The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government yesterday pledged there will be no further value-added tax (VAT) hikes before the next election, with the 12 percent rate deemed sufficient to achieve its revenue goals.

The newly-released Fiscal Strategy Report, tabled in the House of Assembly, said the 4.5 percentage point VAT rate increase should boost revenue yields as a percentage of Bahamian GDP to the point where they are sufficient to meet “the needs of modern governance”.

The Report projects that the rate hike will result in a 55.7 percent increase in VAT collections, which are forecast to rise from $680.6m in 2017-2018 to $1.06bn this current fiscal year, bringing The Bahamas’ revenue yields in line with those of other Caribbean nations.

“As amply demonstrated in recent years, the revenue yield of the tax system was grossly inadequate to the needs of modern governance,” the fiscal strategy report said. “The various revenue measures in the 2018-2019 budget, including the increase in the rate of VAT from 7.5 to 12 percent, are projected to secure a boost in revenue collections from 16.1 percent to 19.9 percent of GDP.

“While lagging regional norms at that level, the increase in the tax yield is nonetheless appreciable and is poised to make a significant contribution to the attainment of the Government’s key fiscal objectives. As such, the Government is of the view that no further increases in the VAT rate will be entertained over the balance of its current mandate.”

That pledge is especially well-timed following yesterday’s protest outside the House of Assembly over rising living costs sparked by both the VAT increase and soaring electricity bills. The Government has also tied its fiscal policy to political goals in other ways, namely by seeking to pay off the $360m in unfunded arrears payments by 2021 - a year before it has to call a general election.

Outlining further revenue considerations, the fiscal strategy report reiterated that “no policy commitment” has been made to any business licence fee alternative amid private sector/accountant concerns that the new regulations represent an attempt to introduce a corporate income tax regime by stealth.

“Business Licence is one area that has long been the target of dissatisfaction on the part of the private sector, partly because it taxes turnover irrespective of profitability,” the Fiscal Strategy Report conceded. “It has been argued that this tax, as structured, effectively represents an inefficient tax on consumption and has no role where an efficient VAT is in place.

“Suggestions have been advanced that a business income tax should be introduced to replace the Business Licence tax and would represent an improvement in the efficiency and fairness of the tax system. In an exploratory initiative, the Government commissioned a private sector consulting firm (Deloitte & Touche UK) to undertake a detailed assessment of the appropriateness of, and options for, alternative forms of business tax.

“As was highlighted in the 2018-2019 Budget, the objective is to obtain an empirically based assessment of tax options and to canvass the views of a full range of Bahamian stakeholders. No policy commitment has been made to the introduction of any alternate form of tax at this juncture.”

The Fiscal Strategy Report said the level of development work required before any Business Licence alternative was implemented meant it cannot be introduced in the short-term, and ant replacement will “very likely extend beyond the time horizon of the 2019-2020 Budget.”

Identifying other potential revenue reforms, it added that “it may be prudent to assume” that some import tariff rates could be cut as early as the 2020-2021 fiscal year due to The Bahamas’ planned accession to full World Trade Organisation (WTO) membership.

Rules-based trading regimes regard import tariffs as barriers to commerce rather than revenue-raising mechanisms, and The Bahamas will have to lower its average Customs duty rate from 32 percent to around 15 percent “in a relatively short transition period” lasting no longer than five years.

The Government, seeking to soften the blow of its VAT hike, promised to return $100m to Bahamian citizens and businesses through import and Excise tax reductions as a reward for accepting austerity measures that will enable the Government to pay off $360m in unfunded arrears debts.

In reality, WTO membership was always likely to force such reductions. Still, the Fiscal Strategy Report said: “These reductions will be designed to advance the objective of rebalancing the tax burden between the provision of goods and services and reduce the attendant distortionary impacts. They will also accommodate the reductions in import taxes attendant upon accession to the WTO.

“The current Customs duty rate structure averages approximately 32 per cent, and could be subject to an aggregate reduction to around 15 per cent over an anticipated relatively short transition period. While negotiations are still underway, it may be prudent to assume that the duty reductions could begin as of the 2020-2021 fiscal year and be completely implemented within five years.

“The revenue losses stemming from these reductions will, to some extent, be compensated with revenue measures in other areas, so that the net revenue impact is contained.”

The Fiscal Strategy Report exposed how next year’s 2019-2020 Budget will have to “address other fiscal pressures looming on the horizon”, including those driven by the WTO and other external forces.

Besides membership in rules-based trading regime, The Bahamas also faces demands to align its tax system with the European Union (EU) and Organisation for Economic Co-Operation and Development’s (OECD) anti-tax evasion offensives.

This will force The Bahamas to remove so-called “ring fencing, and to ensure that any incentives or preferential treatment is linked to significant activity in The Bahamas”.