The Tribune

• Bahamas ‘better served keeping it simple’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government “created a maze” for the Bahamian private sector and consumers when it abandoned the low-rate, broad base VAT model, a prominent banker is arguing.

Gowon Bowe, who headed the Chamber of Commerce’s Coalition for Responsible Taxation when VAT was first introduced, told Tribune Business he “remains critical” of the Minnis administration’s decision to hike the rate to 12 percent and introduce multiple exemptions.

Arguing that “society would be better served by keeping it simple”, he added that one negative consequence from this move was that food stores were forced to raise the prices of non-exempt items to compensate for the VAT they are unable to recover on consumer sales.

“I don’t think the Ministry of Finance has demonstrated to this date that having exemptions at a higher rate is more efficient and effective than the original system we had in place,” Mr Bowe, who is Fidelity Bank (Bahamas) chief executive, told this newspaper.

“There’s now Indian giving; we give you exemptions, but increase the rate to compensate for that. The study by Oxford Economics demonstrated it was fare more efficient to have a low rate with no exemptions, and have targeted initiatives to help those with lower incomes through social assistance.

“The high net worth individuals in this country eat breadbasket items like the low income earners, but high net worth individuals also get exemptions and don’t need it. I was critical of the Government’s decision to increase the rate to the level they did with exemptions, and I remain critical of it,” he continued.

“The complexities in the system have not benefited us, and have only created doubt over what’s included and not included [as a VAT ‘exempt’ item]. It created a maze that we have to navigate, as opposed to a straight line we originally had. I believe society would be better served by keeping the tax as simple as possible and the rate as low as possible.

“If we can keep the base as broad as can be we will not be giving benefits to those that do not need it in the first place.” VAT ‘exempt’ goods and services do not include the 12 percent levy in the price to the final consumer.

However, businesses that sell such products still have to pay the 12 percent VAT on the input costs associated with them, yet are prevented from recovering or netting this off in the absence of ‘output’. VAT.

Therefore, when the Minnis administration introduced multiple exemptions in the 2018-2019 Budget, food stores saw the proportion of rent, utilities and other expenses where they were unable to recover input VAT increase materially. This left them with little choice to increase food prices, further hurting lower income Bahamians in particular.

“We’ve made it cheaper for those with lower income to afford breadbasket items,” Mr Bowe added, “but have likely restricted them to only breadbasket items because we’ve made non-breadbasket items more expensive by increasing the VAT rate.

“Putting food on the table is very important, but so is the occasional treat of chocolate and ice cream. If we start pricing basic luxury items out of their reach, have we done the greater good? My personal view is we haven’t. With a broader base, you make the cost of living more evenly distributed, and use the excess cash collected to redistribute and support those in need.”

The Minnis administration argued that the VAT rate hike was necessary to pay-off some $360m in past due government arrears for which no funding had been set aside to meet. This sum was supposed to be paid off in three years, with ex-deputy prime minister, K Peter Turnquest, pledging that the Government would seek $100m in import duty cuts when this objective was achieved.

Those cuts will not now occur due to the debt blow-out produced by the combination of Hurricane Dorian and COVID-19. And the Minnis administration’s decision to increase the VAT rate, as well as implement numerous exemptions, resulted in The Bahamas moving away from the ‘low rate, broad-based’ tax model it had been praised for introducing.

The Bahamas had been warned against doing this 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.

Exempting products and services from VAT 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, meaning that this merely increases their costs.

A broadening of VAT exemptions also prompts businesses to increase prices on non-exempt items to compensate for their higher costs, thereby hurting the consumer who was the very person that the Minnis administration wanted to help. And the Government also has to ‘make up’ for the VAT revenue foregone elsewhere in its tax structure.