The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government believes that Value-Added Tax’s (VAT) introduction will generate a net revenue increase equivalent to 2 per cent of gross domestic product (GDP), and expects to achieve most of this from the ‘get go’.

John Rolle, the Ministry of Finance’s financial secretary, told Tribune Business yesterday that while the Government expected VAT to be operating “at full steam” by its second year, most of the projected net revenue increase would likely be seen in the 2014-2015 fiscal year if the July 1 implementation deadline was met.

“The calculations are subject to refinement, but the target is that the Government should see an improvement in revenue of about 2 per cent of GDP,” he said.

“We would expect to be at full steam by the second year. And that expectation is that if VAT is introduced at the beginning of the fiscal year, we should be able to hit most of that in the first year.”

Based on the Bahamian economy’s annual $8 billion gross domestic product (GDP), the net revenue increase the Government is seeking from VAT’s implementation is equivalent to $160 million.

VAT, though, will have to raise more revenue than $160 million. The Government is projecting that the ‘revenue take’ from VAT will be much higher, given that it also has to replace the taxes previously generated by Customs duties.

Mr Rolle acknowledged that the Government might ‘undershoot’ VAT revenue projections in the first year as it came to grips with how to properly administer its major tax reform.

Yet he reiterated that if VAT was introduced in time for the start of the 2014-2015 fiscal year, as intended, “the Government is targeting the full realisation during the fiscal year. That is the expectation”.

Emphasising that VAT would act as “a substitute or replacement” for much of the revenue currently generated by import/Excise taxes, Mr Rolle said the latter would be reduced simultaneously with the new tax’s introduction.

“It has to be,” he told Tribune Business. “It will not be acceptable to any stakeholder group, including on the Government side, to do one without doing the other. It’s part of the package.”

The Bahamian private sector had previously been concerned that it may take time to reduce Customs duty rates once VAT is implemented, but Mr Rolle’s comments seemingly rule this out.

“The reduction in Customs duties means that large component of the 15 per cent VAT, especially as it applies to goods and services, is going to be offset,” Mr Rolle told Tribune Business, although he agreed it would not necessarily be a one:one effect.

“VAT will not lead to 15 per cent rise in prices or inflation.... Much of the analysis that has been done on VAT assumes that average Customs duties will be reduced on by at least 15 percentage points to give room for the introduction of VAT. Clearly, this does not leave room for a 15 per cent rise in prices.”

Pointing out that VAT was effectively ‘revenue replacement’ for the Government, the Financial Secretary added: “That means we cannot layer it on top of the existing duties without making any adjustments.”

Pointing out that the Bahamas’ VAT strategy was different from many other countries, which had imposed this without any reduction in existing taxes, Mr Rolle said: “What VAT is doing, in addition to providing that boost in revenue, it’s linking that revenue performance to a more buoyant and robust tax base.

“You’re attaching VAT to more sectors of the economy that will be expanding as it grows. The tax system is currently very heavily attached to goods, and people are spending much more of their income on recreational and entertainment services.”

While agreeing that perfect implementation of VAT was unlikely, Mr Rolle suggested that if the new tax performed above expectations, and there was improved compliance, the Government might have the scope to reduce other tax rates.

“I don’t think in any country it’s 100 per cent on the mark from day one, but we’re prepared to make the fine tuning and adjustments as time goes by,” Mr Rolle said.

If VAT yields exceeded projections, “it could provide the Government with the flexibility to revisit the tax rates on other economic activities”.