The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday said making homeowners insurance VAT-able was “not even on the table”, with legislation to effect the rate cut to be tabled in Parliament by next Wednesday.

Michael Halkitis, minister of economic affairs, yesterday reassured property and casualty insurers that residential coverage will remain “VAT-free” after warnings that it would be “totally asinine” for the Government to reverse course on this issue amid plans to cut the tax rate to 10 percent.

“That matter was not even on the table. That wasn’t even considered in these amendments,” he told Tribune Business in response to the insurance industry’s concerns. “That will remain VAT-free.

“As they [insurers] said, I remember some time ago that there was another discussion about difficulties with reinsurers. The short answer is that did not come on the table. It’s just the zero-rated goods that will be impacted.”

Mr Halkitis spoke out after the insurance industry warned via this newspaper earlier in the week that reintroducing VAT on residential homeowner premiums would create a multi-million dollar hurricane liability for the Government.

Anton Saunders, RoyalStar Assurance’s managing director, warned that if the exemption was removed it would potentially expose the Government to multi-million dollar VAT refunds payable to insurers on hurricane-related claims, something that the cash-strapped Public Treasury can ill-afford at this time.

However, the minister’s clarification should address any confusion in the insurance industry. Mr Halkitis confirmed to Tribune Business that the final decision on what VAT ‘zero ratings’ and ‘exemptions’ will remain, and which will go, was taken at Tuesday’s Cabinet meeting.

He added that “very few” items would remain in these categories, with educational and “certain medical” services retaining their VAT-free status. Electricity and water bills will also be exempt from the tax below their existing thresholds.

Mr Halkitis said an “adjustment” had also been made for the Bahamian financial services industry, where it had asked the Government to “clarify some items”, although he provided no specifics on this.

With the Prime Minister having pledged that the VAT rate cut, from 12 percent to 10 percent, will take effect from January 1 at latest, Mr Halkitis said the enabling legislation will be tabled in the House of Assembly “most definitely by Wednesday of next week”.

He confirmed that the Davis administration is “going back to the status quo” that existed before 2018, when the former Minnis administration introduced multiple VAT exemptions and zero ratings on the basis that this would alleviate the burden that the tax imposes on lower income families.

So-called breadbasket foods that are presently VAT-free include baby foods and cereals; rice; butter; corn beef; flour; and fresh milk. And current VAT-free medicines also include those for heartburn and indigestion; aspirin; cough, cold and allergy medications; and those that deal with pain and fever.

Confirming that these products will now be VAT-able again at 10 percent, Mr Halkitis said: “We’re going back to the low-rate, broad-based mode and that’s the best advice we have received....

“Simplify it, close the loopholes, reduce the opportunity for fraud, reduce the administrative burden, we expect that to contribute to increased revenue collections. That’s what the model is telling us.”

He added that the VAT rate cut, and elimination of zero-rating and exempt treatments, would work with the revival of the Government’s Revenue Enhancement Unit (REU) to grow the Public Treasury’s income beyond what it currently earns at a 12 percent rate.

Tourism’s ongoing recovery will also provide “more buoyancy”, Mr Halkitis added, with the increased economic activity generated boosting consumer spending and the consumption-based activity that VAT thrives upon.

Acknowledging the concerns about the impact on lower income Bahamian families, he said: “It’s a sensitive topic, but all the research and our experience shows that it would be best to keep a low rate with few exemptions and target assistance to those most vulnerable.

“All the studies tell you to keep it simple, and if the most vulnerable are in need of benefits, give it to them directly.” Mr Halkitis said targeting such persons with social assistance benefits, via the reinstated Conditional Cash Transfer (CCT) programme, will be a more effective and efficient means of doing this than the breadbasket and medicine zero ratings.

While these would have benefited “the housekeeper and mother on East Street”, high income earners and businesses who could afford to pay more also enjoyed the benefits flowing from these tax breaks.

“Any time you’re talking about taxation and dealing with these issues, they are very sensitive and very emotive,” Mr Halkitis told Tribune Business. “We understand that. They can be politically explosive and we have to defend it.

“But, in the long run, we think it’s the right thing to do. We think we can have the direct cash system in place in time for when we put this in, so we do away with long lines and that sort of thing.”

A recent University of The Bahamas study found that cutting the VAT rate to 10 percent will cause “only slight improvement” in job creation and economic growth, but advocated it still “be pursued’.

The report, prepared by the university’s Public Policy Institute for the Ministry of Finance, also warned that the two percentage point cut planned by the Davis administration would worsen key fiscal indicators such as the fiscal deficit and debt-to-GDP ratio.

Adding that the tax cut would have no impact on reducing income inequality in Bahamian society, it called for “compensating tax revenue initiatives” to offset the reduction in VAT revenue caused by slashing the rate from the existing 12 percent to 10 percent.

“It was found that reducing the VAT rate by two percentage points, from 12 percent to 10 percent, shows only slight improvements in the real GDP, unemployment rates, prices and poverty levels,” the study said.

“There is, however, a worsening of the current account, the fiscal deficit and the debt-to-GDP ratio..... If the priority is to benefit the economy, if only slightly, the VAT reduction should be pursued.

“However, and at the same time, there must be compensating tax revenue initiatives to address the rise in the deficit and debt-to-GDP ratio.” While the UoB study thus gives cautious backing for a VAT rate cut that will likely be welcomed by many Bahamian businesses and consumers, it indicates that the economic impact will largely be modest - and negative for the Government’s finances.

However, it is unclear whether the UoB study’s VAT cut modelling accounts for the multiple exemption and zero-rating eliminations planned by the Davis administration, making it impossible to judge whether the exact 10 percent structure was assessed.