The Tribune

By CAREY LEONARD

Attorney-at-law

Callenders & Co

What is VAT?

VAT stands for ‘Value Added Tax’. VAT is a ‘tax on consumption’, levied by the national government. VAT is levied on most goods and services provided by registered businesses.

How does VAT work?

Former minister of state for finance, James Smith, in a speech to the Bahamas Chamber of Commerce in October 2003, defined it thus: “The Value-Added Tax (VAT) is essentially a tax on consumption, which is charged at all stages of production with a provision which permits businesses to offset the tax they have paid for goods and services against the tax they charge on the sale of their goods and services. There are many variations of the VAT. However, there are some common characteristics to the tax. For example, the VAT is not applicable for exported goods and services; and some goods and services are exempted, such as food, education, health and social and financial services, as well as small businesses.”

It works like this. A wholesaler imports an item worth $90 and pays his Customs Duty of 30 per cent + 15 per cent VAT. Note that the wholesaler pays those on the value of the item plus the cost of freight and insurance. So if it cost $10 to ship the item, the wholesaler pays on a cost of $100, so his first cost is $100 plus $30 Customs Duty plus $15 VAT for a total of $145. But the VAT paid will be recovered by the wholesaler when the item is sold.

The wholesaler will then sell the item to a retailer. Say the item is sold to the retailer for $130 with a mark-up of 20 per cent ($26) for a total of $156. The retailer will pay $156 + 15 per cent VAT ($23.40) for a total $179.40. The wholesaler will then pay to the Government $23.40 less the $15 VAT that it paid when the item was imported, or $8.40.

The retailer will sell the item to the consumer for $156 plus, say, a 20 per cent ($31.20) mark-up for a total of $187.20. The consumer will pay $187.20 +15 per cent VAT ($28.08) for a total of $215.28. The retailer will then pay the Government the $28.08, less the $23.40 VAT that it paid when it purchased the item from the wholesaler, or $4.68.

Note that at each stage the Government takes a bite of the apple - importation by wholesaler (Customs Duty + VAT), sale by wholesaler (VAT), and sale by retailer (VAT).

The wholesaler will have paid Government $30 Customs Duty, and both the wholesaler and the retailer will have gotten the VAT paid by them back. The consumer will have paid the Government $28.08 VAT ($15 + $8.40 + 4.68) on a $90 item, meaning the Government will have collected over 30 per cent in addition to the 30 per cent that was collected in Customs Duty for a total of $58.08. The wholesaler and the retailer will have collected $26 and $31.20, respectively, for a total of $57.20. It should be noted that out of that $57.20 are the costs of all the additional Government charges for Customs clearance of the item, rent, staff salaries, utilities, service charges (real property taxes), insurance etc.

So it is clear that the biggest cost on the item is that of Government revenue.

Why July 2014 can’t and won’t work

In 2012, the Government announced its intention to introduce VAT on July 1, 2014. For the implementation of VAT, a number of things must be done and achieved. Big businesses, and they are the ones that are going to bear the burden, will need new computer programs.

These computer programs will need to be written or, at the least, portions will need to be rewritten in order for the business to implement the necessary systems required to charge the customer VAT; calculate the amount of VAT previously paid by the business on the item; then calculate the offset; and, finally, pay the balance to the Government.

There are lead times required to write these programs, as they must be written with a knowledge of the law and regulations with which they are to comply. The cost of these programs needs to be ascertained and budgeted for. Many businesses have already done their budget for the year August 2013 to end-July 2014.

With the exception of the issuance of a ‘White Paper’, and a couple of meetings with a very limited number of professional and business persons, the steps taken towards the implementation of VAT have been woefully inadequate to-date.

Sadly, the drafts of both the law and the regulations have been in the hands of the Government since, at the latest, March 2013, yet they have not been released to enable businesses to prepare. This means that the type of computer programs needed cannot be determined, the cost cannot be estimated, and the required training of staff cannot be planned for or implemented. Nothing can be put in a budget because no one knows what to budget for.

The Government has taken the last three years or so to prepare, and yet it expects businesses to implement it without any preparation at all.

Indeed the lack of action by the Government screams of incompetence. The idea of introducing VAT on July 1, 2014, because of this complete lack of action, has become totally impractical.

Why do we

need VAT?

Why is this so important to the ‘man in the street’? Since 1974, the Government has, in each and every year, spent more than it has earned. This has resulted in our country going deeper and deeper into debt.

Repeated governments have been unwilling to make the hard, but proper, fiscal choices for our country. Bahamasair continues to lose over $3,000 for every hour that it exists; it has cost the man in the street over $500 million since it was started 40 years ago.

The newspaper reports on BEC indicate an organisation whose lack of corporate governance has resulted in an unwieldy, grossly over staffed, inefficient operation that continues to fail the Bahamian people by its inability to provide both a reliable supply of electricity and deliver the same at an affordable price. In additio,n BEC requires Government subsidies (addition payments paid for by the man in the street).

All of this has resulted in a national debt that has put our country on the watch list of the International Monetary Fund (IMF), and the rating agencies such as Fitch and Standard & Poors, as we put ourselves into the international poor house.

Unless we want to be faced with the IMF and others running our country as they tell us, just as they have done in Greece, where they have been forced to fire tens of thousands of civil servants and to sell Government corporations with the commensurate lay-offs, we must raise more revenue and raise it quickly.

According to reports from the Department of Statistics, the unemployment rate in the Bahamas stands at around 14 per cent, Today, Greece has an unemployment rate of over 25 per cent. They have had a very rough time, as they have been forced into this because they failed to put their country’s finances in order.

VAT is arguably one of the most effective forms of taxation as it is, in many ways, self-enforcing. In the UK it is the third largest source of government revenue. When VAT was introduced in Barbados, the collections exceeded expectations.

But rest assured: The cost of goods and services are going to go up. We can’t have an inflated civil service and money-losing corporations unless they are paid for, and the rest of the world says, if we want them, we have to pay for them. Make no mistake; this is paid for by the man in the street. The man in the street will pay for it in increased taxes. VAT is a consumer tax, and the man in the street is the consumer: This is his tax.

The only question for the man in the street is: “When will I start to pay?”