By NEIL HARTNELL
Tribune Business Editor
The International Monetary Fund (IMF) has again shredded plans by Opposition leader, Dr Hubert Minnis, to introduce numerous Value-Added Tax (VAT) exemptions if elected to office, warning these could cost the Government some $60 million in revenues.
The Fund, in its full 2016 Article IV report on the Bahamas, which was released quietly earlier this week, warned that Dr Minnis’s proposals would undermine the integrity of the broad-based VAT model and its “efficiency”.
“Staff called for standing firm against pressures to weaken the VAT’s efficiency through introducing exemptions to items such as food, medical and insurance services, which could amount to an estimated three-quarter per cent of GDP in revenue losses,” the Article IV report said.
“Social concerns should instead be addressed by targeted adjustments to the safety net.”
This amounts to a comprehensive rejection of Dr Minnis’s proposal, repeated again as he launched his bid to retain leadership of the Free National Movement (FNM), to introduce a wave of VAT ‘exemptions’ if elected to office.
Given that Bahamian gross domestic product (GDP) is estimated to be around $8 billion, the revenue lost from Dr Minnis’s plan would be around $60 million - a sum around 10 per cent of the Government’s annual VAT revenue.
The IMF’s specific reference to food, medical and insurance products is especially interesting, given that these are exactly the same products Dr Minnis has targeted for his VAT ‘exemptions’.
The Opposition leader told Tribune Business earlier this year that he stood by his proposal, as Bahamians “need relief” from the tax burden created by VAT’s imposition.
As for the revenue foregone by removing the 7.5 per cent levy from products such as food, baby items, healthcare and other ‘breadbasket’ goods, Dr Minnis said tax adjustments elsewhere would compensate.
He promised that, if elected to office, the FNM would conduct “a comprehensive review of the entire Bahamian tax structure”, in a bid to eliminate wastage and find efficiencies.
However, ‘exempting’ products from the 7.5 per cent VAT levy has knock-on consequences for both businesses and consumers.
Companies are unable to recover the VAT they pay on their ‘inputs’ when products they sell are exempt, meaning that Dr Minnis’s proposal will merely increase their costs.
A broadening of VAT ‘exemptions’ would likely also prompt businesses to increase prices on non-exempt items to compensate for their higher costs, hurting the consumer - the very person Dr Minnis wants to help.
The Government would also have to ‘make up’ the VAT revenue foregone by increasing ‘exemptions’ elsewhere in its tax structure.
And, perhaps, most importantly, widespread exemptions would undermine the very philosophy of the Bahamas’ VAT model, which is to have as broad a tax base as possible. In doing so, this ensures the tax rate is kept low.
Increasing exemptions will thus put pressure on the Government to increase the current 7.5 per cent VAT rate, in order to maintain revenues.
The Bahamas was also warned against such a ‘trap’ by former Barbadian prime minister Owen Arthur, who on a visit to Nassau revealed that the southern Caribbean nation, by giving into industry and special interest requests for ‘exemptions’, had been forced to raise its own VAT ‘rate’ into the high double digits.
The Christie administration appears to have taken both Mr Arthur’s and the IMF’s advice to heart, based on its response to the Fund and its Article IV team.
“To mitigate the potential impact of the VAT on low-income earners, the authorities have already raised the minimum wage and increased social spending,” the Article IV report said.
“They continue to review social assistance benefits, and would prefer to increase them further instead of introducing exemptions that would reduce revenues and compromise the integrity of the VAT regime.”
The Fund’s Article IV report suggested there were “some concerns” with the accuracy of the Government’s VAT registration database, which includes around 6,500 monthly and quarterly filers.
“Reports suggest a relatively smooth implementation and an efficient VAT regime,” the report added. “While there are some concerns about the accuracy of the registration database, registration, filing and compliance rates appear to have been broadly comparable to regional standards. “VAT revenue over the first 12 months, at $536 million (about 6 per cent of GDP), has exceeded expectations.”
The IMF also urged the Government to simplify “non-business friendly” taxes, pointing to the Business Licence fee in particular.
And, in an assessment that may send chills down the spine of both the private sector and Bahamian consumer, the Fund concluded there was “substantial room” for the Government to raise more revenues from consumption based-taxes to offset losses elsewhere.
“The authorities should further simplify domestic taxes (such as the Business License fee regime) that are not business–friendly,” the Article IV report said.
“While VAT introduction has increased tax utilisation capacity, there is substantial room to raise more revenue through non-distortionary consumption taxes to compensate for revenue losses elsewhere.”
The Government had “also recognised the benefits” of reviewing the numerous tax exemptions and investment incentives that it grants, especially in the tourism industry, with the IMF urging it to “consider eliminating low revenue yielding fees and duties”.