The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The private sector’s Tax Coalition has added its voice to those urging that Price Controls be abolished, warning that food store overheads would have increased by between 7.5-12 per cent under a 15 per cent Value-Added Tax (VAT).

The Coalition for Responsible Taxation, in its March 2014 compilation of business community concerns over VAT, described price controls as “unnecessary” because the level of market competition, both domestically and from Florida, would act as a block to merchant ‘price gouging’.

Price controls have been in existence since 1971, limiting gross margins on ‘breadbasket’ grocery items to 18.67 per cent, with wholesalers enjoyed just a 13 per cent mark-up on these products for more than three decades.

Many price-controlled industries, such as food retailers and auto dealers, have warned that VAT’s implementation will merely exacerbate the present difficulties they face, further eroding gross margins.

As a result, the Coalition document argues: “It is the Coalition’s view that price control legislation is unnecessary. Within a free market economy, Florida and international competitors would act as a natural price control to the Bahamas.

“Will price controls be moderated or removed as a result of gross margins being further impacted by the implementation of VAT?”

AML Foods chairman, Dionisio D’Aguilar, has been among those calling for the abolition of price controls. The Retail Grocers Association has also started dialogue with the Cabinet minister responsible, Shane Gibson, over their request for price control gross margins to be increased to 25 per cent, or one-third in percentage terms, to counteract VAT’s anticipated impact.

Noting that the price control margins implemented in 1971 have never been altered, despite the major jump in business operating costs over the past three decades, the Coalition reiterated that the policy had unintended consequences for Bahamian consumers elsewhere.

“Money is lost on price-controlled items, leading to higher mark-ups on non-price controlled items,” the Coalition added.

“If prices move above those of wholesalers in Florida and our major competitors, our customers will buy direct from the US.”

VAT’s potential cost of living impact was cited as a major Coalition concerns, and it remains to be seen whether the lower tax rate promised by Prime Minister Perry Christie will help mitigate this. A VAT rate lower than 15 per cent will mean a smaller reduction in Customs duties to ensure the Government hits its revenue targets, so the impact on commodity (physical goods) prices may be negligible.

“It is estimated that the current iteration of VAT will cause an increase in retail prices of 6-9 per cent,” the Coalition report said.

“Due to existing high prices resulting from high Customs duties, these increases are likely to drive residents to shop online and import from abroad; act as a deterrent to entrepreneurs and developers within the Bahamas; lead to staff lay-offs and business closures, due to customers fleeing to lower cost vendors abroad; curtail growth and employment.”

The price increase impact, the Coalition added, will be even greater for the food retail industry, who will only be able to net-off VAT ‘input’ payments in proportion to the sale of items treated as non-exempt.

“By classifying price control and other ‘breadbasket items’ as exempt, the sales of these items will no doubt increase, increasing the proportion of exempt sales and reducing retail grocers’ ability to reclaim VAT credits on their operating expenses and shipping costs,” the Coalition document warned.

“Fifty to 60 per cent of current sales generated by the larger retail grocery stores, and 75-80 per cent of sales generated by the smaller retail grocer stores, will be classified as ‘exempt’ (under the draft legislation), thus reducing the reclaimable VAT on overheads by the same percentage. The result will be an increase in overhead costs from 7.5-12 per cent.”

The Government has yet to alter its position on this, despite pleas from the Coalition and Retail Grocers Association.

For that reason, and the failure to-date to address its concerns and those of specific industry groups, the Coalition reiterated that the private sector and Ministry of Finance did not appear to be on the same page when it came to VAT.

“Despite meetings of the Ministry of Finance with several private sector industry leaders, there remains a serious disconnect between the VAT Implementation Team and the private business community with regard to the proposed requirements and/or solutions to VAT implementation in the Bahamas,” the Coalition said.

It added that “the propose timescales to implementation and readiness for a VAT in the Bahamas are unworkable”, something the Prime Minister appeared to acknowledge when hinting in his Mid-Year Budget address that the July 1 target date would likely change.

Tribune Business contacts have predicted that the Government will likely still implement VAT, albeit at a lower 10 per cent rate, and possibly delay its implementation until either New Year’s Day or July 1 next year.

The Ministry of Finance’s technical team, according to informed industry sources, want VAT to be implemented as rapidly as possible, potentially as early as fall 2014, given the various pressures the Government’s financial situation is creating.

Apart from the domestic need to reduce the national debt and fiscal deficit, failure to implement tax/fiscal reform in a timely manner could lead to a further sovereign credit rating downgrade by the Wall Street agencies.

Then there is the need to slash import tariff rates as part of the World Trade Organisation (WTO) accession process.