Coalition urged the Government to dialogue with price-controlled industries, “with a view to amending price control rates”.

In addition, the Coalition also expressed concern about how replacement goods supplied under warranty would be treated under VAT, as there was “no additional revenue or value-added”.

This, it warned, might force businesses to pay VAT on warranty supplies with no opportunity to pass it on to consumers.