The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government yesterday estimated it would lose over 1,000 mandatory Value-Added Tax (VAT) payers in increasing the registration threshold to $100,000, but would still “capture” almost 98 per cent of economic activity.

Confirming that the Government was seeking to increase the VAT registration threshold from the originally-proposed $50,000 annual turnover, Michael Halkitis, minister of state for finance, said this change would impact less than 1 per cent of the Bahamian economy’s turnover.

Noting that 3,798 Bahamas-based businesses would have been required by law to register to pay VAT under the original threshold, Mr Halkitis told a Bahamas Association of Compliance Officers (BACO) conference this number would drop to 2,743 at $100,00.

Yet the increase to $100,000 will make little difference to the amount of economic activity covered, the Minister disclosing that 97.7 per cent of total Bahamian economic turnover would still be captured by VAT. This compares to 98.6 per cent at the old $50,000 registration threshold.

“We are now looking at a threshold of $100,000 as opposed to $50,000,” Mr Halkitis said, adding that even at the new benchmark the Government was “capturing the vast bulk of turnover in the economy”.

The Minister added that the increase in VAT registration threshold would prevent small and medium-sized Bahamian businesses from becoming “entangled” in the need to upgrade their accounting and bookkeeping systems - at a potentially considerable cost.

Meanwhile, Mr Halkitis disclosed that the Government wanted to “be in a position where we’ve passed the legislation and begun registering by mid-December”.

This indicates that the Christie administration is allowing a relatively short window for consultation with the private sector and Bahamian public, if it expects to begin registering companies who are mandatory VAT payers within three months.

Mr Halkitis, though, promised that the VAT legislation and regulations were “largely complete”, and would be released for public consultation within the next two to three weeks.

Elsewhere, Mr Halkitis took on concerns and critics of the Government’s proposed key tax reform, which it aims to introduce by July 1, 2014.

In an oblique reference to the study produced for the Nassau Institute economic think-tank, which calculated that VAT would result in an average $165 million net annual revenue loss for the Government, the Minister said: “This is a lot of work to collect less money than we do now.

“We would not be implementing this if it results in a loss of revenue.”

Mr Halkitis told BACO members that VAT was effectively 50 per cent of the solution to plugging the Bahamas’ gaping annual fiscal deficit, which is currently running at $443 million.

Suggesting that VAT was not the total panacea to the Government’s fiscal woes, Mr Halkitis said the other components of a “four-pronged approach” were spending restraint; new revenue sources apart from VAT; better administration of existing taxes; and economic growth.

Yet the Christie administration’s main goal is to “bring revenue yields of the tax system more in line with the rest of the Caribbean”.

“Our present tax system generates revenue equivalent to 17.5-18 per cent of GDP, compared to yields in the mid-20s to 30 per cent range in other countries in the Caribbean,” Mr Halkitis said.

Noting that Bahamian government spending was currently around 21 per cent of GDP, he added: “If every year we are collecting 17.5-18 per cent of GDP, but spending 21 per cent, there is a gap, and that gap has been existing for many years, resulting in government borrowing to the tune of - over the last two years - $1 billion to fill that gap.

“If nothing is done, and we continue to have that gap financed by government borrowing, we will see the continued rise of government debt and all that flows from that.”

The Government, Mr Halkitis said, was aiming to raise revenue yields to above 20 per cent of GDP, although this percentage would remain below the Caribbean average.

With the fine details, such as which goods and services will be declared ‘exempt’ or ‘zero rated’, yet to be determined, the Minister said it was difficult to determine the precise net revenue increase VAT will yield.

Yet Ministry of Finance, and other, studies “suggest that a Bahamian VAT along the lines of that proposed in the White Paper could produce an increase in net revenues in the order of just over 2 per cent of GDP”.

Mr Halkitis pegged this sum at $170 million, with the balance of the $443 million deficit set to be eliminated through increased real property tax collections, better Customs administration, and the creation of a Central Revenue Agency.

And, in a seeming swipe at the Government’s critics, he suggested they were being hypocritical. Pointing out that just nine months ago the Christie administration was under fire for the size of the national debt and associated deficits, Mr Halkitis suggested it was now being attacked for trying to do something about it.

“This proposal and entire reform package is designed to close the gap between what we earn and what we spend, move the debt-to-GDP ratio back to sustainable levels, and put the country back on a sound financial path, doing so in a way that is minimally disruptive to low income earners,” Mr Halkitis said. “We believe we are on the right track.”