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Construction: 'Worst Time' For 12-15% Vat Cost Rise

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian Contractors Association’s (BCA) president yesterday said Value-Added Tax (VAT) “could not have come at a worse time”, given that it was forecast to increase construction costs by up to 12-15 per cent.

Godfrey Forbes urged the Government to delay the new tax’s implementation by two-three years, as businesses - both inside and outside the construction industry - had not been given “a breathing period” to recover from losses incurred in the recession.

And, with workers likely to suffer a reduction in their purchasing power, Mr Forbes warned that contractors might be trapped in a cycle of having to increase employee wages if they were to retain skilled staff and remain competitive.

“We do have some concerns that VAT in the form the Government is currently proposing will have an adverse, negative impact on the construction industry,” the Dykton Mechanical Company president told Tribune Business.

“Our concern is that the overall cost of construction will increase, and as of now, we have been listed as a destination where the cost of construction is a bit high.

“If we’re going to go ahead and go a bit higher with the proposed VAT’s implementation, we may discourage some investors from investing here locally, and as a result, the construction industry, which relies heavily on foreign direct investment, will feel the impact of investors not coming in as they have been coming in prior to.”

Mr Forbes told Tribune Business that the construction industry was predicting that VAT would increase its costs from anywhere around 8 per cent to “as much as 12-15 per cent”.

He added that Bahamas-based investors would also have to take a second look at their investment projects, while Bahamians seeking mortgage financing to build their own homes may also find themselves needing to borrow more - something that could stretch them financially, and potentially push them out of the market.

Mr Forbes, meanwhile, said the proposed reductions in Customs duty rates that will accompany VAT are unlikely to fully compensate for the latter’s impact.

“The VAT will now be added on to the labour costs, which will be 15 per cent right off the top,” Mr Forbes added. “And that does not take into consideration that some companies may have to add accounting personnel to track all the VAT charges that have to be accounted for.

“In doing so, the labour burden of construction operations is going to automatically increase.

“There have been some organisations that have been able to operate without having certified accountants dealing with their finances, but when you’re talking about dealing with the Government and VAT, hiring accountants is not cheap. That will be an added burden, especially with small and medium-sized contractors.”

VAT-induced inflation would also reduce the purchasing power that construction workers currently enjoy via their pay cheques, and Mr Forbes said contractors might have to pay more to retain their best employees.

“If you want to be competitive and keep your trained personnel in place, nine times out of 10, you may have to revisit their pay scale,” he warned.

And Mr Forbes said building materials suppliers would also have to manage the transition to VAT carefully, differentiating between inventory imported pre- and post-implementation.

“I don’t think it could have come at a worse time,” Mr Forbes told Tribune Business of the proposed July 1 VAT implementation date.

“Taking into consideration that we’re trying to get out of a recession, and are still not 100 per cent out of it yet, and the amount of losses businesses incurred during the recession, you don’t have a breathing period to recover any of it.

“Now VAT is coming on top of you, it couldn’t have come at a worse time. This is something we should be delaying for two-three years, and give the country and businesses as a whole, not just the construction industry, time to recoup their losses and put something in their savings before we go ahead and implement something of that nature.”

The Government, though, is unlikely to agree, given the pressure it is under to tackle the Bahamas’ $443 million fiscal deficit and $5.5 billion national debt, and get the public finances back on a sustainable path.

It has yet to be moved from its July 1, 2014, implementation target despite the mounting concerns of the private sector and Bahamian consumers. Many observers believe VAT is a ‘done deal’, or foregone conclusion.

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