The Tribune

SEEKING support from accountants for the government’s Value Added Tax plan, the Ministry of Finance said a change is needed to save the Bahamian economy.

Minister of State for Finance Michael Halkitis, speaking at an event held at the Sheraton as part of Accountants Week, said the government is doing its homework on VAT in an effort to fully understand the impact it will have.

He said: “As we are all well aware, over the past year or so, there has been a lot of talk about the introduction of the Value Added Tax in the Bahamas – on both the positive and potentially negative effects the implementation of this tax is likely to have on various sectors of the Bahamian economy.

“The government has been working tirelessly to ensure that all of the potential impacts of this tax are considered and that the net positive impact by far outweighs any negative impacts.”

Mr Halkitis told Accountants VAT will broaden the tax base, which would provide government with the revenue it needs to meet its expenditures.

“The government has also been diligent in looking at ways it can make the transition to VAT as smooth as possible for all sectors of the economy, to ensure that no group is forced to unfairly bear more of the burden of compliance.
“A key pillar of these efforts has been to ensure that all affected groups are equipped with all of the necessary information on exactly how the VAT will affect their industry and to ensure that they are given the tools needed to effectively prepare themselves,” he said.

Mr Halkitis said that as the July 1, 2014, date for the implementation of the VAT approaches, it is important that all affected groups are educated on why this reform is needed in the first place; and what the potential results will be if we continue down the same path.

He explained why the additional revenue is necessary at this point in the country’s history and why broadening the tax base guarantees the nation’s economic stability going forward.

“The Bahamas has always enjoyed a very liberal tax environment; characterised by the absence of key taxes upon which other major economies rely. The most notable absences have been taxes on capital gains, corporate earnings, personal income, sales, inheritance, and dividends. This being the case, we have largely relied on a very narrow range of revenue sources: principally customs duties, real property taxes and stamp duties. What this means is that our country continues to rely on very few revenue sources to finance a very wide range of public services,” said Minister Halkitis.

“Furthermore, our current system is one where the burden of taxation falls on a relatively narrow base of goods and makes us particularly vulnerable to economic shocks. While these revenue sources have been sufficient to sustain positive real growth in the Bahamian economy in decades past, the effects of the worldwide recession put enormous pressure on the government to spur economic growth, which put additional strain on our country’s resources.”

He said this pressure necessitated increased borrowing to finance injections into the economy and resulted in a steady rise in the debt-to-GDP ratio.

“According to IMF predictions, if left unchecked, central government debt is projected to reach 62 per cent of GDP by fiscal year 2016/17. Adding the debt owed by non-financial public corporations, the total public sector debt is projected to increase to about 76 per cent of GDP by fiscal year 2016/17,” said Mr Halkitis.

“At those levels, and as a consequence, higher levels of public funds being directed towards debt-servicing, significantly fewer resources would be available to finance critical investments needed for our country’s economic growth.”

Minister Halkitis said such high debt levels have implications for the country’s continued ability to adequately service that debt and negatively affects the ability to attract investment and grow.

He said reducing the debt ratio over the medium term is therefore imperative for the Bahamas.

“Furthermore, Revenue-to-GDP in the Bahamas is low by regional comparison and the tax base is narrow while the growth sectors of the economy — tourism and financial sectors — generate a small proportion of net revenue,” said Mr Halkitis.

“These two factors: rising debt-to-GDP and comparatively low revenue-to-GDP, have highlighted the critical need for a broadening of the tax base in the Bahamas. A core objective of tax policy must be to raise sufficient tax revenues to finance public expenditure while maintaining sustainable public debt ratios.”

Mr Halkitis said that without an attempt to reform the tax structure in the Bahamas, there would be real potential for an unchecked rise in the country’s debt and a decreased flexibility to borrow in cases of emergencies – meaning increased vulnerability to shocks like hurricanes and sudden contractions in foreign economies, on which the Bahamas depends for tourists.

“Failure to raise revenues now has the potential to result in additional credit downgrades and eventual loss of access to credit markets. What this will inevitably mean for the Bahamas is a much higher tax increase, larger reductions in spending when the situation is eventually addressed,” said Mr Halkitis.

“Another important consideration when it comes to the need for tax reform is the Bahamas’ upcoming accession into the World Trade Organisation.

“Accession to the WTO will immediately compel the Bahamas to lower its average tariff rates to be consistent with other WTO members and to encourage global trade.

“While the Bahamas cannot afford in the long run to remain on the outside of such global trade agreements, lowering the tariff rates, without any attempt to raise revenues in other ways, would significantly reduce our country’s revenue. A shift in the way the Bahamas approaches taxes is therefore crucial in order to place our country in a strong economic position.”

Mr Halkitis said all these eventualities were considered as Value Added Tax was being considered.