The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A 5 per cent payroll tax would have just ‘one-fifth’ of Value-Added Tax’s (VAT) price inflation impact, a leading businessman suggesting it would protect consumers and “not throw the economy into recession”.

Dionisio D’Aguilar, Superwash’s president, told Tribune Business that, assuming labour accounted for 50 per cent of a company’s total costs, such a payroll tax paid entirely by the employer would result in just a 2.5 per cent increase in costs.

Assuming the company translated this into a price increase of the same percentage, as it sought to recoup 100 per cent of the cost rise, Mr D’Aguilar said the 2.5 per cent rise would be much less than the 10-15 per cent inflationary impact he estimated from VAT.

Pointing out that VAT would likely create a huge clamour for salary increases, given that all wage earners will see their purchasing power reduced, Mr D’Aguilar told Tribune Business: “For those people who say a payroll tax will add too much to their payroll, when prices go up 10 per cent, there will be enormous pressure on payroll.

“The Government needs to raise taxes, but in my humble opinion VAT is absolutely not the way to go. It’s too complicated. To me, it’s absolute madness.

“The shock to the economy is too substantial, and will throw the economy into recession, making our end product too expensive and making us non-competitive. It’s too risky; too much of a risk to do.”

Pointing out that a payroll tax, which the Coalition for Responsible Taxation has estimated could raise $190 million in annual revenues, would ensure consumer spending power remained largely the same, Mr D’Aguilar said: “I don’t think that’s going to throw the economy into recession.

“It’s simple, raises the same amount of money, doesn’t create a massive bureaucracy and doesn’t cause mass confusion. All of that goes away.”

Returning to the theme that the Bahamas needed to grow, not tax, its way out of the recent recession and ongoing fiscal problems, Mr D’Aguilar said VAT would not help the Government to stimulate the economy.

His recent interview with Tribune Business came before yesterday’s meeting between the Government and Coalition, at which the two agreed to work together on the latter’s Dynamic Economic Analysis Modelling Study to assess VAT’s impact on the economy and business competitiveness.

The Coalition, in a statement issued last night, said the study would aim to forecast the impact from alternative tax measures; VAT as proposed by the Government; a revised VAT; other revenue raising measures and overall fiscal reform.

Gowon Bowe, the Coalition’s co-chair, described the meeting as “productive” and the agreement to collaborate on the economic modelling as “key”.

He added that they had also agreed on the information and data that will be exchanged between the two sides for the study, and that the economist conducting it will have to be someone both “respect”.

Mr Bowe said this would ensure the study’s results are seen as credible by all, adding that the parties now had to “roll up our sleeves” to get everything accomplished.

The Coalition added that it and the Government had also agreed to work through various VAT legal, implementation and operational issues “that are of significant concern to the Coalition and the industries it represents”.

Mr D’Aguilar, though, told this newspaper recently that he feared the Government was “on auto pilot” when it came to VAT and its July 1 implementation, despite the widespread private sector and consumer opposition to the proposed tax reform centrepiece.

“The general consensus is, I think, that as we get closer to the date it becomes more apparent how truly complicated this thing is,” he told Tribune Business.

He identified as the major complications issues such as companies that sold a mix of ‘zero-rated’, ‘exempt’ and ‘taxable’ inventory; what proportion of their VAT input tax payments such firms could reclaim or ‘net off’; and how the new tax is to be calculated, and paid, on inter-company transactions.

“It’s far too complicated,” Mr D’Aguilar said. “My simple message in VAT is this: Prices will go up 10-15 per cent, everyone’s salary will be the same, and everyone will be poorer.

“The lower income people in this country will be absolutely hammered by 10-15 per cent price increases. Everyone’s fighting for their exemptions, and as they get them other people will have to pay more.

“That’s even before we get to the complexities of VAT implementation, the filing of VAT returns. It’s going to create an enormous bureaucracy to collect this extra $200 million.”

The Government is projecting that VAT will generate $500 million in gross annual revenues, with the $300 million balance replacing existing Customs duties that will be foregone under tax reform and the Bahamas’ accession to full World Trade Organisation (WTO) membership.

Mr D’Aguilar, though, said the proposed $100,000 annual turnover threshold above which businesses will have to register to pay VAT was likely to catch more companies in the tax net than the Government is bargaining for.

He calculated that businesses taking in an average $275 per day in revenues will have to charge, collect and remit the tax to the Government.

“It’s too complex. The tax is too complex. It requires too much administration,” Mr D’Aguilar said.