The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A leading tour operator has lost three winter 2014 convention bookings, each 500-plus strong, due to the price increases caused by the impending 15 per cent Value-Added Tax (VAT), Tribune Business was told yesterday.

This disclosure, and other likely VAT impacts, came from Fred Albury, the Bahamas Motor Dealers Association’s (BMDA) president, who expressed concern that the Government’s tax reform centrepiece was going to “shrink”, not encourage, economic growth.

Recalling a meeting on VAT that he attended last week with a group of businessmen, Mr Albury, the Auto Mall, Executive Motors and Omega Motors head, said: “There was a tour operator saying they were taking bookings for next winter season, conventions.”

But, once potential clients and their representatives were informed that convention costs would go up with VAT’s imposition come July 1, 2014, Mr Albury said: “They lost three bookings of 500 people each.”

He suggested that, based on the tour operator’s information, that those groups had decided to head to the Dominican Republic or another nation where costs were cheaper.

While Mr Albury did not reveal the tour operator’s name, Tribune Business understands that it is Majestic Tours, owned by well-known businessman, William Saunders.

The BMDA president, though, expressed concern that VAT’s introduction on top of an already-high cost base could result in the Bahamian tourism industry pricing itself out of the market.

Focusing on his own industry, Mr Albury expressed concern that VAT-induced increases to its input costs would squeeze profit margins in a sector where vehicle sales, and parts, were price controlled.

This means that dealers/repair shops are unable to increase prices to compensate for any margin shrinkage, and Mr Albury urged the Government to abolish price controls on everything bar ‘breadbasket’ food items.

“We’ve been talking to the Ministry of Finance, and they understand price control is outdated,” the BMDA president told Tribune Business. “Just allow the free market to dictate, and only allow controls on breadbasket items.

“On parts and vehicles, they can’t expect VAT to be absorbed in the 25 per cent. On new cars you’re allowed a 25 per cent mark-up by law, but in reality prices and market competition dictate that you don’t get anywhere near that.”

Auto dealers are concerned that to compensate for a potential ‘margin squeeze’ in their parts and car sales segments, service costs will have to “go through the roof”.

Mr Albury told Tribune Business this had impacted colleagues in other Caribbean countries that have recently implemented VAT, having himself investigated its effects in the region.

St Lucia’s Toyota dealer, he added, had told him that auto sales surged in the run-up to VAT implementation there, as consumers rushed to avoid price increases, followed by an inevitable drop after the tax was introduced.

And the St Lucia dealer then suffered a “30 per cent reduction in revenue” in his services business as customers, once they saw VAT’s impact on labour costs, switched to using ‘bush mechanics’.

“You get a lot of ‘dilly tree’ mechanics messing around with high-end vehicles and messing them up,” Mr Albury added.

While discerning auto owners would likely stay with the authorised dealers for service, he said: “They will be on tight budgets. Really, the end user paying this is the consumer.

“At the end of the day they are going to have 15 per cent less disposable income and buying power, and have to cut where they can. Banks are afraid, because people paying loans will have 15 per cent less income to service them.”

Inventory management in the lead-up to, and immediate aftermath, of VAT’s introduction was described by Mr Albury as “one of the biggest concerns” for the automotive industry.

The Government has yet to provide details on how its proposed bonded warehouses, which are intended to prevent Bahamian businesses paying pre-July 1 Customs duty rates as well as VAT, while also encouraging companies to run down their stocks.

“Right now I carry $3 million of spare parts, and where does that leave me when I’ve already paid 55 per cent import tax on them on average,” Mr Albury told Tribune Business. “How do you treat them after VAT is introduced.

“There has to be some sort of way to offer credit back to us on those items. They say run your inventory down, but with the inventory we have in the parts industry, we can’t do that.”

With parts having “a high obsolescence rate”, Mr Albury said running down stocks would force consumers to wait longer for vital parts.

He suggested that the Auto Mall might have to “look at a bonded warehouse in south Florida and draw down on it when needed”.

“This VAT is going to force business places to rethink how they do business, their models,” Mr Albury told Tribune Business.

With companies becoming liable to pay VAT the month after they bill/invoice customers, even though sales revenues may not have been collected, the BMDA president said the auto industry would have to revise its policy of offering 30-45 day credit terms.

This, he added, would affect the inter-dealer purchases of parts and supplies from each other.

“The hurtful part about this is that we’re just starting to come out of recession, and if this hits now it’s going to be hard,” Mr Albury said.

“It’s going to take us two steps back. The VAT is not going to promote economic growth; it’s going to shrink it. The last thing we want to do is slow the economy. We want to grow the economy, and grow the tax base and reduce the deficit at the same time.”