The Tribune

By Simon Cooper

Bahamians have had an easy ride when it comes to funding the national Budget. Until recently, we balanced our books with import duties, instead of applying income, corporate, capital gain value-added or wealth taxes, as other countries do. That is all in the past now. Clearly, the state needs extra income, and the citizens must pay.

Our government has chosen to go the Value-Added Tax (VAT) route. This has caused howls of protest in parts of the commercial community. I am not convinced this is justified. Traders will raise their prices to absorb the extra cost, so why are they complaining? The rest of us should be complaining, because prices and inflation are going to increase. Something has to give.

That said, VAT without income tax is an unholy brew. It lays the burden on the poor. There is no differential rate, and no way to implement it if there were. The mixed model used elsewhere has an element of cross-subsidy, in which businesses and rich people pay more in income tax to lighten the burden on the poor.

That was the essence of the recent Tea Party episode. Obama wanted to transfer money from corporate wallets to fund a national health insurance scheme. The haves did not want this. The fight between VAT and income tax in the Bahamas is set along similar battle lines. Who should pay to run the country, and who should benefit the most?

Businesses will feel some pain in that they are going to have to adapt to a modern point of sale technology, and keep a detailed record of their purchases and expenses. This is because the VAT they are going to collect is a percentage of the difference between their sales, and their purchases and expenses, taken together.

In the process, the Government will be building a massive database of business numbers. This will prove useful if it considers introducing business tax at some point in time. The general reticence of businesspeople to spend money on things they can avoid is going to require a small army of VAT inspectors. I do hope they are well prepared.

VAT could cost individual businesses an average of $300 to implement, including purchasing software and training staff. Across 4,000 firms, this comes to a tidy sum of money, and they may need outside assistance to help them implement it.

I am glad to see our government is being less hasty. This is a time for cool heads while we plan implementation, and perhaps a referendum, to put the thing to bed. We cannot afford to let discontent simmer. It would be difficult to reverse out of VAT if there were a subsequent outcry.

Next week, we delve into the differences between exempt businesses and zero-rated goods and services. The benefits to suppliers and customers are not always what they seem. The Government must collect the VAT it needs to pay for what it provides. In the final analysis, the VAT rate is the wild card.

• NB: Simon Cooper is a founding partner of Res Socius, a firm authorised by the Bahamas Investment Authority to facilitate the sale and purchase of businesses and provide management consultancy services. It is an agent for the cloud-based XERO Accounting System that is fully VAT compatible. Contact 376-1256 or visit www.ressocius.com