The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Opposition’s leader yesterday pledged to “stick with” his Value-Added Tax (VAT) ‘exemptions’ plan, despite strong criticism from the International Monetary Fund (IMF) and political rivals, one of whom urged him to “stop talking fool”.

Dr Hubert Minnis told Tribune Business that while he was “listening” to the warnings and advice from the IMF and others, Bahamians “need relief” from the tax burden created by VAT’s imposition.

As for the revenue foregone by removing the 7.5 per cent levy from products such as food, baby items, healthcare and other ‘breadbasket’ goods, Dr Minnis said tax adjustments elsewhere would compensate.

He promised that, if elected to office, the FNM would conduct “a

comprehensive review of the entire Bahamian tax structure”, in a bid to eliminate wastage and find efficiencies.

Dr Minnis’s comments came after Branville McCartney, the Democratic National Alliance’s (DNA) leader, branded the Free National Movement’s (FNM) ‘exemptions’ proposal as “pie in the sky” and populist economics designed to win general election votes.

Mr McCartney said that whichever party won the upcoming general election, the Government’s priority was to achieve faster economic (GDP) growth and cut unemployment, rather than tinker with VAT and other revenue streams.

“The Opposition is talking about VAT exemptions. That ain’t going to happen,” the DNA leader told this newspaper yesterday.

“Let’s not talk fool and say things that sound good politically. We need to build the economy before we deal with VAT. It’s pie in the sky.

“They’re [the FNM] sounding like the PLP. They’re saying things that sound good, but are not do-able, just like how they talk about tax-free zones in the inner-cities,” Mr McCartney added.

“Pie in the sky. How’s that going to happen. The FNM talking about VAT exemptions without building the economy is like the PLP talking about how they were going to have Mortgage Relief prior to the 2012 general election. Unfeasible. Can’t work.”

A defiant Dr Minnis, though, said he and the FNM were sticking to the VAT ‘exemptions’ proposal when contacted by Tribune Business last night.

This was despite last week’s call by the IMF, following its two-week stay in Nassau for the Article IV consultation, strongly advising against such action.

The Fund instead called for “resolute implementation of the current VAT regime with few exemptions.

“The authorities should resist pressures to weaken the VAT regime’s efficiency through the introduction of exemptions,” it added.

Shrugging off the IMF warning, Dr Minnis told Tribune Business of the VAT ‘exemptions’ proposal: “We’re sticking with that.”

He acknowledged that the Fund’s delegation had provided contrary advice when the FNM met with them, but argued that poor, lower income Bahamians needed relief from the higher cost of living ushered in by VAT.

“We listen to them,” Dr Minnis said of the IMF and other critics. “The bottom line is people need help.”

Prime Minister Perry Christie specifically read out the section of the IMF report recommending that the Bahamas “resist pressures” for VAT ‘exemptions’ when he closed the mid-year Budget debate last week, implying that it was a ‘direct strike’ against the FNM”s plan.

Michael Halkitis, minister of state for finance, and ex-financial services minister, Ryan Pinder, had also used their earlier mid-year Budget contributions to warn against/criticise the Opposition proposal.

‘Exempting’ products from the 7.5 per cent VAT levy has knock-on consequences for both businesses and consumers.

Companies are unable to recover the VAT they pay on their ‘inputs’ when products they sell are exempt, thus increasing their costs. A broadening of VAT ‘exemptions’ would likely prompt them to increase prices on non-exempt items to compensate for higher costs, hurting the consumer.

The Government would also have to ‘make up’ the VAT revenue foregone by increasing ‘exemptions’ elsewhere in its tax structure.

And, perhaps, most importantly, widespread exemptions would undermine the very philosophy of the Bahamas’ VAT model, which is to have as broad a tax base as possible. In doing so, this ensures the tax rate is kept low.

Increasing exemptions will thus put pressure on the Government to increase the current 7.5 per cent VAT rate, in order to maintain revenues.

The Bahamas was warned against such a ‘trap’ by former Barbadian prime minister Owen Arthur, who on a visit to Nassau revealed that the southern Caribbean nation, by giving into industry and special interest requests for ‘exemptions’, had been forced to raise its own VAT ‘rate’ into the high double digits.

The Christie administration has elected to protect lower income Bahamians from VAT via an expanded social security budget, but Dr Minnis yesterday said the FNM’s proposed ‘exemptions’ plan could be funded by adjustments elsewhere in the tax system.

“It’s only a matter of looking at tax reform and tax efficiency,” he told Tribune Business. “We have lots of wastage in terms of real property tax and other taxes.

“We can make adjustments. It’s a matter of tying the tax revenues into the correct coffers.”

Dr Minnis said the FNM, if elected to office, would appoint a committee to review the entire Bahamian tax structure.

“That’s not been done; a review of the entire tax structure of the Bahamian economy. We need a comprehensive review,” he told Tribune Business.

Dr Minnis also said the Prime Minister’s review of the IMF’s Article IV statement was “contradictory”, and branded his rival “hypocritical” for agreeing with the Fund on the VAT ‘exemptions’, but disagreeing with its assessment of the Bahamas’ economic growth prospects.

Mr McCartney, meanwhile, reiterated that the Bahamas needed to focus on growth and job creation first, and further fiscal reforms second.

“Let’s talk things that can actually happen, and not say things to get elected,” he told Tribune Business, branding the IMF report as “a fair assessment of where we are”.

“We ought to heed what they said,” the DNA leader said. “Let’s diversify our economy. Let’s get foreign investors back in here, where they can trust the Government they’re dealing with.

“Let’s stop the wastage going on, stop the cronyism and corruption, which costs the Bahamian people every day. Let’s manage this country like we’re managing our own business.

“That’s the starting point. To start talking about VAT ‘exemptions’, that’s in the future, but we’re not at that point. We have bad fiscal policies because of the FNM and PLP. That’s why we have VAT.”

Mr McCartney questioned where the FNM would find replacement revenues under its VAT ‘exemption’ plan, and warned that higher costs could result in businesses closing their doors and reduced consumer spending power.

“Exemptions sound good; people jump for it, but they [the FNM] need to be business minded when they make these comments,” Mr McCartney added.

“You have to look at all sides to make sure you’re not speaking politically to get votes, and are not talking pie in the sky to the Bahamian people.”