The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

New auto prices will likely be 7-11 per cent higher under the lower rate Value-Added Tax (VAT) than the previous 15 per cent proposal, a leading dealer yesterday suggesting the Government lacked confidence in its own revenue projections.

Rick Lowe, Nassau Motor Company’s director/operations manager, told Tribune Business that new vehicle prices would be higher under the lower 7.5 per cent VAT rate because the Government was not reducing the Excise Tax rates imposed on the industry.

Taking a vehicle with a $67,3134 list price, Mr Lowe said his own calculations showed that under the old 15 per cent VAT proposal, the final selling price to Bahamian consumers would have been $70,180.

Yet despite the VAT rate being halved, Mr Lowe’s sums showed a vehicle with the same price would now fetch $77,5790 post January 1 next year - a value that was 10.5 per cent higher.

This, he explained, was because unlike the 15 per cent VAT proposal, where the Government had contemplated reducing import/Excise Tax rates by up to 17 percentage points to compensate for the new tax, the revised tax structure maintains the auto industry’s already-high 65-85 per cent border tax rates.

Mr Lowe told Tribune Business that the Government’s decision to largely maintain the existing import duty structure, both for his industry and others, indicated it “did not trust” its VAT revenue projections.

Tribune Business understands that the Government is not minded to reduce the auto industry’s Excise Tax rates, despite industry pleas, although it has hinted it might reassess the situation prior to the 2015-2016 Budget cycle.

“If discounts are higher, VAT is less, but based on our preliminary calculations I’d say it’s anywhere from a 7-11 per cent price increase depending on the situation,” Mr Lowe said of the comparison between 7.5 per cent and 15 per cent VAT.

“The consumer is worse off, and so are the businesses, and that doesn’t take into consideration the normal cost of living price increases.”

While the Government’s auto industry tax take and yields will seemingly increase, this may not be the actual outcome if the increased cost of living/reduced disposable income takes its toll on consumer demand.

Bahamian auto dealers are already bracing for a sales revenue drop as a result of VAT’s implementation, and maintaining the existing Excise Tax structure is only likely to exacerbate the extent of the decline. Experience from the rest of the Caribbean shows their fears are not without merit.

“Everybody is using the yardstick that transpired in the region of 30 per cent,” Mr Lowe said of the anticipated drop in new auto sales. “That’s a guess, but it seems a fairly consistent number throughout the region that sales dropped 30 per cent with VAT.

“I’ve spoken to both Honda and Chevrolet, and I know their sales are very sluggish in the entire region.”

Bahamian new auto sales are still 50 per cent below the pre-recession peak in 2007, and are understood to be relatively flat year-over-year for 2014.

With new vehicles seen by many as a ‘luxury good’, notoriously price sensitive, and demand extremely elastic, a further sales decline similar to what happened elsewhere in the Caribbean would likely result in long-avoided sector downsizing and lay-offs.

Mr Lowe, meanwhile, told Tribune Business that the Government’s decision to largely avoid multiple, extensive duty/Excise Tax reductions showed is was not confident that VAT would be the anticipated revenue ‘gold mine’.

“The only one better off in theory is the Government, but they are obviously not very confident it’s going to work as planned, because they’re not prepared to reduce the duty,” he said.

“There’s got to be a tremendous amount of revenue coming in if they’re charging 7.5 per cent VAT on every service - lawyer’s fees, doctors, insurance - everywhere we don’t pay taxes now.

“In theory, they should be getting a serious volume of business, but they don’t trust their own numbers to reduce the duty proportionately at this point.”

The Government is projecting that VAT will generate $400 million in revenues for it during its first full year in 2015-2016, while only foregoing $39 million in import taxes via recent rate cuts.

The private sector’s Coalition for Responsible Taxation had previously promised to lobby the Government for duty reductions on the auto industry’s behalf, agreeing that the sector would suffer a “devastating” impact if no adjustments were made.

Mr Lowe said that if prices continued to be “jacked up”, consumers would have no alternative but to respond and make alternative purchasing decisions.

“Besides VAT, we’ve got the Business Licence seemingly doing irreparable damage,” he added. “There are a lot of realities that we can’t seem to get resolved, and if you want to tax and put people out of business, how great is that for government revenue.

“I’m worried. We’ll have to make the best of it, if they [the Government] see this as the best course of action. Where we end up, who knows? In the immediate and medium-term, I don’t see anything positive.”