The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet Minister yesterday indicated the Government was modifying some parts of its Value-Added Tax (VAT) plans, agreeing it would be “inconsistent” with the Government’s election promises to levy it on electricity bills.

Michael Halkitis, minister of state for finance, said countries treated the application of VAT to electricity differently, and that the Christie administration had yet to reach a decision on the matter.

Yet he dropped a heavy hint that the Government was moving away from imposing VAT on consumer electricity bills, telling a Bahamas Association of Compliance Officers (BACO) conference: “The feeling is there is a strong response.

“This government came in on a pledge to reduce the cost of electricity. It would be inconsistent with that pledge to seek to have that increased.”

Mr Halkitis’s comments certainly differ from the ‘market segmentation’ proposal previously outlined to Tribune Business by the Ministry of Finance’s financial secretary, John Rolle.

He told this newspaper on July 18 that the Government will likely structure its 15 per cent VAT to protect low income households and minimal energy users from its inclusion on electricity bills.

Mr Rolle said then that countries with VAT regimes normally set an energy consumption threshold below which VAT is not levied on bills.

“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,” Mr Rolle said then.

“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.”

It appears, though, that the Government’s thinking may be shifting given the potential negative consequences of doing this.

With over 5,000 BEC customers still disconnected, amid a struggling economy and persistently high levels of unemployment, any increase in electricity bills via VAT could push more households and businesses over the edge.

Indeed, Dionisio D’Aguilar, Superwash’s president, warned in Wednesday’s paper that imposing VAT on energy bills could lead to a “revolution”.

And such a move might also be counterproductive to the Government’s plans to lower electricity costs by reforming the Bahamian energy sector, and effectively split BEC in two.

The situation also illustrates the pressure the Christie administration is likely to face for VAT ‘zero ratings’ and ‘exemptions’, something that could undermine its objectives and erode the potential tax base.

Some of Mr Halkitis’s comments yesterday indicated the Government has been receiving such ‘push back’ from various quarters, particularly industries such as the banks and insurance companies.

Both these sectors are proposed as VAT ‘exempt’, meaning they will not have to pay the tax, and consumers will not be required to pay the 15 per cent levy on products and services they buy from these industries.

But as ‘exempt’ sectors, both the banks and insurance companies will be unable to claim VAT ‘refund credits’ for the tax they have paid on their inputs.

As a result, their fear is that costs will increase, profits will reduce, and the end result will either be increased consumer prices or staff lay-offs.

“I think the banks are resisting aggressively that they are VAT exempt, and can’t recover the tax they pay on their inputs,” one banking source, speaking on condition of anonymity, said yesterday.

Mr Halkitis confirmed yesterday that the financial services industry would “by and large” be VAT ‘exempt’, although talks were being held with the Bahamas Financial Services Board (BFSB) and Clearing Banks Association to “fine tune that”.

“Most financial services, the vast majority, will be exempt,” the Minister added. But, while this would apply to the likes of savings and chequing accounts, he said “certain fee-based activity” - such as renting a deposit box - would be liable to VAT.

And Mr Halkitis indicated that the Government’s desire to protect the international competitiveness of the tourism/hotel industry in the context of VAT also applied to financial services.

“We’re in detailed discussions with the BFSB in terms of how the offshore sector [is] treated,” he added. “That’s not unique to the Bahamas, and we’re getting feedback on whether to exempt the offshore sector and how to treat it,

“We don’t want a situation, like the hotels, where we price ourselves out and make ourselves less competitive.”