The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A well-known businessman believes it would be premature to celebrate the Government’s decision to lower Value-Added Tax (VAT) to below 15 per cent, as it is unclear how much duty rates will now be cut.

Rick Lowe, Nassau Motor Company’s (NMC) operations manager/director, told Tribune Business that the Prime Minister’s rate change announcement meant all previous auto industry price change calculations became “meaningless”.

That is because the sector had previously been told that Excise Tax rates on imported vehicles would drop by 17 percentage points to accommodate a 15 per cent VAT, thus ensuring - at least, acccording to the Government - that there was no change in landed commodity costs at the border.

Calculations stemming from these two rates must now be ‘thrown out of the window’, though, as a lower VAT rate will force the Government to cut Customs and Excise Tax rates by a smaller amount to achieve its revenue targets - which have not changed. It is seeking a total $500 million revenue increase by 2016-2017.

If the VAT rate is cut to 10 per cent, or by one-third in percentage terms, this seems likely to imply that the average Customs and Excise Tariff rate will now only be slashed by 12 percentage points.

And given that the Government was planning to cut import duties by $320-$330 million once a 15 per cent VAT came in, it seems likely that a 10 per cent rate would significantly reduce this sum - possibly by $110 million to just $220 million in Customs/Excise revenues that will be replaced

Either way, regardless of whether VAT is 15 per cent or 10 per cent, Bahamian sellers of imported commodities (physical goods) are unlikely to see any difference (especially a reduction) in landed costs at the border post-new tax. And some, including Mr Lowe, had projected that a 17 percentage point duty cut, combined with a 15 per cent VAT, would result in a slight - though not material - increase in landed costs.

Indeed, the main beneficiaries from a lower VAT rate, as announced by the Prime Minister in the House of Assembly last week, will be the services sector. With no landed costs, those services businesses that will have to register to pay VAT will be able to levy the tax at a much reduced rate on their customers.

While companies will also see a reduction in the amount of VAT theymust pay on their ‘inputs’, that which they charge their customers will also be down, meaning the ‘netting off’ or amount they must pay to government will be little changed.

“I keep hearing 10 per cent,” Mr Lowe told Tribune Business on the likely new VAT rate. “Ryan Pinder [minister of financial services] mentioned that to me, and I was speaking to someone doing some consulting work for them [the Government], and that’s what they had heard.

“But no one knows what duty and Excise tax rates are going to drop by. Unless we know the number Excise Taxes are dropping by, doing this pricing exercise becomes meaningless.

“We were told VAT is 15 per cent, Excise Tax is dropping by 17 per cent, so we can do this exercise to assess pricing and how it impacts gross profits. It’s just so unsettling.”

Both Mr Pinder and John Rolle, the Ministry of Finance’s financial secretary, recently sent subtle public signals that VAT was likely to be reduced to a 10 per cent rate, with implementation possibly pushed back until January 1, 2015, at the earliest.

Prime Minister Perry Christie confirmed that the original July 1, 2014, implementation target date for VAT was likely to be pushed back. However, his failure to say what the new date will be, or announce the new tax rate, means only continuing uncertainty for Bahamian businesses.

Businessmen such as Dionisio D’Aguilar had previously correctly predicted to Tribune Business that VAT would be the Government’s choice, but that it would come in at a later date and lower rate.

In truth, Mr Christie had little choice other than to attempt to pacify the opposition to, anc concerns over, VAT from both the public and private sector. He and the Government will have realised that the issue is a potential election liability, especially if implementation goes badly and the economy is harmed.

Robert Myers, the Coalition for Responsible Taxation’s co-chairman, welcomed the Government’s seeming VAT ‘backpedal’ as “great news”. He added that the Prime Minister’s Mid-Year Budget wrap-up had touched numerous areas focused on by the private sector body, including the need to tax web shop gaming.

“We’re very pleased to receive this much-anticipated news,” Mr Myers said, “and are working very hard to complete this Oxford Economics modelling to understand the economic baseline, and provide the Government and public with our findings, and report our recommendations.

“We want to encourage the Government to examine all aspects of fiscal reform; compliance, accountability, enforcement of existing tax laws, the rule of law and government expenditure.”

One person unconvinced by the Prime Minister’s House of Assembly performance is Mr Lowe. “I expect it’s just a ruse. I don’t expect them [the Government] to back off,” he told Tribune Business.

“They’ve got these international people [IMF, rating agencies] that they’ve got to live up to, that they have to deal with, and that’s why we cannot escape this.”

He added of VAT’s likely effects: “It will impact our gross profit. It’s going to raise our prices. Take a car for $23,000; it’s going to end up $2,000 and some more expensive [at 15 per cent VAT] even though the list price is going to be less.

“What does that do to consumer confidence, the ability to pay and get a loan? Tell us [the new tariff rates]. We’re, in the auto industry, on up to seven-month ordercycles. We’ve got these lead times, don’t know what’s coming down the pike, and they are taxing people and business down.

“How does government get its taxes? They do not come out of thin air. If you’re destroying the business environment, making things unbearable, that’s self-defeating.”

“I don’t want to take a chance on rhetoric. I want guarantees,” Mr Lowe said in response to Mr Christie’s House of Assembly speech. “They want guarantees on how we operate. It’s a two-way street; we’re in this bath together. It’s very, very unsettling and I don’t see it getting any smoother.”