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Food Retailers Fear 12% Vat Cost Rises

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian food retailers fear the Government’s Value-Added Tax (VAT) legislation will have a “profound impact” and result in job losses, increasing their cost base by up to 12 per cent.

Gavin Watchorn, chief executive of BISX-listed AML Foods, told Tribune Business the Government’s plan to allow the industry to only recover ‘input’ VAT on the so-called ‘taxable’ proportion of its inventory would further exacerbate the margin squeeze imposed by price control.

He revealed that price controlled items, as a percentage of AML Foods’ total inventory, had already increased from 15 per cent to the current 18 per cent as hard-pressed consumers switched to so-called ‘breadbasket’ items.

And, in common with others in the industry, Mr Watchorn said VAT’s introduction on July 1, 2014, - coupled with the Government’s plans to ‘exempt’ many food products from the 15 per cent tax - would further drive consumers to purchase products upon which they earned no profit.

Suggesting that between 50-80 per cent of food store inventories would be treated as ‘exempt’ under the current draft VAT legislation, Mr Watchorn said both retailers and wholesalers would be unable to reclaim the bulk of their ‘input’ tax payments.

“If 80 per cent of your sales are VAT exempt, you’re looking at your expense base going up 12 per cent if you only recover 20 per cent [of your input costs],” Mr Watchorn told Tribune Business.

Such a material increase in food retailers’ costs will likely result in store closures and/or major industry lay-offs, given that the sector’s profit margins are already minimal.

Explaining how VAT threatened to exacerbate the industry’s issues with Price Control, the AML Foods chief executive added: “Our expense base is 28 per cent.

“Price control allows you to make 18 per cent gross, before breakage and pilferage, so you are subsidising a large percentage of your sales base.

“The percentage of price controlled items is increasing month-on-month. For us, it’s always been 15 per cent of inventory, and now it’s creeping up to 18 per cent.That’s challenging our industry in how we have to adapt to the environment we’re in.”

Mr Watchorn further told Tribune Business: “The food stores are quite aware of this number with VAT and the ‘exempt’ implications. We’re talking about this number, and that’s a significant and increasing number for many members of the Retail Grocers Association.

“The exempt status is very concerning. We met with the Ministry of Finance during the week. The understood our concerns. Our concern is whether politically-pleasing decisions will overwhelm business sense decisions.”

“We felt it was a productive meeting and they understood our concerns,” Mr Watchorn added, “but they are very major concerns for us.”

The VAT ‘exempt’ situation tied in directly to price control issues, he said, because if the former drove consumers to increasingly purchase breadbasket items, retailer profitability will be threatened.

“The reality is business people have got to try and make profits with less business, and unfortunately many people believe profit is a bad thing,” the AML Foods chief told Tribune Business.

“But if they do not get the profits, they will not reinvest, expand and generate employment and jobs. Food stores are large employers, and if they came under pressure, there may be reduced employment because they are not making substantial profits now.”

Mr Watchorn told Tribune Business that the food retail industry “does not concur” with the Inter-American Development Bank’s (IDB) modelling of VAT’s economic impact, which suggested that employment would increase instead of being slashed.

“We’re quite concerned with job losses in our industry unless there’s a change,” he added. “The Association’s done a lot of research, and has not come across a country where food items are exempt” for VAT purposes.

Implying that other VAT regimes treated food items as either ‘zero rated’ or ‘taxable’, Mr Watchorn said all retailers and wholesalers were watching the issue carefully.

“It’s going to have a profound impact on all businesses unless it’s amended in the final legislation,” he warned.

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