The Tribune

By CONOR SCOTT

For Citizens for a Better Bahamas

www.citizensforabetterbahamas.org

NOTHING has been debated more this year than the single acronym known as VAT, or “Value-Added-Tax,” which came into the spotlight following the current government’s announcement as supported by the IADB (Inter-American Development Bank) and IMF (International Monetary Fund).

An 11-year analysis by the IABD leaves the Bahamian reader slightly perplexed by its conclusion suggesting higher GDP growth, lower unemployment (to roughly seven per cent), lower public debt yet with today’s similar levels of inequality and increased poverty (Baca-Campod�nico, 2013).

This also includes an inherent assumption that the government effectively implements a safety net intended to stem the loss of free cash left available to the lower-wage worker.

This is not impossible but like the working paper written by Tauh Minh Le (2003) for the World Bank, developing countries such as the Bahamas have an extraordinarily difficult time coping with the amount of bureaucratic organisation and transparency needed to implement said VAT.

The VAT brings increased revenue while shifting the tax base towards capable businesses, but inefficiencies in compliance and the auditing structure diminishes this return, and possibly reverses economic development causing an extremely expensive tragedy similar to that recently experienced in Grenada (VAT was repealed due to administrative incompetence).

Notwithstanding, over 140 countries around the world and several within the Caribbean have used the VAT, and many with success, though with such success dependent upon a wider range of reform outside of tax. The purpose of this article is to identify that reform.

The VAT aims to enlarge the revenue base by taxing the major segments of an economy at every stage of the supply-chain.

This means that the importer is taxed, as is the intermediary and then ultimately the retailer who delivers the tax to the end consumer.

Producers can only redeem credits against their paid VAT if they register and are compliant. Thus it is a “self-enforcing money machine,” now earning 20 per cent of the total tax revenue produced by OECD countries (Charlet & Owens, 2010); all the while avoiding the under-the-table business inherent in sales tax and the foreign investment-destroying qualities of income tax.

For the Bahamas, this leads to the organic growth of legitimate, small businesses (the historical backbone of successful free market economies).

A tax threshold selectively chooses which bigger businesses must devote part of its annual budget to accounting VAT and also forces them to raise their prices (charge VAT); smaller businesses (not chosen) earn a price-advantage that is pronounced when also purchasing their inputs from other small businesses or VAT-free sources.

Couple this with decreased tariffs (VAT is typically lower than import duties, and with no export taxes) and the end result is a cheaper product or service for a Bahamian culture that values their savings (Peters & Bristol, 2006).

More fortunate consumers create a market of their own for VAT-paying producers are now able to import more refined products (ie high-end clothing) due to the opening of the Bahamas to international trade treaties; this factor is clearly inherent in the VAT as it strives to replace tariffs (Ebrill et al., 2001).

Especially consider this along with the demographical makeup of the wealthy communities of Nassau. At numerous levels of business capital, the ideal yet possible scenario is a decrease in the cost of supplies that also gives small, Bahamian manufacturers a chance to make it.

Entrepreneurship is vital to the survival of the Bahamas given that the 2008 financial crisis led to an even-today stagnant economy that is evidently dependent upon the success of foreign cash: tourism and offshore banking.

In order for the Bahamas to grow as a nation, it must create its own jobs and reduce its dependency on having foreigners give said jobs (or sell its land). This is the positive social reform behind the VAT.

But what’s the negative? Earlier it was mentioned that it was somehow possible to have increased poverty and employment at the same time.

The VAT is a regressive tax in that it taxes a larger proportion of the income earned by a lower-wage worker relative to a higher-wage one.

Personal disposable income (free cash) will ultimately decline in the lower to lower-middle income populations as the “transformation sector” (base agriculture and manufacturing) will certainly lag in its ability to increase employment (Baca-Campod�nico, 2013).

In other words, things will get worse before they get better as the market waits for the reduced tariffs and increased competition to take effect.

However, this saving grace necessitates the above social reform – independent of the VAT – for entrepreneurship and export-oriented businesses.

Further, being the most critical negative attribute, there is the issue of ineffective tax management (Charlet & Owens, 2010). Grenada, Trinidad & Tobago and Barbados all represent prime examples of a failure in this regard, each from separate polar angles (Peters & Bristol, 2006).

The original introduced in the VAT failed in Grenada by collecting 75 per cent of the projected revenue in the first year, increasing the cost of household goods by 26 per cent and decreasing the growth of their major exports by six per cent (Sanfiord, 2003; Peters & Bristol, 2006).

This was due to a rushed and poorly though-out implementation process, lack of administrative capability for enforcement and collection and cascading (doubling) taxes due to improper exemptions (Samuel, 1987; Bain, 2002). This is the exact fear of today’s private economy in the Bahamas.

In Trinidad & Tobago the misplacement of VAT on items prone to rampant inflationary pressures not only cost their government millions of T&T dollars in revenue through the subsequent food VAT removal, but also contributed to a 24 per cent year-on-year price jump for most food products.

This excludes the further economic analysis on the pronounced regressive nature of the VAT coupled with lower money for a “safety net.”

In addition, highly-demanded products such as food stuffs often resist price reductions, as VAT removal failed to stop grocers from raising prices (Hassanali, 2013, “Vat on Food Flops”).

In 2010, Barbados applied the 17.5 per cent VAT and was urged by the IMF to raise corporate taxes by at least one per cent (this includes pre-existing duties and excise taxes) in order to finance increased public spending.

Taxes give the public sector more revenue to spend, but without a thought-out reinjection into the private sector, the country is ultimately rated as “junk” (Standard & Poor’s, 2013).

Either the IMF or Barbados, or both, “missed the ball” on this one, but that is another debate. The key of this debate is that without clearly understanding what to tax, when to tax, where to tax…and so on, the end result is ruin.

And, this assumes that taxes are actually paid. Research concerning developing economies frequently points to the large and efficient administrative structures needed to maintain the incentives to register for the VAT (Le, 2003; Peters & Bristol, 2006).

In India, VAT evasion became rampant due to multiple-year backlogs in processing VAT refunds (the incentive to comply), leading to “The Punjab Vat Relief Fund” for the equivalent of $65 million (Web India 123, 2013). Vietnamese export companies faced significant losses due to VAT refund delays, and subsequently their coffee industry (a major revenue source) is dwindling after much tax fraud due to an embattled tax administration unable to accurately trace receipts (Le, 2003; Reuters, 2013, “Tax dodge by some Vietnamese dealers hurts foreign coffee firms”). Barbados also suffers from various reported complaints around VAT refund delays.

In either case the result is decreased competitiveness in the export market coupled with numerous frauds that create a downwards spiral, burdening an already-encumbered tax administration.

It is unclear how the Bahamas plans to avoid this issue, especially for the IADB’s transformations sector when the Bahamas NIB, already associated with the buzzword “scandal,” failed to receive a quarter of its due payments in 2011 on time.

In fact, the government of the Bahamas has many questions to answer, as it is not the VAT that is the core issue but (1) its implementing body and (2) how it is used.

While Guyana’s seven-year streak of four per cent average growth annually is linked to the implementation of the VAT and private economy reforms, this does not sway the fact that a poor result is just as likely if not more so (IMF, 2013).

To avoid the VAT pitfalls of other developing countries the government of the Bahamas must provide page-on-page explanations as to how it plans to:

• Fund and apply its safety net (welfare) programme effectively (which is New Zealand’s success).

• Target the Bahamian consumer likely to suffer most from lower disposable income.

• Reform the private economy for manufacturing – and export-based businesses.

• Ensure a gradual lowering of supply costs by removing the import tariffs.

• Reduce its public spending, avoid further administrative “scandals,” and establish the administrative efficiency for collecting VAT receipts.

• Implement an online system for businesses to pay VAT.

• Create bi-annually reports detailing the government’s full expenditures (including those by the Prime Minister).

• Prevent tax fraud occurring for exporters.

• Optimise public offices by removing unproductive inputs (this includes employees and as Barbados demonstrates, happens inevitably).

• Explain the July 1, 2014 implementation date whilst import duties are still in effect. Trinidad & Tobago showed that sudden and large reductions in future import costs are not passed on to the consumer.

VAT is a piece of long-term economic reform that restructures both the public and private sectors. If the government is unable to produce the above explanations or refuses to reform, then the VAT will more likely-than-not go to waste.