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Bahamas Faces Recession If Consumer 'Can't Absorb' Vat

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas will fall back into economic recession if consumers are unable to absorb Value-Added Tax’s (VAT) inflationary impact, a co-chair for the private sector’s Tax Coalition warned yesterday.

Robert Myers emphasised that the 15 per cent VAT was ultimately a consumption tax that would be paid by all Bahamians, and warned: “If the consumer fails, we all fail.”

Pointing out that few, if any, Bahamas-based businesses could afford to absorb even a portion of the VAT, the businessman said the overall economy “could be hard hit” if the new tax slashed consumers’ disposable incomes.

While VAT will create increased administrative costs for businesses, and cause cash flow and profit margin issues (especially for price controlled industries), its structure allows registered firms to ‘net off’ the tax paid on their inputs with what they collect from customers. In other words, a significant chunk of corporate Bahamas will be able to recover the VAT it pays.

Noting that companies would be able recover the 15 per cent VAT they will likely have to pay on their electricity bill, for example, Mr Myers said this would do little to help consumers.

“That there is the $65,000 question now: Can the consumer absorb it?” Mr Myers told Tribune Business of VAT. “If not, we’re going to go into a recession.

“It’s not a business tax, it’s a consumer tax. If the consumer fails, we all fail. It’s our tax; that’s the message. If the consumer catches a cold, we [the private sector] catch the flu.

“What impact is VAT going to have on the economy and, predominantly, that’s what impact is it going to have on the consumer.”

The Government has conceded that VAT is estimated to cause a 5-6 per cent increase in the general price level (inflation), based on the as-yet unpublished results from an Inter-American Development Bank (IDB) study.

It has, though, said the inflationary impact will be mitigated by reducing Customs tariffs by an average 17 per cent simultaneously with VAT’s introduction, ensuring the latter’s 15 per cent levy does not increase the cost of imports at the border.

Critics, though, have suggested this ignores the impact VAT will have on the economy’s largest sector, services, which will not be impacted by the Customs reduction and may take the full 15 per cent brunt.

Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, told Tribune Business earlier this week that VAT was likely to have a 7-8 per cent inflationary for Bahamian consumers, and possibly as high as 10 per cent.

The latter estimate was given by Anwer Sunderji, Fidelity Bank (Bahamas) chief executive, while accountant Ronald Atkinson went as high as an 18-20 per cent impact on prices.

Mr Myers, as co-chair for the Coalition for Responsible Taxation, suggested that as a regressive tax, VAT would further squeeze an already hard-pressed Bahamian middle class and lower income groups.

It is no secret that many Bahamians are having trouble meeting their current obligations, as shown by the fact that more than $1 out of every $5 lent by commercial banks, amounting to $1.2 billion, is either in arrears or non-performing.

In addition, more than 5,000-6,000 Bahamas Electricity Corporation (BEC) customers have their power cut off at any one time for non-payment.

The concern is that if more dollars are taken away from Bahamian incomes to pay taxes, more persons could default on their obligations. And the reduction in disposable income will also reduce consumer spending power throughout the economy, damaging business incomes and living standards.

With the cost of living set to rise, Mr Myers told Tribune Business: “We’re all consumers. If disposable income is cut, we could be hit hard.

“The consumer is already pressed, and having trouble meeting and paying their bills. If they do not have the disposable income, look what happens.

“There are some in the middle class who are going to feel it more than others. It’s a regressive tax. At the bottom end of the middle class, it is likely going to eliminate their disposable income, which is going to have an effect on consumption.”

Work by the College of the Bahamas (COB) School of Business Studies have suggested that consumption/consumer spending accounts for close to two-thirds of Bahamian economic activity, illustrating the impact VAT may have if spending power is cut significantly.

Mr Myers said businesses were ill-placed to absorb any of the VAT increases. “If the business is taxed, the consumer pays,” he added.

“A lot of businesses are not making money now. A lot of businesses are working in single digit profits, and they are in the low single digits. Anything in my businesses will be passed on, as we’re barely making any profit now. If the business can’t absorb it, it’s going to go on to the consumer; that’s the way it works.”

While praising the Government for finally releasing the draft VAT Bill and regulations for public consultation, Mr Myers reiterated that the private sector needed the economic modelling and Tariff Schedule to determine the full impact.

Emphasising that the Coalition would continue to engage the Government, he added: “This is more about fiscal reform than tax reform.

“VAT may have started the discussion, but this is about fiscal reform, not tax reform. It’s the whole kit and caboodle. It’s more encompassing than this one tax or not; it’s enforcing the rule of law, competitiveness.”

Comments

Honestman 6 years, 10 months ago

Look, you don't have to genius to understand that The Bahamian economy will grind to a halt with the introduction of 15% VAT. People will simply reduce their spending and All businesses will suffer. Consequently, jobs will be lost and the additional tax revenue that Government is seeking will not materialize. The Bahamian people fully understand the need for the country to redress the fiscal imbalance but it has to be done in a way that keeps the economic engine oiled and moving. Also, any tax reform has to ensure that the golden goose (the tourist) is not strangled. The administration should be concentrating on clamping down on the wealthy homeowners who are overdue on their property tax and reducing the bloated public service sector. On top of that a low level payroll tax would help to make up the shortfall. I would also llegalise the numbers houses and hit them with a hefty business license fee. The referendum only resulted in a No vote because the people wanted to punish the government for its duplicity on the matter. It's time for this administration to show some true leadership and not blindly follow the path to economic ruin that the IMF and the rating agencies want us to follow. But it starts and finishes with the politicians desiring to clean up their act and stop the cronyism / jobs for the boys mentality.

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B_I_D___ 6 years, 10 months ago

Yeap...if VAT gets implemented in it's current form, can give you a 110% guarantee that we will be plunged into an even deeper recession than we are in now. The minimum wage employee at the moment cannot make ends meet as it is, businesses are running on razor thin margins at the moment, if they are making any money at all, VAT will drive prices for everything UP, businesses will pass along all those increased fees and taxes onto the consumer...it is a CONSUMER tax...not a business tax, and people have to get that through their heads...everyone just looks at it now as a tax on businesses making over 100K per year...businesses do not just ABSORB additional fees, they add it to their costing of merchandise and increase their mark up accordingly to cover the costs of doing business, driving the price of goods up and taking more money out of the pockets of consumers. What next...government will increase minimum wage? Guess what...that's added business expense...more markup to cover the new costs and no one is any further forward. NO VAT!!

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The_Oracle 6 years, 10 months ago

1) VAT is being implemented by Govt because they've been told they cannot continue running deficits, they risk default and devaluation. ( the revenue increase will not occur within 5 years, if at all) 2) the Government is going to tax the people to gain this increase, and make the private sector their tax collector) 3) increased cost of living translates into less purchasing power, which leads to reduced spending and taxes. 4) Is VAT not increasing the risk of default and devaluation? Foreign Wealthy home owners have the option of leaving, and some already are. Is this the desired result? 5) FDI is further discouraged. Is this a desired result? 6) "Free" National Health care is an additional cost, as is increased subsidies for the poor and marginal. Is this a desired purpose? What happened to reducing debt and shortfalls? if 20% of Companies produce 80% of Tax revenue, but have their cash flow hit, Will they continue to "risk" their capital on inventory, or shrink same? can the 80% withstand the cash flow hit at all? They will feel this hit as they will be under the threshold, will incur the costs with no netting. No matter the angle or perspective this is looked at, The unintended consequences is where the disaster lies. Foresight is not endemic in the Bahamas, Government is no exception and leads in that regard.

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banker 6 years, 10 months ago

There is a fix, but nobody has the balls to fix it. It can be done quickly. Dollarize the economy. Throw open the gates and let any foreigner set up a business for free. Help him do it. Privatise all of the government agencies to non-Bahamian entities, and revamp the duty structure and tax structure to be fairer (sales tax, payroll tax etc), and this country will turn around.

Clean house. Reduce the size of the government by 50% or more. Either close or regularise the web shops and tax them at the 50% level. Start jailing people for white collar crimes. Decriminalise marijuana. Level the playing field between the haves and the have-nots by eliminating the treatment gap between foreigners with money and Bahamians.

This is fixable, but no one has the vision or the courage to do it. The average Bahamian who holds a vote is too unsophisticated to realise the necessary things that need to be done, and can easily be swayed with ham and tee shirt at voting time. So, we will inevitably descend to a failed state.

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