The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A VAT Education Task Force member has urged Bahamians to prevent the Government using its anticipated $400 million revenue windfall to finance “a spending spree”, adding that other taxes should be cut to ease the economic burden.

Gregory Bethel, Fidelity Bank’s president, told Tribune Business he “fully expects” the Government to live up to the promise contained in its February 2013 ‘VAT White Paper’ and cut Business Licence fees once it starts seeing the returns from tax reform.

Suggesting that this, and further import tariff reductions, would provide some economic stimulus, Mr Bethel said the Government’s persistent $500 million annual fiscal deficits had left the Bahamas with “no choice” but to embrace VAT or a similar tax.

He added that VAT would likely impose “long overdue” spending discipline on all sections of Bahamian society, adding: “It’s time to hit the reset button.”

And Mr Bethel compared Bahamian fears of VAT to the ‘Y2K’ situation at the turn of the millennium, when concerns about a global computer systems/technology crash proved groundless.

Implying that Value-Added Tax (VAT) implementation will not be as difficult as many in the private sector were making out, he nevertheless acknowledged that there would be “growing pains” post-January 1, 2015.

“Frankly, we need fiscal reform in government, in the business community, and in households,” Mr Bethel told Tribune Business, “and we haven’t done it.

“Everywhere around the world, countries have done it, business have done it, and households have done it. It’s time for us to press the reset button.......

“As you well know, we are a society, a culture that is not accustommed to paying taxes. This is new, but at the end of the day it’s going to be very beneficial for the country. Yet there are going to be growing pains going through it.”

Mr Bethel emphasised that VAT was “nothing new”, as it was already employed in more than 140 countries - developing and developed - worldwide.

He added that the ‘audit trail’ required by VAT, both to ensure compliance and for businesses to obtain refunds, would boost private sector accountability through better record-keeping/accounting.

“We need this discipline. Government needs it, businesses need it,” Mr Bethel told Tribune Business. “Businesses don’t keep proper books and financial statements. They have no records and don’t know if they’re making a profit or a loss; they just check the overdraft facility at the bank.

“This will bring accounting knowledge to the Government, business and society. In the long run, it’s going to be a good thing.”

Mr Bethel conceded that VAT’s introduction would mean a disposable income decline, and drop in living standards, for many Bahamians as the new tax ate into their salaries.

He added that this was not necessarily a bad thing, as it would likely prompt a change in Bahamian consumption/spending habits that was “long overdue”.

“Initially, of course, everyone will have less disposable income,” Mr Bethel agreed, “so we will just have to reduce spending and be more disciplined in our spending. We’ll make that adjustment, which is long overdue, long overdue.”

The Fidelity president added that VAT’s implementation would likely increase the Government’s revenue gain from other taxes, given the systems and eventual Central Revenue Agency (CRA) formation that would bring revenue administration/collection under one roof.

Mr Bethel said that with “everyone forces to be transparent and keep records” by VAT, and the Government’s systems creating a database to link different taxes, real property tax and Business Licence takes should also increase.

The Government is projecting that VAT will generate $400 million in gross revenues during its first full year, the 2015-2016 Budget period, and Mr Bethel said the ‘spin-off’ effects were likely to be even greater.

“They will certainly collect higher revenue, and it will be up to the business community and voting public to keep the Government accountable for prudent spending and bring a greater degree of transparency to their spending,” Mr Bethel warned.

“We don’t want the Government to go on a spending spree because they have additional revenue.”

He added: “Most certainly, we are looking for and anticipating a reduction in Customs Duties and a reduction in Business Licence taxes, which goes hand in hand with VAT.

“Most certainly, it would provide some stimulus to the economy as Customs duties come down and Business Licence fees come down.”

While the Christie administration has signalled that further Customs duty/Excise Tax rate reductions are likely, once it has assessed VAT’s performance and revenue returns, it is unclear whether Business Licence fee reductions are in the offing.

The February 2013 ‘White Paper’ promised that all Business Licence fees would be reduced to a flat $100 per annum, and a similar approach was recommended by the likes of the International Monetary Fund (IMF).

Yet government officials subsequently indicated that they would ‘hold off’ on any Business Licence fee reductions at least until VAT was hitting the required revenue targets.

Still, expressing optimism on this issue, Mr Bethel said: “I fully expect that over time we will see a reduction in Business Licence fees and Customs duties, and see the return on VAT.

“We have so many more taxpayers sharing the burden [under VAT]. We have elections in 2017, so all politicians need to pay attention to the people.”

Mr Bethel said the January 1, 2015, VAT implementation date had also given Bahamian businesses “certainty”. This was because they knew what was coming and when, and could plan for the transition accordingly.

He added that the preparation lead-in was “a bit like Y2K”, where everyone was predicting ‘doom and gloom’ come the turn of the century.

Such fears turned out to be groundless, with Mr Bethel predicting a similar outcome in the January 2015 New Year. “We were still alive, eveything was functioning and we breathed a sigh of relief,” he recalled of Y2K.

The Fidelity president then added that the Bahamas had no alternative but to adopt VAT as a revenue-raising measure. “We’ll do it for the simple reason that the Government needs $500 million a year to cover running a deficit,” he told Tribune Business.

“There is no choice. Government, like businesses, like households, cannot borrow into infinity. There comes a day when the cost of borrowing and debt servicing is much higher than cash flow, and you can’t borrow any more because no one will lend you the money.”

Mr Bethel expressed confidence that the VAT Education Task Force would be able to accomplish its mandate in the little under three months left, pointing out that it would “supplement” the ongoing training initiatives led by the Government.

“We’re added manpower to what they’re doing,” he added, suggesting both public and private sector would would work together to eliminate any “overlapping” of effort.