The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Institute of Chartered Accountants (BICA) president yesterday warned it was "hubris" to believe the private sector can implement the new VAT rate and exemptions within 30 days.

Gowon Bowe told Tribune Business that the proposed 60 per cent increase in the VAT rate to 12 per cent, which the Government wants implemented on July 1, should "have been done in a very structured manner" involving feedback with all 6,000-plus registrants.

He warned that the move raised major compliance concerns, with the introduction of VAT 'exemptions' on so-called 'breadbasket' food items, medicines and other items set to only "complicate a system that we want to keep as simple as possible".

The Government, through the rate increase and exemptions unveiled with the 2018-2019 Budget, is thus abandoning the principal of a low-rate, broad-based VAT that resulted in the Bahamas' tax being branded the "most efficient" in the region by the Inter-American Development Bank (IDB).

K P Turnquest, Deputy Prime Minister, said the Government was targeting a $400 million revenue increase from the 4.5 percentage point rise in the VAT rate. Budget documents show a projected increase in gross VAT revenues from the $663.562 million forecast in 2017-2018 to $1.062 billion in the upcoming 2018-2019 fiscal year.

This translates into a 60 per cent revenue increase, matching the magnitude of the rate rise. Mr Bowe, though, expressed scepticism about whether one would translate directly into the other given that the new VAT rate was likely to produce a further downward adjustment in Bahamian consumer spending.

"My initial reaction is that it certainly isn't the manner in which I would have expected the Government to lay out that type of increase for several reasons," he told Tribune Business.

While VAT was relatively well implemented in 2015, the BICA president said merchants will have to adjust both their IT software systems and processes to accommodate the new rate, as well as re-price potentially thousands of products on shelves or held in inventory.

Given the scale of this task, Mr Bowe said: "The idea that it can be done in a month is hubris on the part of government. It's a bit optimistic to think it's easily done. This one is certain;y one that should have been done in a very structured manner.

"The consequence of that is going to be compliance. If you're going to waive [VAT] compliance, and appreciate people will have difficulty complying with it [the July 1 deadline], it's very difficult to get it back. It's a dangerous and slippery slope because you haven't socialised with the persons you are relying upon. Compliance to me would be the greatest concern, doing it in a rushed manner."

Mr Bowe said VAT registrants were given several months lead-in to ready their systems and pricing when VAT was first introduced in 2015, but he - like all others in the private sector - was taken unaware by the Government's proposed rate change within 30 days.

He added that the successful 2015 implementation was achieved through business community buy-in and support, which was now absent because of the lack of warning and consultation.

"The wisdom from the consultants and business community was that if you want the support of the business community, be collaborative," Mr Bowe recalled. "Don't take a bludgeoning approach to implementation without having it property vetted."

The Bahamas ultimately settled on a low-rate, broad-based VAT with minimum exemptions, but the 2018-2019 Budget abandons this model in favour of seemingly trying to relieve the tax burden on lower income Bahamians.

"Exemptions just really complicate a system that we want to keep as simple as possible," Mr Bowe told Tribune Business. "What has not been taken into consideration is the impact this will have on the Department of Inland Revenue, the process of compliance and the impact it will have on the general community, taking what was a very simple approach and complicating it.

"The benefit was a simple approach of having VAT charged across the board. While governments have responsibility for making decisions in the best interests of the people, this type of change should have been accompanied by empirical analysis showing this is a positive change."

Mr Bowe, in particular, decried the seeming absence of an analysis of VAT elasticity, and evidence that the increase to 12 per cent will generate the desired revenues. "It's a bit asinine to believe revenues increase by the amount of the rate increase," he added, "because people will adjust their spending habits."

The International Monetary Fund (IMF) had previously warned the Government against increasing the level of VAT exemptions, having described 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.

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 that while he supported the Government's desire to be fiscally responsible, and be able to pay its bills, the Budget had for him recalled an old Winston Churchill quotation: "Taxing yourself out of pocket is like standing in a bucket and trying to hold yourself up."

Suggesting that the VAT reforms were akin to implementing the tax all over again, Mr Bowe urged the Government to prepare itself for "a tremendous debate season" over the next few months.

He revealed that the phones and chat groups among fellow passengers on his flight from Freeport were "buzzing" as a result of the Budget announced yesterday.