By NEIL HARTNELL
Tribune Business Editor
A Value-Added Tax (VAT) with widespread exemptions will be “dead on arrival”, a former Chamber of Commerce president warned yesterday, arguing that it would lead to higher tax rates and prices.
Dionisio D’Aguilar branded the Government’s initial 15 per cent VAT proposal, which listed numerous goods and services as ‘exempt’, as “absolute lunacy”, and described claims by politicians that this policy would lead to reduced prices as “hogwash”.
Pointing out that businesses selling VAT ‘exempt’ items would inevitably incur a higher cost burden, as they would be unable to reclaim tax levied on their inputs, the Superwash president said numerous exemptions would make VAT “unnecessarily complex” and expensive to administer.
Speaking in the wake of the release of the Coalition for Responsible Taxation’s tax impact study, which backed his assertions, Mr D’Aguilar also agreed with its finding that increased government revenues had to be accompanied by public spending cuts and restraints.
The outspoken businessman added that a combination of spending and tax non-compliance issues had got the Bahamas into its current fiscal predicament, with the Government preferring to “gloss over” both and not discuss them.
As a result, Mr D’Aguilar told Tribune Business that the Bahamas had to draw “a line in the sand” in terms of a debt-to-GDP ratio that the Government was forbidden, by law, from breaching.
“One takeaway is that VAT has to be as simple as possible,” Mr D’Aguilar said of the Coalition study, produced by Oxford Economics, “and all these exemptions are dead on arrival. It’s a non-starter.
“It leads to a higher tax rate for all of us to pay. It does not achieve the goal of keeping prices down, for the obvious reason that businesses selling VAT ‘exempt’ items have to pay VAT on their expenses bills [without recovering this].”
Oxford Economics said that to maximise Bahamian gross domestic product (GDP) growth in the long run, “VAT with a narrow range of exemptions would represent the best option”, but it acknowledged that this was only “marginally” better than alternative tax reform options.
While acknowledging that the results produced by its study were largely “ambiguous”, Oxford Economics’ study added: “One key policy conclusion from our analysis is that the introduction of VAT with a headline rate of 10 per cent and the current planned set of exemptions would be inadequate” to set “government debt as a percentage of GDP on a sustained downward path”.
This finding indicates that a wide range of exemptions would both fail to achieve the required fiscal tightening, and undermine the twin concepts of keeping any VAT rate as low as possible and the tax base as broad as possible.
Further support for the Oxford Economics findings came from the visiting New Zealand tax consultants, who also recommended that VAT ‘exemptions’ be minimised as much as possible. New Zealand has only three, including domestic rent and financial services.
“It makes it unnecessarily complex and expensive for a business to administer VAT with all these exemptions, and it wildly increases the cost of enforcement by the Government,” Mr D’Aguilar told Tribune Business.
“Having all these exemptions is absolute lunacy, and I hope that’s one big take away from all this. I’ve seen MPs standing up in Parliament and saying it will keep prices down. It’s absolute lunacy.”
VAT with numerous exemptions, at either a 15 per cent or 10 per cent rate, was found by Oxford Economics to produce an inflationary surge of 6.5 per cent in its first year.
“I’m sure that if they’re going to go with VAT, it’ll be at a lower rate with no exemptions. That’s the option,” Mr D’Aguilar said.
He also backed the study’s blunt assertion that: “private sector growth will be boosted by a strategy that includes expenditure as well as purely revenue-raising measures”.
“That was always a given; that there would have to be some tax raising measures and some cost cutting measures,” the Superwash president told this newspaper.
“It was always the intent of the Coalition that just increasing revenues through a payroll tax or VAT was not the be all and end all, and solve all our woes.
“We have a spending problem and collection of existing taxes problem. There’s no fear of non-compliance,” Mr D’Aguilar added. “If you add a new tax, you’ve got to address the problem of non-collection of existing taxes.
“Hopefully this [the Oxford Economics study] will provide an impetus to address that. They [the Government] like to gloss over it.”
Mr D’Aguilar again renewed his call for statutory spending caps or limits to be placed on government spending, suggesting that the Bahamas’ debt-to-GDP ratio not be allowed to ever exceed 60 per cent - a level many others believe is still too high.
“There should be some spending caps. You can’t spend it if you don’t have it,” he told Tribune Business. “You can’t go over a 60 per cent debt-to-GDP ratio and continue spending.
“There is some sort of line in the sand that you cannot cross. So far those have been guidelines that we have fallen through without even looking back, and that’s brought us to the edge of where we are now.”