By NEIL HARTNELL
Tribune Business Editor
The Bahamian Contractors Association's (BCA) president yesterday hailed the eight-month VAT 'transition' for existing projects as "the best thing the Government can do for construction".
Leonard Sands told Tribune Business that the Minnis administration's decision to "honour" the existing 7.5 per cent VAT rate for developments and construction contracts already underway gave the industry "a real chance to rebound" from the Budget's tax hikes.
He was reacting after Marlon Johnson, the Ministry of Finance's acting financial secretary, confirmed to this newspaper that the Government was providing "leeway" for projects scheduled to be completed by February 2019 following representations from the industry.
"We've had representations from small contractors and developers with contracts already set to give them some guidance and leeway on costs already fixed through February next year," Mr Johnson said.
"What it would mean is that where work is already in progress and money transacted, and real estate projects and construction underway to be completed by February next year, it allows them to be honoured at the existing VAT rate."
Full details of this 'transition' arrangement will be provided in the 'guidance notes' that the Ministry of Finance plans to release to the private sector this week, but Mr Johnson's comments suggest the Government has agreed to much of what Mr Sands and the BCA have called for.
The BCA president said he was unaware of the move when contacted by Tribune Business yesterday, but added that it would help calm much of "the panic" that arose in the construction and real estate development sectors over the new 12 per cent VAT rate and related implementation uncertainties.
"We're happy with that. It really gives the sector an opportunity to get into a phase of real growth," Mr Sands said. "If VAT is maintained at 7.5 per cent, it gives the construction sector a real chance to rebound. It would be the best thing the Government could do for that sector."
Mr Sands and the BCA had earlier this month called for a "waiver", or six-month transition, to 12 per cent VAT to prevent contractors/developers locked into existing contracts from being "wiped out".
The construction industry had feared it would have to "eat" or absorb the 60 per cent VAT rate hike in contracts that had already been priced and agreed - a situation that threatened to erode or eliminate contractor profit margins, even forcing some to take a loss on existing jobs.
Material, supplier and construction services prices are set to increase on July 1 when the new 12 per cent rate takes effect, and the BCA had argued that the 30-day implementation period was too short for contractors to adjust and renegotiate contracts with clients and the banks.
"We did express concern about the impact on existing projects already capitalised," Mr Sands reiterated yesterday, "where the impact of a 12 per cent VAT would have negative effects that it would be hard for the sector to recover from. "We felt very strongly that there ought to be time for existing projects to be completed, and not have an impact on industry contracts already set."
The eight-month transition gives the construction industry slightly longer than the BCA had been seeking, and Mr Sands suggested the extra clarity would remove uncertainty that had caused developers to hold back on real estate projects.
"It had caused there to be a lot of panic in the marketplace," he told Tribune Business of the VAT rate increase and transition concerns. "We saw the effects from that where people were wondering whether to to go ahead with projects. We feel this news will encourage people to pull the trigger and go ahead with projects."
Real estate developers, though, yesterday revealed they had also been seeking a "claw back" provision allowing them to regain the VAT paid on 'input' costs as a result of Budget changes to the 'transfer tax' structure.
Khaalis Rolle, Sterling Global Advisors' managing director, warned that it was impossible to "absorb" a 60 per cent VAT hike on projects such as his company's $250 million Hurricane Hole development as a result of their new 'exempt' treatment.
He confirmed that the Government had made Sterling and other developers "a proposal" to address this and other VAT-related transition issues, and the sector was now waiting to hear whether it had followed through on these ideas.
"They would have made some concessions to allow us to not be as severely impacted; some 'grandfathering in' clauses," Mr Rolle said. "In addition there would have been some claw back provisions made. In a business like this, you can't absorb a 60 per cent increase in VAT.
"We've been discussing it, negotiating it since the Budget presentation given by the Minister of Finance. We don't want it to be a contentious issue. As developers it's really incumbent to work with the Government to protect the economy."
Other developers have also warned they cannot absorb 12 per cent VAT on their project costs as a result of the Government reverting back to the old "transfer tax" structure.
The former Christie administration changed the ten percent Stamp Duty levied on real estate sales to accommodate the current VAT rate, splitting this 7.5 percent/2.5 percent between VAT and Stamp Duty.
But the 2018-2019 Budget goes back to the ten percent Stamp Duty on all real estate purchases over $100,000. KP Turnquest, deputy prime minister, said this was intended to "create a simpler formula" for real estate transactions by eliminating the VAT component.
This move, though, threatens to have the likely-unintended consequence of increasing real estate costs for both Bahamian and international buyers as developers can no longer offset their 'input' VAT.
Developers currently 'net off' the VAT they pay on construction materials, and the likes of contractor, engineer and architect bills, against the 'output' tax whenever a property is sold.
The Budget's altered tax structure, by eliminating VAT, robs developers of the ability to claim back already-paid input tax, thus saddling them with a multi-million dollar increase in development costs that will likely be passed on to buyers.
Mr Rolle said the proposal under discussion would have allowed projects in progress to "recoup the VAT" on their input costs, thereby ensuring a smooth transition for a sector vital to Bahamian employment and economic growth.
"Development is the engine of this economy, and we have to be in a position where we don't negatively impact the ability to support construction jobs, service jobs and management jobs," he told Tribune Business. "Development is a vertically-integrated job creating mechanism; you design, you build and you operate."