By Simon Cooper
There has understandably been resistance to the impending implementation of Value-Added Tax (VAT) in the Bahamas. Most of us would prefer that things remain the same unless there are self-serving benefits. In the case of VAT, a number of industries have applied to be VAT ‘exempt’. While there may be some logic to their arguments, this is hardly helpful in terms of the bigger picture.
Let us assume the insurance industry remains VAT exempt. This breaks the chain by which VAT passes down the line. While it may appear that they save time and effort, and their customers avoid a price rise, consider this picture:
* Their suppliers will continue to levy the tax on goods and services, such as premises, repairs and maintenance, utilities, consulting fees and so on. The insurers will have to pay these extra charges without being able to offset them against VAT they collect from their own customers.
*The Government will have to recover the lost income elsewhere. This could increase the VAT rate to the point where all of us – and not only VAT exempted businesses – pay a higher rate of VAT.
* An increase in the VAT rate would pass on to insurance customers, too. The Government needs to collect ‘N’ amount of VAT from you and me to balance the Vudget. Exempting insurance from VAT simply shifts the pain.
To argue that the insurance industry should be VAT exempt is questionable. The same applies to many other sectors. I agree with the authorities that zero-rating is simpler and more manageable. However, I do not regard it as a panacea either.
I used the above example as a vehicle to explain the point. In reality, the Bahamian insurance industry seems clear that it would like to move out from under the umbrella of the proposed blanket exemption of the financial services sector, and become zero-rated. In this case, their logic is parochial. They would like their brokers to be able to claim their input VAT back without paying output tax.
I don’t find this helpful in terms of the bigger picture. While it may be beneficial to their clients, it is also a slap in the face for those who self-insure, and now have to pay VAT as well when they finance an ‘internal claim’. Value Added Tax – for all its blemishes – is supposed to be a universal tax levied across a level playing field.
I would far prefer to see a clean VAT model where the rate is as low as possible across the board. If non-profits feel that VAT is unfair to them, there should be a mechanism for them to apply for a cross-subsidy instead. This should be no more onerous than an application for VAT exemption, and should make overall administration simpler. In the next, and final, article in this series, we’ll explore the long-term effects of VAT in developed economies.
NB: Simon Cooper is a founding partner of Res Socius, a firm authorised by the Bahamas Investment Authority to facilitate the sale and purchase of businesses and provide management consultancy services. He isan agent for the cloud-based XERO Accounting System that is fully VAT compatible. Contact 376-1256 or visit www.ressocius.com.