By NEIL HARTNELL
Tribune Business Editor
Large Bahamian businesses “will be deluding themselves” if they believe Value-Added Tax’s (VAT) introduction will result in consumers deserting them in droves for the ‘black economy’ or non-paying rivals, a top official is arguing.
John Rolle, the Ministry of Finance’s financial secretary, told Tribune Business that the competitive positions of $100,000-plus turnover companies, which must register by law to pay VAT, would not be eroded by the Government’s tax reform plans.
While acknowledging that “there may be some” movement of consumers to purchasing from the ‘informal’ sector, or businesses below the $100,000 turnover threshold that did not have to register and pay VAT, Mr Rolle said large companies would still retain their “logistical advantages” relied upon by their customers.
Such advantages included product quality, superior service and better purchasing power, the Financial Secretary argued, adding that these factors would ensure large firms levying the 15 per cent VAT would retain their client base.
And Mr Rolle told Tribune Business that non-VAT registrants will not enjoy an automatic 15 per cent price differential advantage come July 1 next year.
This is because, unlike their VAT counterparts, they will be unable to claim refunds of the VAT they pay on their inputs. As a result, many Bahamas-based businesses with an annual turnover of $100,000 will see their costs rise to some degree, and thus be forced to raise prices to their customers.
Numerous concerns have been raised, especially in the report on VAT that was prepared for the Nassau Institute think-tank, that the tax’s 15 per cent levy will drive consumers – both of physical goods and services – to purchase from both the ‘black’ or underground economy, plus small businesses that are not required by law to charge it.
Refuting this notion, Mr Rolle told Tribune Business: “I don’t think that’s going to be a major concern. We have thousands of businesses in this country and, yes, there may be some more inclined to go to different vendors for transactions.
“But in the economy of the Bahamas, like any other economy, large businesses generate the bulk of the tax revenues. Big businesses have logistical advantages most customers rely upon. It’s the package of services the customer gets.”
Taking the example of a homeowner with a construction project, Mr Rolle added: “If you invest in a multi-million dollar project, you’re not going to suddenly go to a lower grade contractor because their below the [VAT registration] threshold and not charging VAT on their services. You’re going to the contractor with quality given the size of the investment.”
Comparing companies that would have to register to pay VAT with those that did not, the Financial Secretary conceded that “in both of those businesses, customers will see some price impact with a VAT”. That means price increases and inflation.
However, Mr Rolle told Tribune Business: “It is not going to be the case that the business charging VAT is going to have a 15 per cent price disadvantage over the business that doesn’t have to charge it.”
Any price differential, if one existed at all, would likely be much less than 15 per cent, he explained. This was because VAT registrants, while adding 15 per cent to their customer bills, would be able to ‘net off’ this amount against the VAT paid on their inputs – something non-registrants cannot do.
“The Government is going to be pocketing part of the final sales proceeds,” Mr Rolle said of VAT registrants, whereas for non-registrants “the business will be pocketing part of the sales proceeds to compensate for VAT paid on their inputs.”
And he told Tribune Business: “Selling a product for a few pennies less than that charged by your neighbor….. To think that will suddenly catapult you ahead, businesses will be deluding themselves to think that will happen to any great degree in the Bahamas.
“Large businesses have considerable advantages that cause them to be in the position they’re in, and those positions are going to be preserved for the most part.”
The Nassau Institute’s study, ‘The Economic Consequences of VAT for the Bahamas’, gave a slightly different account to Mr Rolle’s.
Written by David Godsell, a former Canadian Revenue Agency auditor, it warned VAT was likely to drive Bahamians towards the informal or ‘black’ economy.
Focusing on VAT’s impact on consumer spending and consumption, the Nassau Institute study said retailers would “face the greatest consequential decline in revenues”.
An International Monetary Fund (IMF) study, the report said, found that when Ireland increased its VAT rate from 10 per cent to 18 per cent, private consumption levels fell by 7.1 per cent.
And with others suggesting a 1 per cent increase in VAT rates corresponded to a 1 per cent reduction in consumption, the Nassau Institute report added: “Consequently, we can infer that consumption may decline by up to 15 per cent upon adoption of a 15 per cent VAT.
“It is important to note that a VAT will not only decrease purchasing power and thereby the purchases made by Bahamian citizens, but it will also encourage Bahamians to purchase from exempt, zero-rated or informal market sectors instead of VAT-affected sectors.
“Consequently, VAT-affected retailers not only bear higher compliance costs, but also suffer declining sales due to a ‘poorer’ customer and because the ‘poorer’ customer chooses to allocate his or her resources in a market sector unencumbered with VAT,” the report added.
“A startling outcome of VAT adoption in a country with a large informal market sector is the incentive to reallocate resources from benign conventional goods and services to illicit, informal market goods and services.
“Along with the reallocation incentive, the reallocation itself puts conventional and complying retailers at a competitive disadvantage which can, in turn, force compliant firms to become non-compliant themselves.”