The Tribune

The Government was yesterday urged by a leading governance reformer to reduce “inefficient taxes across the board” so that it could make room for potential Value-Added Tax (VAT) rate increases.

Robert Myers, a former Organisation for Responsible Governance (ORG) principal, told Tribune Business that VAT’s relative ‘success’ to-date showed that the Government needed to focus on this tax as its principal revenue earner.

With the $852 million collected during VAT’s first 18 months exceeding even the private sector’s expectations, Mr Myers said the relatively high compliance levels should encourage the Government to move away from “less efficient taxes”.

He suggested that in return for increasing the existing 7.5 per cent VAT rate by a single percentage point, the Government slash existing Customs duty rates by a blanket 4-5 per cent, so that the tax burden on Bahamian consumers and businesses was not increased.

“I think you are seeing the effects of a compliant tax structure with VAT,” Mr Myers told Tribune Business, “in that they are receiving considerably more money than even we had thought in the Coalition for Responsible Taxation (CRT), because it is somewhat a self-policing tax, in contrast to real property tax and duty.

“We know from the research we were doing that compliance on those taxes alone was under 50 per cent, which means an awful lot of money was being evaded or stolen.

“What ought to happen is a reduction in inefficient taxes across the board, and then an increase in the efficient taxes, which is VAT,” the ORG principal added.

“The question is: If you raise the VAT rate by 1 per cent, how much do you drop duty by? With these levels of compliance, you could theoretically drop duty by 4-5 percentage points for every 1 percentage point VAT increase, which would be beneficial to the consumer and the tax structure overall.”

Many businesses and individual Bahamians will likely be extremely nervous about any suggestion of a VAT rate increase, but Mr Myers’ comments also resonate for several other reasons.

The Government, in its 2013 VAT ‘White Paper’, promised to reduce Business Licence fees to a flat $100 ‘across the board’ once the new tax was properly bedded in and revenue streams predictable.

With VAT’s two-year anniversary fast approaching, this is yet another fiscal promise the Christie administration has yet to fulfill, with no indication of when it might be acted upon.

The private sector, though, has long argued that Business Licence fees represent one of the most inequitable forms of Bahamian taxation, given that they are calculated as a percentage of gross turnover rather than profits.

This has resulted in many companies paying more in Business Licence fees than they earn in annual profits. And it has resulted in high turnover, low profit margin businesses such as food stores and gas stations, plus those impacted by price controls, paying considerably more than low volume, high profit margin companies.

Mr Myers’ suggestion that VAT is now the Government’s most efficient tax also reflects the fact that responsibility for collecting and administering it has been transferred from the public to the private sector.

The 6,000-plus VAT registrants are now effectively ‘vassal tax collectors’ for the Government, with the requirement to produce a ‘paper trail’ capable of being audited acting as a self-enforcement, or self-policing, mechanism to ensure compliance.

The contrast in compliance, and revenue performance, between VAT and those taxes the Government is directly responsible for enforcing and collecting, is stark, hence Mr Myers’ suggestion that the Bahamas focus on VAT and minimise its reliance on the likes of Customs duties and real property tax.

The Government will likely be forced to increase the VAT rate in any event to compensate for the reduction in Customs duties/border tariffs that will be imposed by the Bahamas entering into rules-based, liberalised trading regimes, such as full membership in the World Trade Organisation (WTO).