By NEIL HARTNELL
Tribune Business Editor
The Chamber’s chairman yesterday described calls for increased Value-Added Tax (VAT) exemptions as “a fool’s argument”, warning it would not reduce the taxation burden for poor Bahamians as intended.
Gowon Bowe told Tribune Business that the Chamber, its Coalition for Responsible Taxation (CRT) and all private sector representatives involved with VAT’s implementation would be “very concerned” if election campaign rhetoric on VAT became reality.
He explained that while ‘exempting’ electricity bills, health and education from VAT sounded good, such policy action would not reduce taxation costs for low income Bahamians.
For industries whose products are treated as VAT ‘exempt’ are unable to recover the 7.5 per cent levy paid on their ‘input’ (factors of production) costs, since they cannot charge the tax to their consumers.
As a result, ‘exempt’ businesses are left to ‘absorb’ the VAT, increasing their costs, which are inevitably passed on to consumers in the form of higher prices.
Mr Bowe said “individuals in great need” would thus end up paying VAT either way, either as a 7.5 per cent levy added to their bill, or embedded in increased prices for goods and services.
The Chamber chairman’s comments came before last night’s Free National Movement (FNM) rally, at which the party’s leader, Dr Hubert Minnis, again repeated his pledge to eliminate VAT on key services and products.
Those targeted for VAT ‘exempt’ status by Dr Minnis include so-called ‘breadbasket’ items, likely meaning food products that are already price controlled.
The FNM leader is also promising to exempt electricity and water bills; education; and health from VAT, despite warnings from the likes of the International Monetary Fund (IMF) - as well as the Bahamian private sector - not to do so.
Addressing last night’s FNM rally at Christie Park, Dr Minnis said: “An uncaring PLP put VAT on breadbasket items, making things worse for poor people. The FNM will remove VAT on breadbasket items.
“ It is unconscionable that the PLP put VAT on health care. When you or your children, or your parents, get sick, the last thing you need is VAT on your health bill. This is especially so considering the hundreds of millions of VAT money and other revenue the PLP wasted.”
Dr Minnis’s position is contrary to the latest IMF report, which describes the Bahamas as having the “most productive” and efficient VAT in the Caribbean - and one that is also better-performing than the average for OECD, European and Asian countries.
The Fund said the Bahamas’ performance stemmed directly from its ‘low-rate, broad-based’ model that contained few exemptions, with this nation’s VAT structure held up as something for the rest of the Caribbean to emulate.
Warning against the exact same policies being promoted by Dr Minnis, an IMF paper on tax administration reforms in the Caribbean, said: “Initially, Caribbean countries intended to introduce VATs with very broad bases, limited schedules for exemptions, and zero ratings.
“However, the scopes of these schedules were expanded at the time, or since the passage of the VAT legislations in several countries, thereby reducing VAT potential.”
Mr Bowe acknowledged that Bahamians had “already heard” talk of increased VAT exemptions “on the campaign trail”.
While the Chamber and private sector “are less concerned right now because it is all political talk”, they would become “very concerned if [politicians] actually seek to implement it”.
Mr Bowe said the Chamber and private sector had “offered to sit down and explain the merits of a simple” VAT system to Opposition politicians and others, but not say whether there had been any takers.
Taking education, Mr Bowe said “it sounds good not to have VAT” on the sector. While tuition fees are already treated as ‘exempt’, the Chamber chairman urged Bahamians to consider the impact if schools and colleges were unable to recover the VAT paid on electricity, maintenance and other services.
“If they’re unable to charge VAT on their auxiliary fees [to consumers] to offset that, those auxiliary fees will have to go up,” Mr Bowe explained.
He added that it would be the same with medical fees, if the likes of doctors and hospitals had to absorb VAT on their inputs, thereby increasing their costs.
“You’ll pay VAT either way; either upfront or embedded in the price,” Mr Bowe told Tribune Business.
“Creating exemptions from VAT is only a shifting of the cost, and individuals in great need will pay it in some form or fashion. In a blunt way, it’s a fool’s argument effectively.”
The Chamber chairman said the Bahamas should instead focus on ensuring its VAT system remains relatively simple, and retaining the ‘low rate, broad base’ model.
To achieve this, Mr Bowe said administrative efficiency needed to be maximised, as this would keep public sector costs low when overseeing VAT collections and filings.
He also called for social assistance programmes to mitigate VAT’s impact on lower income Bahamians in “a more effective way”, urging that they: “Teach a man to fish, give a man a fish.”
Dr Minnis’s policy promises, while likely striking a populist chord with some Bahamians, could be especially problematic for food stores as they would increase the proportion of inventory treated as VAT ‘exempt’.
For example, if 60 per cent of a food store’s inventory was VAT-able, and 40 per cent ‘exempt’, that business would be unable to reclaim 40 per cent of the VAT paid on its ‘input’ costs - such as rent and utilities.
This, in turn, increases that business’s operating costs, forcing it to increase prices to compensate. These price increases might encompass a broader base of goods, and greater rises, than if all goods had been VAT-able.
Backing Mr Bowe’s arguments, the latest IMF paper advised the whole Caribbean: “Simplifying the system and broadening the tax base are among the main directions to take.
“Initially intended to be a broad-based, single rate tax, the VAT’s legislation has deviated from these objectives. Zero-rating of domestic supplies, generous exemptions, lower rating of tourism activities, and low registration thresholds have affected its performance negatively and compromised administrative efforts.
“This paper argues that, instead of eliminating the VAT, the objective should be to strengthen it.”