By NEIL HARTNELL
Tribune Business Editor
The Bahamas’ Value-Added Tax (VAT) model has not been given enough credit for preventing any “recessionary impact” when it was implemented, the Chamber of Commerce’s president said yesterday.
Gowon Bowe told Tribune Business that while VAT’s introduction inevitably affected business sales and GDP growth rates, it did not push the Bahamian economy into recession as many had predicted.
Distinguishing between slower growth and negative growth, Mr Bowe said an IMF paper describing the Bahamas as having “the most productive” and efficient VAT regime in the Caribbean had effectively “endorsed” the ‘low rate, broad base’ model urged by the private sector.
The Christie administration had initially proposed a 15 per cent VAT rate with multiple exemptions, but a concerted campaign by the Chamber’s Coalition for Responsible Taxation (CRT) and other business organisations forced it to reconsider this approach.
Suggesting that the International Monetary Fund (IMF) paper had recognised the Bahamian private sector’s “common sense approach” to VAT and tax reform, Mr Bowe told Tribune Business: “That certainly is a confirmation of the confidence we had in the recommendations we made.
“It [the IMF paper] is a positive endorsement. I believe that ultimately we can feel proud we have an efficient system in the sense we took a common sense approach that most tax systems don’t take.
“While it was intended to increase revenues, how do you make it as least onerous as possible? The way to do that was with the least exemptions.”
Mr Bowe said the Bahamas’ 7.5 per cent VAT rate, with minimal zero-rated or exempt products and services, had made the tax relatively simple for both the Government and the 6,700 registrants responsible for collecting and remitting the tax on a quarterly or monthly basis.
While increasing the Government’s net revenues by $756 million over its first two years, Mr Bowe said VAT’s introduction had not created a new cadre of Bahamian professionals - tax advisers.
Pointing to the US, where a tax advisory industry has grown up alongside a taxation system becoming ever-more complex, the Chamber chairman said Bahamian businesses - in contrast - did not need “high powered attorneys or accountants” to help them understand and administer VAT.
Mr Bowe said Bahamian accountants instead have to play a “value-added” role, helping registrants to improve efficiency in administering it, and assisting them in dealing with disputes over VAT rulings.
“I believe we’ve received positive marks from the observers; not just the IMF but the rating agencies,” he told Tribune Business.
“The one element that was not promoted enough was it [VAT] came in without a recessionary effect. I’m not saying it hasn’t slowed growth; all taxes do, but it didn’t put us in a tailspin as some of the procrastinators were saying.
“It’s now embedded in the system to the extent it’s an afterthought, as most people have adjusted their spending, and it did not result in an ‘off the cliff’ effect on sales and growth.”
An IMF ‘working paper’ on tax administration reforms in the Caribbean found the Bahamas has the most productive VAT regime in the Caribbean, holding out the ‘low rate, broad base’ structure as a model for the entire region.
The paper’s author, Stephane Schlotterbeck, also found that the Bahamas’ VAT productivity/efficiency even exceeded the average across OECD member states, plus European and Asian nations.
Measuring ‘productivity’ as the ratio of actual VAT revenues collected to potential collection if all domestic consumption was taxed at the same rate, the paper found that the Caribbean average was “slightly below” international standards.
“It ranges from 0.36 in St. Lucia to 0.79 in the Bahamas, with an average of 0.54 in the region compared to 0.55 in OECD countries, 0.59 in Europe, and 0.64 in Asia and Pacific,” Mr Schlotterbeck wrote.
“A low productivity ratio indicates erosion of the tax base, exemptions, excessive zero-rating, concessional rates, evasion, and weak enforcement.”
The IMF paper also set out a ‘road map’ for the Bahamas on what not to do with its VAT regime, detailing many of the challenges the Government and Department of Inland Revenue will likely face, and how this nation can learn from the experience of other Caribbean nations.
Mr Bowe told Tribune Business: “We’ve known the greatest challenge was not implementation. The greatest challenge is two-fold: To control the desire to increase exemptions, and use it to increase revenue, meaning increasing the VAT rates accompanied by a decrease in inefficient taxes.”
Explaining the latter point, Mr Bowe said that while the Bahamas could use efficient taxes, such as VAT, “to rid ourselves of inefficient taxes”, this should not be done simply via a ‘revenue grab’ from increasing the 7.5 per cent rate.
An increased VAT rate, he added, could result in reduced productivity and economic growth and, as a result, less revenues being collected by the Government.
“We should look at keeping the rate as low as possible to allow the base to expand as quickly as possible, thereby allowing revenues to grow by volume, not by price,” Mr Bowe told Tribune Business. “It [VAT] has to be used as a lever for activity in the economy.”