By NEIL HARTNELL
Tribune Business Editor
Food stores will likely hike their non-breadbasket food prices due to the impact the new VAT exemptions will have on consumer behaviour, the Chamber of Commerce's chairman is warning.
Michael Maura told Tribune Business that the Budget effectively "incentivises" consumers to alter their buying habits and purchase more breadbasket items, which are typically subject to price control regulations.
With these "all but eliminating" retailers' profit margins, Mr Maura said a consumer shift to breadbasket items will force food stores to increase the cost of non-price controlled products to maintain their profitability.
He described this as one of the unintended consequences of the Budget's tax reforms, adding that it again highlighted the need for the Government to consult the private sector in advance of far-reaching changes to ensure the desired objective was achieved on "both sides of the scale".
The Chamber chairman also reiterated that the narrow 30-day timeline given to prepare for the Budget changes, including the new VAT rate and associated exemptions, was potentially "destructive" to businesses and jobs without prior dialogue between the two sides.
His comment came ahead of Cabinet's meeting yesterday afternoon, which was intended to finalise all aspects of the 2018-2019 Budget and the accompanying legislation ahead of the Prime Minister's debate-closing address in the House of Assembly and subsequent approval of all 'line items'.
Citing the 'breadbasket' foods' VAT 'zero rating' as an example, Mr Maura told Tribune Business: "The major food retailers have advised that over 30 per cent of their grocery sales are breadbasket items.
"That will likely increase as shoppers see there is more of an incentive to buy breadbasket than other grocery items. With that, and the 12 per cent VAT, you're going to see a greater share of food purchases represented by VAT-free, breadbasket items.
"Because many of those breadbasket items are price controlled, which all but eliminates profits on those items, they're [the food stores] going to have to put a disproportionate share of profits on the other items, which in turn carry a disproportionate share of healthy foods." Dr Duane Sands, minister of health, said healthier foods will be substituted for the existing breadbasket list post-Budget once the consultation process is completed.
But Mr Maura said supermarket chains and food stores will have little choice but to implement such adjustments given that they "have to pay their bills".
He echoed the views of others in the private sector that price controls may have to be eliminated as part of the Bahamas' accession to full World Trade Organisation (WTO) membership, while describing the 'breadbasket effect' as an example of the unintended consequences of well-intentioned government policy to help minimise the 12 per cent VAT's impact on low income Bahamians.
"The Government historically has been very reluctant to allow for adjustments on price control on the margin side," the Chamber chairman said. "When WTO rolls around, we may have to look at eliminating price control.
"We're trying to help the Government understand these are the challenges we face in business, and if we don't look at the impact on both sides of the scale, the net result will not be what we had hoped for."
He added: "It comes down to recognising, from the private sector side, commercial business, that we live here, we are part of the community, we're the job maker in the country. We have the same compassion for our fellow Bahamians, but we are the appropriate partner for the Government to sit with and talk to about these initiatives to ensure they have the greatest impact and the desired impact.
"It goes back to sitting with us, meeting with us and talking to us to help us help you achieve your objectives."
Mr Maura said the 30-day adjustment period to the 12 per cent VAT, and complexities of numerous exemptions, was insufficient for industries such as the automobile industry, where the duty reduction to 25 per cent for vehicles with engine capacity of 1,500 CC or less meant dealers would likely have to 'eat' the higher taxes on already-imported inventory.
"What the automotive industry is saying is not that this is something the Government shouldn't be passing, but let us be partners working with you to achieve this," the Chamber chairman added.
"You're hurting the performance of our company and jobs by rolling out within 30 days. It comes back to consultation every time. We're not saying this is a negative step, that it shouldn't happen. It's the manner in which it's happening can be destructive."
The Government has already provided an extended VAT transition period for the hotel/tourism industry, and the real estate development and construction sectors are at least two that have joined auto dealers in seeking timelines beyond July 1.
Mr Maura, meanwhile, also expressed concern about the move away from the original low-rate, broad-based VAT model with minimal exemptions and 'zero ratings'. He warned that the Government was now making the tax more costly and complex for the private sector, and creating compliance loopholes, through exemptions that will not only benefit poor Bahamians.
"We still remain concerned with the complexity of the change in VAT because of all the exemptions," he told Tribune Business. "We appreciate the compassion for our citizens, and the intention to make the cost of living on breadbasket items less; we understand that, we appreciate it, and we recognise it's hard on the most vulnerable in our society.
"We are concerned that the overall impact is they are throwing out a relief that is far too big because the likes of myself, yourself and others that don't need a subsidy, a VAT waiver, are going to benefit from it."
All Bahamians - rich and poor - will benefit from the Budget's VAT 'zero ratings', and Mr Maura questioned whether the 60 per cent hike to a 12 per cent rate would have been necessary had the Government elected not to extend such a break to the middle and upper middle classes.
He added that around 42 per cent of Bahamian families earned over $60,000 per year, all of whom would benefit from the VAT 'zero rating' on breadbasket items and other products.