The Tribune

• Auditor General: Consumer spend nosedived by 34%

• ‘Phenomenal’ drop-off but magnitude is questioned

• Inland Revenue collected just $27m more at 12% rate

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Consumer spending shrank by $2bn in the year after the Minnis administration hiked the VAT rate to 12 percent, the Auditor General’s Office calculated in a newly-released report.

Assessing the rate increase’s impact on VAT performance in the 2018-2019 fiscal year, the report said total tax filings submitted to the Department of Inland Revenue showed that money spent on goods and services in the Bahamian economy nosedived by 34 percent year-over-year.

The Auditor General’s Office said that comparing total filings by VAT registrants for 2017-2018, when the tax rate was 7.5 percent, with the following fiscal year’s returns showed that the “consumption value of VAT-able goods and services” fell from $5.945bn to $3.943bn in 2018-2019 after the 4.5 percentage point rate increase was introduced.

Defining consumption value as “the amount of money injected into the economy”, the Auditor General’s Office said the “total” value - which combines the worth of imported goods with what consumers purchased in the domestic economy - fell by $1.6bn or 18 percent year-over-year to $7.47bn as compared to $9.07bn in 2017-2018.

The more measured decline in that indicator resulted from Customs valuing VAT-able imports at $3.522bn for 2018-2019, which represented a 13 percent or $404.056m increase upon the prior fiscal year.

Yet, despite the rate hike, the report by the Auditor General’s Office showed that the Department of Inland Revenue (DIR) collected just over $27m more in VAT in 2018-2019 than it did the prior year when the rate was still at 7.5 percent.

The DIR’s collections grew by 6 percent to $473.155m, which was only slightly ahead - by just over $50m - of the $422.587m gained by Bahamas Customs. The latter agency saw its VAT collection jump by 80.7 percent year-over-year, rising from $233.813m in 2017-2018 to $422.587m.

“Overall, the importation value of goods increased while the consumption value of VAT-able goods and services declined in the domestic market,” the Auditor General’s Office report concluded.

The “incredible” findings are likely to stoke fresh debate, and controversy, about the merits of the former administration’s VAT rate hike and whether it choked-off potential economic growth just prior to Hurricane Dorian and then COVID-19. It also raises questions as to whether the Public Treasury will see diminished yields once the VAT rate is increased beyond a certain point.

The timing of the report’s release coincides with a fresh back-and-forth on the newly-elected Davis administration’s move to slash the VAT rate to 10 percent, and return to the original broad-based, exemption and zero-rating free model, which is coming under intense attack from Opposition accusations that the move will “harm” lower income Bahamians (see other articles on Page 1B).

Gowon Bowe, who headed the private sector’s Coalition for Responsible Taxation (CRT) prior to VAT’s introduction in January 2015, told Tribune Business yesterday it was little surprise consumer spending fell as a result of the rate increase although he questioned the magnitude of the decline as stated by the Auditor General’s Office.

Suggesting that there may not be “a linear relationship” between the VAT rate increase and plunge in Bahamian consumer consumption, he explained that “there are other factors that may contribute” to reduced spending such as oil price increases.

“The gist is one I wouldn’t dispute, but the assessment in terms of percentages may be exaggerated,” Mr Bowe said, speaking after the report was tabled in the House of Assembly yesterday.

“The truth is that where tax rates are increased, and this is not done on elasticity, there will be a natural decline in consumption because you’re taking tax money out of the purchasing power of individuals and putting it into the Government’s coffers. If government consumption is not commensurate with that of citizens, there will always be a reduction...

“To increase the tax rate, although you have introduced multiple exemptions, leads to people reducing consumption - particularly when there are other cost pressures taking place, like oil.” Adding that he has “great respect” for the Auditor General, Mr Bowe said there was sometimes a tendency to “over simplify” analysis.

“The thrust of that message is correct, but the specifics are something we have to look at in more detail because there are other contributory factors,” he concluded of the “$2bn” finding. Basing the calculations on filings by VAT registrants and taxpayers also meant they were exposed to the errors, omissions and evasion associated with such returns.

Meanwhile Rick Lowe, an executive with the Nassau Institute think-tank, said of the Auditor General’s Office findings: “That’s incredible. That’s phenomenal. I’m speechless. That’s very intriguing and is a drastic decrease. What could contribute to a $2bn year-over-year reduction?

“I wonder if people were doing cash business and not invoicing, or if people had stopped buying locally to buy more from Amazon and things like that? People buying online would indicate an increase in Customs collections. There’s any number of issues that impact that.”

Meanwhile, the Auditor General’s report revealed that gross VAT revenue collections for 2018-2019 came in some $135.558m below forecast to stand at $1.045bn. This accounted for more than one-third of the revenue shortfall that year, which came in $369.41m or 13 percent below the total $2.79bn Budget forecast.

Customs duties and Excises taxes were below Budget estimates by $51.715m and $54.88m, respectively, although real property taxes beat collections targets by $78.323m to come in at $247.619m compared to a $169.296m target.

The year-over-year comparisons, aided primarily by the VAT rate hike to 12 percent, were better. Total tax revenues were up by $467.38m or 28 percent compared to 2017-2018, although non-tax revenue dropped by $83.41m or 27.04 percent compared to the prior year’s $307.04m.

“VAT, the highest source of government revenue, generated $896.56m (41 percent of the $2.42bn recurrent revenue),” the Auditor General’s Office said. “VAT revenue increased by $215.98m (32 percent over $680.58m in fiscal year 2017-2018).

“It is important to note that the $422.58m VAT collected by the Customs Department accounted for 47 percent of the $896.56m. The importation VAT with the 12 percent standard rate accounted for an 81 percent increase over $233.81m in fiscal year 2017-2018.”