The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian contractors were yesterday said to be “very concerned” about Value-Added Tax’s (VAT) potential impact on construction prices, one warning that many were already “hanging on by a thread”.

Stephen Wrinkle, the Bahamian Contractor’s Association’s (BCA) immediate past president, said many small and medium-sized contractors “will not survive” a VAT-induced shock, with the domestic housing sector already down 50-60 per cent from activity levels seen just three years ago.

And those fears are likely to be exacerbated by the conclusions from the recently-unveiled Nassau Institute study, which said VAT’s arrival come July 1 will encourage Bahamian home buyers to switch to purchasing existing homes, rather than new builds.

The report, ‘The Economic Consequences of the VAT for the Bahamas’, said: “Generally, new housing is subject to VAT, which may slow down the construction industry as homebuyers evolve to prefer VAT-free resale homes over VAT-affected new housing.

“However, this benefit to buyers of resale homes will be diminished by the increased cost of furnishings and durable goods as they seek to outfit their homes.

“As a result of the foregoing, the construction sector will either languish under VAT adoption or, as in the Canadian experience, clandestinely migrate to the informal sector after VAT adoption.”

If this happens, the knock-on effect on two key industries - real estate and construction/development - could be dramatic.

Describing Bahamian contractors as “very concerned”, Mr Wrinkle said his successor as BCA president, Godfrey Forbes, had written to the Ministry of Finance seeking clarification on several VAT-related issues, but to his knowledge had received no reply.

“Make no mistake about it, the construction sector, which includes tilers, plumbers, sub-contractors and small and medium-sized contractors, will be affected in a very negative manner - and extremely quickly,” Mr Wrinkle told Tribune Business.

The BCA council had held several meetings on the issue, along with a Town Hall meeting at which members were canvassed for their views.

“We’re hanging on by a thread. Our sector is devastated; it’s in deep decline,” Mr Wrinkle said. “When the Government should be considering incentives to restart the housing sector, to be talking about increasing the tax burden on small and medium-sized contractors is totally the wrong way to go.

“Many will not survive. There’s a lot of contractors barely hanging on right now as we speak.”

With VAT likely to feed right through the construction industry supply and value chain, Mr Wrinkle said that a potential 15 per cent increase in construction costs would likely make homeowners “stop and think” over renovations and additions - let alone new builds.

“The economy is in trouble,” he added. “Our local construction sector is a huge contributor to the economy’s weekly cash flow, and housing is probably down 50-60 per cent from where it was two-three years ago.

“We’ve seen a continuous decline for the last three years, and that trend is continuing. We don’t see the Government looking at the other side of the table; they’re only looking at how to tax us.

“No one’s sitting down with industry and saying: ‘How can we increase your business?’ That’s the first step to take, and the next one is to take some of our suggestions.”

The Nassau Institute report also warned that the inflation, and general price increases, likely created by VAT would cut the purchasing power of Bahamian incomes and the dollar.

“Elderly and retired individuals with lifetime savings are most adversely affected as the purchasing power of their savings declines the most during retirement, typically the highest-consumption period of their lives,” the report said.

“Consumers facing fixed budget constraints will purchase less from VAT-affected vendors and will reallocate their income to VAT-free vendors, including but not limited to informal market goods and services, real estate and exempt foodstuffs.

“Furthermore, consumers implicitly face a ‘make-or- buy’ decision with every purchase. In the presence of a VAT, the consumer will more often choose to substitute consumption with self-supply. Combined, these factors dramatically reduce demand for VAT-affected market sectors.”