The Tribune

By Gaylord Taylor

AGT Security Services

Value-Added Tax (VAT) is a topical issue and one that many Bahamian business owners and consumers are concerned about.

VAT is a very attractive form of taxation for most governments simply because of the ‘catch all’ quality of this particular tax mechanism. A Value-Added Tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material or service, from an accounting point of view, at any stage of its manufacture or distribution. The selling business remits to the Government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on their inputs.

The purpose of VAT is to generate tax revenues for the Government similar to a corporate income tax or personal income tax. The value added to a product by a business is the sales price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that, ultimately, only the end consumer is taxed.

It differs from the sales tax in that, with the latter, the tax is collected and remitted to the Government only once - at the point of purchase by the end consumer. With VAT collection, remittances to the Government and credits for taxes already paid occur each time a business in the supply chain purchases products. VAt is also self-regulating, so in terms of resources used in its collection there is minimal input by the Government. But VAT, by its very nature, is prone to manipulation as it depends on the honesty of businesses in accurately accounting for their revenue intake

A common criticism of VAT is that certain industries or services can find it easier to avoid the tax. This happens in an industry where cash sales are predominant. In some countries, VAT has even been seen as causing an increase in cash transactions, as this makes it very hard to capture VAT. The Bahamas is just beginning to see positive growth in electronic and cheque transactions outside of big businesses, but it is expected that VAT will cause cash transactions to be viewed favourably by persons and companies trying to avoid or evade the new tax.

In discussing VATwith various business persons throughout the Bahamas during the past year, the general feeling is that the new tax is going to not only be burdensome but also a cumbersome addition to an already-tough business climate. Several persons even went so far as to emphatically state their positions on evading and defrauding the Government in this exercise. I do not personally or professionally believe that persons or companies should engage in fraud. Given the preliminary draft VAT legislation making the rounds, I actually applaud the Government for the draconian penalties, which should help deter these types of activities.

The IMF, in a working paper in 2007, said: “Like any tax, the VAT is vulnerable to evasion and fraud. But its credit and refund mechanism does offer unique opportunities for abuse, and this has recently become an urgent concern in the European Union (EU).”

In the EU, various schemes have been developed to evade and defraud on VAT, but the most common is the ‘missing trader’ strategy. This scheme involves a person or company buying goods from a country where VAT is not charged, and then selling it in a country where it is -charging the consumer the tax and then pocketing the revenue without paying it to the Government.

You may wonder how that will work in the Bahamas. Well, bear in mind that Grand Bahama may be a ‘tax free’ zone. A company can simply import items to Freeport, ship them to Nassau and sell them with VAT included, but not turn over the revenue to the Government. It will require a bit of creative accounting, but then again, Bahamians are notoriously creative.

Businesses, therefore, must practice a bit of their own ‘Know Your Customer’ or, in this case, ‘Company Policy’. Ensure that the company or vendor you are purchasing from is reputable, that they are compliant with regulators and are paying their VAT. Consumers likewise can also check with the Central Revenue Agency and the Consumer Protection Department, whom I am sure will create a fraud hotline for persons and businesses to report suspected fraud.

It will therefore be up to us to effectively combat VAT fraud by being vigilant. If the Government cannot collect the needed revenue from VAT because of fraudulent practices, you can rest assured that they will add more taxes to cover the shortfall. To quote Winston Churchill: “There is no such thing as good tax.” So keeping them to a minimum should be everyone’s goal.

As always be aware and be safe.