The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is proposing to make electricity Value-Added Tax (VAT) ‘exempt’ for both residential and business consumers, providing some relief from the price increases many are fearing.

The latest October draft of the VAT Bill and accompanying regulations, which has been obtained by Tribune Business, confirms that the Government has reversed its initial position - at least for the moment - when it comes to levying 15 per cent VAT on electricity bills.

The Ministry of Finance’s explanatory notes, which accompany the draft Bill, state: “The Government will also provide an exemption for electricity and water consumption.

“Specifically, this will apply to the residential and commercial supply of electricity.”

This means that all Bahamas Electricity Corporation (BEC) and Grand Bahama Power Company (GBPC) bills will not levy VAT at 15 per cent on consumers.

However, Bahamian households and businesses could still experience an increase - albeit smaller than 15 per cent - as the ‘exempt’ status means that BEC and GB Power will likely be unable to claim ‘refunds’ of the VAT paid on their inputs. Some of this will likely be passed on in the electricity price.

The revised VAT Bill and accompanying regulations are in keeping with comments by Michael Halkitis, minister of state for finance, at a Bahamas Association of Compliance Officers (BACO) conference, when he indicated the Government was having ‘second thoughts’ about levying the tax on electricity bills.

Many households and businesses are struggling to pay their electricity bills as is, and VAT could well have pushed them ‘over the edge’.

And Mr Halkitis agreed that the addition of VAT would also be incompatible with the Government’s ongoing efforts to reform BEC and the wider energy sector, and lower already-high electricity prices for Bahamians.

The latest position is different from the one articulated to Tribune Business this summer by John Rolle, the Ministry of Finance’s financial secretary.

He said then that the Government would likely structure its 15 per cent VAT to protect low income households and minimal energy users from its inclusion on electricity bills, but not grant an ‘all-encompassing’ exemption.

Confirming that countries with VAT regimes normally set an energy consumption threshold below which VAT was not levied on light bills, Mr Rolle said then: “Typically, you can structure it so the lower income households and those not consuming a lot of energy may get an initial level of consumption that does not attract the tax.

“This is part of our technical thinking and proposal, and is the way VAT has been introduced in many countries.

“What happens is that those households that do not consume large quantities of electricity, which should cover most if not all of the lower income households, they would see an exemption from VAT for some or all the electricity consumed.”

The Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) Coalition for Responsible Taxation declined to comment on the electricity ‘exemption’, saying this would be “premature”.

However, Gowon Bowe, the PricewaterhouseCoopers (PwC) partner who is the Coalition’s co-chair, said the Ministry of Finance had given responses to the 12 macroeconomic concerns that had been supplied to it.

Confirming that the two sides were now “working through” these issues, Mr Bowe added: “At the same time, we have requested access to the analyses and modelling done by or on behalf of the Ministry over the past few years in order to understand how the conclusion on VAT was arrived at, and determine whether the Coalition and wider public can come to the same conclusion.”

The PwC partner said the Coalition was also “flushing out” several proposed alternatives to VAT to determine their likely impact on government revenues, prior to sharing these with the Government.

“Given the understanding of the need for greater revenues, along with the need for expenditure control and growth of the economy, our recommended alternatives must be viable from the perspective of the cost:benefit equation - that is, there needs to be incremental revenues with a fraction of incremental costs (if any) to administer,” Mr Bowe told Tribune Business.

“Only following the above mentioned dialogue and consideration of alternatives can a determination be made as to whether VAT would achieve the necessary tax increases, while not causing irreparable harm to the growth of the economy.

“As has been said by many learned individuals, fiscal reform is not without ‘pain’, but that pain should be kept to a minimum and should not retard economic growth.”

The legislation and regulations, Mr Bowe added, were “only two pieces of the VAT puzzle”, the outstanding ones being the revised Tariff Schedule and economic modelling.

Meanwhile, the Ministry of Finance’s notes indicated that the Government proposed to make Water & Sewerage Corporation bills VAT ‘exempt’, but “only if the supply for the regular billing period does not exceed 2,000 gallons of water”.

“The water exemption will only apply to low income or low usage households,” it added. “To be placed in the qualifying category for water, the average monthly consumption over that same period should not have exceeded ..... gallons.

“For newly-occupied residences or connection, the Water & Sewerage Corporation will be required to make an assessment of the projected monthly usage.”

This runs the risk of both increasing the Corporation’s costs, and driving consumers to use their own private wells to escape VAT.

And the latest draft also confirms the Government is backtracking on plans to levy 15 per cent VAT on property and casualty insurance premiums.

“For clarification, medical, life and property and casualty insurance services will be exempt, even if rendered for an explicit fee,” the Ministry of Finance said.

This is in line with the insurance industry’s wishes. Howard Knowles, the Bahamas Insurance Association’s chairman, yesterday said he had not seen the revised legislation, and since the sector was still in talks with the Government, he declined to comment in detail.

But, told of the contents by Tribune Business, he did venture: “It’s better news. Obviously it’s a better position to be in if it’s true.”

Bahamian property and casualty insurers had feared a 30 per cent business loss if VAT had been added to premium costs.