By NEIL HARTNELL
Tribune Business Editor
The price impact from the Government’s decision not to drop import tariffs in proportion to 7.5 per cent Value-Added Tax (VAT) will “not be as radical” as many in the private sector believe, a Tax Coalition co-chair argued yesterday.
Gowon Bowe acknowledged that the Government’s restructured VAT was “not a perfect solution”, but added that while consumer demand would be “dampened”, the impact would be much less than under the initial 15 per cent VAT proposal.
Suggesting that Prime Minister Perry Christie had to make “trade offs” between VAT’s impact on the economy and the Bahamian people, and the Government’s desperate need to eliminate its fiscal deficit, Mr Bowe said many Customs and Excise tax rates would shortly have to be reduced anyway as a result of trade commitments.
He added that the Government was using what little “leeway” it had to maximise import tariff revenues in the 18 months left before the Bahamas completes its accession to full World Trade Organisation (WTO) membership - a move that will mandate border tariff cuts.
And, noting that there was still time for further fiscal reform negotiations with the Government, Mr Bowe told the private sector: “Don’t bring the train to a stop” given the urgency of the Bahamas’ fiscal predicament.
Agreeing that automobiles and other ‘luxury’ goods would see the greatest price impact from the Government’s ‘u-turn’ on reducing border taxes simultaneously with VAT’s implementation, the Tax Coalition co-chair pointed to its Oxford Economics study to show why the ‘broad brush’ effect may not be as great as feared.
In running its six different ‘tax reform’ scenarios, Oxford Economics had calculated the ‘effective duty rate’ under both Customs and Excise Taxes, defined as the ‘duty rate divided by the value of goods’. A 46 per cent compliance rate was also factored into the models.
Mr Bowe said that under the Coalition’s payroll tax scenarios, which assumed no reduction in Customs or Excise taxes, the effective rates were calculated as 9.8 per cent and 4.4 per cent, respectively.
And the Coalition’s 7.5 per cent VAT scenario, which had assumed import tariff cuts to coincide with VAT, had produced effective Customs and Excise Tax rates of 8.1 per cent and 3.6 per cent, respectively.
Factoring in the Government’s revised VAT, with no border tax reductions, Mr Bowe said the Oxford Economics study suggested that the effective tax rate under its chosen model would only be 1.7 percentage points higher for Customs duties, and 0.8 percentage points higher for Excise Taxes. He based this on the difference between the payroll and 7.5 per cent VAT model in the study.
“It is higher? Yes. But it’s not a radical change,” Mr Bowe told Tribune Business of the Oxford Economics report’s implied findings on the impact of a ‘7.5 per cent VAT with no duty reductions’.
“It’s not a dramatic difference. There were trade-offs he [the Prime Minister] had to consider. While it is going to lead to an increase in the Consumer Price Index (CPI), it’s not going to be as radical as some people make it out to be.”
Mr Bowe said he had asked Oxford Economics to do “a quick run through” to assess the projected “initial spike” in prices from the Government’s revised VAT might be, but reiterated: ‘I don’t think it’s going to be radically different.”
He added that the ‘blow’ would also be cushioned by the fact that “a large proportion” of the Bahamas’ import bill comprised food and breadbasket items, which already attracted low or no taxes.
“If you look at what’s happening in reality, it’s going to impact more the goods of choice and luxury,”
Mr Bowe said, “unfortunately, things like automobiles and items that attract high duty rates. It is going to push prices up on those items, but it’s pressure on those classes of goods people can choose whether they can afford.
“There’s going to be a dampening of consumer demand, but nowhere near what it was going to be if we had a higher VAT rate.”
The Tax Coalition co-chair, who is also a PricewaterhouseCoopers (PwC) Bahamas accountant and partner, said the Prime Minister had to make hard choices between maintaining existing duty rates and generating the necessary revenues to close a $462 million deficit, and the likely impact this would have on prices, society and the economy.
“It is somewhat contrary to the initial intent, but all these elements are trade-offs,” Mr Bowe told Tribune Business. “It’s not a perfect solution, but if there is a cry, it’s a cry to better explain what he traded off to get the end result.
“It should not be a cry that he did not reduce duties, but instead a rationale and practical explanation of how we got to this point.
“Once you reduce the VAT rate, there have to be trade-offs because you are not going to get the same level of duty reduction,” he added.
“The Prime Minister is using his leeway until we accede to the WTO to maintain duty rates, and that is going to come shortly if the country continues its accession pace.
“Is everyone going to get what they want? No, they are not. Did they get a lower rate? Yes. Did they get duty reductions? No. There’s going to have to be a middle ground.”
Besides, Mr Bowe said all Bahamians would benefit from reduction a total national debt that was already at $5.567 billion at year-end 2013, and a GFS fiscal deficit which, at a projected $462 million, is only slightly less than the $526 million worth of ‘red ink’ incurred in the 2012-2013 Budget year.
“It’s not the end of the show; things need to be clarified,” Mr Bowe said of the Budget, adding that the private sector knew what the VAT rate and implementation date was, and could budget accordingly.
“Don’t use that as a show stopper,” he warned of the ‘no duty reduction’. “The dialogue is open, so make sure you use it. But don’t bring the train to a stop; we’ve got to help keep it moving along.”