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Implement Vat As 'Matter Of Urgency'

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James Smith

By NEIL HARTNELL

Tribune Business Editor

THE Bahamas needs to be "well on its way within the next two years" to implementing a VAT/sales tax regime, the Ministry of Finance's leading consultant said yesterday, adding that this nation's tax revenues - as a percentage of GDP - were 10 points below the Western Hemisphere average.

James Smith, the former Central Bank governor and minister of state for finance, said broadening the Bahamas' tax base was essential to bridging a revenue "gap" that appeared structural in nature, especially given assertions from the newly-elected Progressive Liberal Party (PLP) government that the fiscal deficit for the 2011-2012 Budget year was likely to reach close to $500 million.

Suggesting that the Government design a schedule for implementing a value added tax (VAT) or sales tax "as a matter of urgency", Mr Smith added that its other priority should be to stimulate a private sector recovery and get the economy growing "at a much faster rate".

Acknowledging that the Bahamian economy was facing "very serious challenges" when it came to growth and job creation, the current CFAL chairman also warned that this country "can't continue on the same path without getting into enormous trouble" when it came to the Government's finances.

The former Ingraham administration had projected a total $314 million fiscal deficit for the Budget year to end-June 2012, but both the Deputy Prime Minster, Philip Davis, and PLP chairman, Bradley Roberts, have argued that the final outturn is likely to be closer to $500 million.

Mr Smith, who is advising the Christie administration's Ministry of Finance 'behind the scenes', yesterday described the $500 million deficit projections as "quite worrisome".

"That's very troubling in the sense that it's larger than last year's, which suggests we continue on an upward trend," he told Tribune Business of the new fiscal deficit projections.

"It also suggests there's been no dramatic change in the revenue line, and that expenditure is also trending upwards. It has the appearance of being structural in nature."

The former government's Budget projections had estimated that the total 2011-2012 fiscal deficit would come in at a sum equivalent to 3.8 per cent of Bahamian gross domestic product (GDP). A $500 million deficit, though, would be equivalent to 6.1 per cent of GDP.

Analysing the implications if the final outturn was closer to $500 million, Mr Smith told Tribune Business: "That's a really large number. I think it's quite worrisome from the macroeconomic point of view, because when you look at it just in terms of the Government's fiscal position, revenue is not performing at a level to sustain expenditure."

The gap between government revenues and spending first emerged in the 2008-2009 Budget year, producing a total deficit of $430 million. That increased to a $514 million peak in the 2009-2010 fiscal year, before reducing slightly and $206 million in 2010-2011 (aided by the Bahamas Telecommunications Company (BTC) privatisation and Baha Mar/BORCO deals).

Mr Smith said the Bahamian government's revenues, standing at between 16-18 per cent as a percentage of GDP, were "about 10 points below the average in the Hemisphere".

Absent any sudden explosion of economic growth, he added that the Christie government's options were to either raise more revenue, curtail public spending or a combination of both when it came to controlling the fiscal deficit and, by extension, the national debt and its GDP ratio.

"We can't continue on the same path without getting into enormous trouble," Mr Smith added.

When asked by Tribune Business about the need to implement an alternative form of taxation in the Bahamas, either a sales or VAT tax, he replied: "That should be done almost immediately. Enough research has been done on it, and I believe an implementation schedule should be drawn up as a matter of urgency."

Asked about the timescale the Bahamas should follow in implementing a VAT, Mr Smith responded: "We probably need to be well on this course within two years."

The likes of the International Monetary Fund (IMF) and Moody's, the Wall Street credit rating agency, have both urged the Bahamas to implement a VAT tax. They argue that it will address the issues international trade agreements will create for the current import-duty based tax system, plus address the relatively poor revenue yields.

Most major industrialised countries have employed a VAT tax for years, given that it generates revenue yields - and is levied - at each stage of the production process.

In addition, a VAT would also capture services industries - the majority of the Bahamian economy, which is currently relatively untaxed. Mr Smith told Tribune Business that a VAT "suggests itself, in so far as it broadens our tax base to include both goods and services".

With Bahamian consumer consumption down, unemployment remaining stubbornly high and tourist spending relatively flat, Mr Smith said the main revenue drivers for the Government were not in the best shape.

"The macroeconomic indicators as they line up indicate very serious challenges for the economy going forward that have to be addressed, and those are of a structural nature. It's not easy," Mr Smith told Tribune Business.

"What we need above all is to grow the economy at a much faster rate, and there are no short-term fixes for economic growth, so we would need to concentrate on growing visitor arrivals and visitor expenditure. That would impact the largest sector by employment, and similarly we need to look at other measures to expand the economy. We've really got to eke out some economic growth."

Comments

B_I_D___ 8 years ago

Implement VAT...you better dang well do away with import duties then!!

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spoitier 8 years ago

If you eliminate customs duty then Bahamians will spend even more money out of the country, even though it is everybody free will to spend their money where they please, a government don't need to make it more easy for them to do so.

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MartGM 8 years ago

VAT is added to all goods and services where as Import Duty is only added to most imported items (there's no duty on educational goods like laptops and books), If we eliminated Import Duties, Bahamians would have zero incentive to "buy Bahamian". VAT also adds much needed transparency (and certainly much needed revenue) in the government because I need to know what I'm paying them when I purchase a can of tuna at Super Value.

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concernedcitizen 8 years ago

it all sounds good and i agree ,go straight vat tax and elimnate custom duties ,,i don,t know how we will do that because then we will have no need for custom officers ,,it would be a start as it is now over half our yearly budget goes to pay civil servants,that is one reason we have to borrow to do any infurstructure...

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Ironvelvet 8 years ago

I agree with the VATs. Let's get on it Parliament!

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concernedcitizen 8 years ago

if we do convert to a vat tax,how will we offset the loss of jobs from customs and also the custom brokerage businesses ..i can see where we could move custom officers to other areas until there retirement ,but what about the brokerage houses and smaller independant custom brokers ??is it so dire that it has to hurt to make the country better ??i too support a vat, just wondering how it can be fairly implemented so the less fortunate don,t pay a higher % of their income than the more fotunate ???

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Ironvelvet 8 years ago

No, VAT is separate from import tax which is what the customs officers are doing now. Having VAT does not mean you lose import tax, customs would remain as is.

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concernedcitizen 8 years ago

so than we would have additional taxes ??i understand goverments need money and we are in debt , we spent alot during the recession ,some say on good some say on bad,if goverment gets some new revenue PLEASE USE ALOT OF IT AGAINTS THE DEBT ...

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MartGM 8 years ago

yup, there would be additionally taxes. The Bahamas has been needing to revamp its tax system for a while now. So sad it has to be done during a time when we're all struggling.

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concernedcitizen 8 years ago

i got it now ,it would be like sales tax in florida ,so the more expensive things you buy the higher the tax ,,so it is fair between rich and poor

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Rontom 8 years ago

No, it is a Regressive form of taxation--meaning the tax burden is passed on the consumer as the profit margin of businesses Increases

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Farmer 8 years ago

They cant even collect national insurance or business license from allot of businesses how are they going to get the VAT out of them? Same thing with property tax people just don't pay it and they continue. Only the few honest business people will pay up further hurting their business. Most will crook and scam their way out. Customs duties can be avoided as well but it is much much harder. If they get rid of customs duties our govt will be broke in no time!

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concernedcitizen 8 years ago

i think it maybe harder to cheat customs with the new port ,but you make valid points on the other areas ...

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Farmer 8 years ago

I feel sorry for you guys living in Nassau. Those new port fees are going to kil you guys. People and shipping companies are just finding out how bad they are.

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Farmer 8 years ago

Our government really needs to sit down and put their thinking caps on. For instance most people in this country make what $250.00-$300.00 a week roughly. Right now the government is taxing BEC fuel hence electricity 3-4 times. Custom duties on the fuel when it lands in the Bahamas, sales tax when it is sold to BEC, and business license at least once when it is sold to a business maybe 4 times I don't know of BEC pays business license. Now anyone making 250-300 bucks is spending all of their income every week. If taxes were eliminated from electricity cost saving someone like $25 a week (pure speculation dont know the actuall $$ amount)that person making only 250-300 is still going to spend all of their income on others items which are probably taxed by duties or if its a local product generate demand hence jobs who salaries can then buy dutiable items. So the government would still get their tax from duty and business license but it would drive consumption and more business activity and make people happier hence more investor confidence.

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C_MonMan 8 years ago

The administrative mechanism to collect, supervise and enforce custom duty fees has not been fully figured out as yet, therefore, I wonder how long it would take to design and implement a robust collection, supervision and enforcement administrative machinary for VAT. This would be a nightmare in the Bahamas with its immense underground economy.

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Farmer 8 years ago

I totally agree with this. The undergound economy that doesnt pay their fair share is immense. At least if they are selling some type of good it has a good chance of paying the duties to get it off the dock much better than the chance the person is going to pay VAT especially if they do not even have a business license to be selling something in the first place. Lol imagine those fisherman down on potters cay paying VAT on their fish they wouldnt even know how to calculate it.

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