By NEIL HARTNELL
Tribune Business Editor
The $130m year-over-year increase in first half VAT revenues proves that the 12 percent rate hike has “not dampened” consumer spending, a top Ministry of Finance official argued yesterday.
Marlon Johnson, the Ministry of Finance’s acting financial secretary, told Tribune Business that the 33.7 percent increase in VAT revenues during the six months to end-December 2019 showed fears voiced when the rate increase was announced had failed to “materialise”.
Many observers had predicted the 60 percent hike in the VAT rate, from 7.5 percent to 12 percent, would cut consumer demand to the extent that The Bahamas would be thrown back into recession, but Mr Johnson said 2019-2020 first half performance demonstrated the economy had been “healthy enough to absorb the increase without a deterioration in consumption”.
However, the government’s six-month “fiscal snapshot”, which was released last night, showed as much as $86.2m or two-thirds of the VAT increase may have resulted from the switch with stamp duty as the principal levy on real estate sales in this year’s budget. With VAT now acting as either the two percent or ten percent “transaction tax”, stamp duty from such deals fell by 82 percent.
Still, the government’s total income for the 2019-2020 first half increased by almost $92m or 9.1 percent compared to the same period in the prior fiscal year even though Hurricane Dorian’s devastation on Abaco and Grand Bahama took around 20 percent of the economy off-line for almost four of those six months.
Revenues received a boost from the Government’s taxation settlement with the web shops even though the tax on patron winnings has yet to take effect. “Receipts from gaming taxes nearly doubled to $19.4m (53.5 percent of the budget) vis-à- vis the comparable period of fiscal year 2018-2019,” the “fiscal snapshot” said.
“This reflected the implementation of the revised tax regime agreed to by the Government and gaming operators of 15 percent on revenues up to $24m, and 17.5 percent on revenues greater than $24m. The regime also featured a 5 percent tax on winnings up to $1,000, and 7.5 percent on all winnings of over $1,000 - although this is not yet in effect.”
Some $515m in VAT revenues accounted for 52 percent of the Government’s first half income, with collections aided by the fact that the hotel and construction industries were paying the full 12 percent rate. Both sectors were granted a six-month transition period at the old 7.5 percent rate during the 2018-2019 fiscal year, meaning the total effect of the increase was not felt in the prior year comparative period.
Revealing that the Government had been anticipating a “banner” fiscal year in 2019-2020 after cutting the deficit by more than 60 percent since taking office, Mr Johnson said the first half revenue performance indicated “the broader momentum in the economy is still holding notwithstanding Dorian”.
“What I feel comfortable saying is that it’s allayed the concerns expressed at the time [of the rate increase] that it may dampen economic consumption,” Mr Johnson told Tribune Business of VAT’s performance. “There were quite a number of commentators pointing to that possibility.
“What we’ve seen is the overall economy was healthy enough to absorb the VAT increase without a deterioration in consumption. That’s the lesson so far: That the momentum of the economy was sufficient to sustain the VAT increase.
“The economy is still in expansion. Tourism arrivals are still high, foreign direct investment is continuing. Those fears about a deterioration in economic growth have not materialised so that’s one of the takeaways so far.”
Mr Johnson added that the first full year of 12 percent VAT, with no transition periods for the likes of the hotel and construction industries, had been a “significant element” in the increased collections during the 2019-2020 first half.
“Particularly in the month of July, which was the first full assessment, we saw a substantial uptick; a significant jump in there year-over-year in the first month of the year,” he confirmed. “That really is attributable to the first full year of implementation.”
Acknowledging what might have been, the acting financial secretary told Tribune Business: “From 2017 to now we’ve seen a more than 60 percent decline in the deficit, and we were optimistic that this year was going to be a real banner year, but we have Dorian to deal with.
“It’s [the revenue yields] signalling to us that the broader momentum in the economy is holding notwithstanding Dorian. But, as the tax concessions continue and reconstruction accelerates, we will see a widening of the deficit.”
Mr Johnson said increased deficits would “hopefully be short-term”, and he suggested that the start of the next fiscal year will see a resumption of the “trend” back towards the Government’s consolidation plan.
“We’ve got to roll with the punches,” he added. “We’ve revised the plan, but still with a long-term view to fiscal consolidation. That benefits from the Fiscal Responsibility legislation, as we have to explain how we will move to fiscal consolidation and keep focused on moving in that direction.”
Total VAT revenues for the first-half jumped from $385.3m to $515.3m, accounting for 46.8 percent of the full-year’s projected revenue. While the switch from Stamp Duty to VAT as the principal real estate transaction tax may have accounted for up to $86m of the $130m increase, this revenue source still enjoyed at least a $44m year-over-year rise.
And, either way, VAT was a major part of the total $91.8m rise in government income year-over-year. “Revenue receipts for the first half of fiscal year 2019-2020 stood at $1.104bn or 42 percent of the budgeted amount, representing a gain of $91.8m (9.1 percent) over the previous fiscal year,” the Government’s “fiscal snapshot” said.
“Tax receipts - at 42.5 percent of the budget - advanced by $95.3m (10.6 percent) to $995.2m, while non-tax revenue decreased by $5m (4.5 percent) to $106.8m for 37.4 percent of the budget.”
Breaking the Government’s revenue performance down, the report added: “Taxes on goods and services - comprising 72.8 percent of total tax receipts - improved by $72.2m (11.1 percent) to $724.6m and represented 42.4 percent of the budget.
“VAT receipts strengthened by $130m, or 33.7 percent, to $515.3m to register at 46.8 percent of the annual target. This performance reflected the full application of the 12 percent VAT rate on hotel bookings and construction sector activities compared with the year earlier concessions at the old VAT rate.
“Reflecting a combination of the transition from a Stamp tax to a VAT regime and timing-related developments in financial transactions, collections from Stamp tax on financial and realty transactions fell by $86.3m (80.2 percent), representing only 21 percent of the budget.”
The Government’s “fiscal snapshot” added that Excise taxes increased by $14.7m, or 12.5 percent, year-over-year to hit $132.5m or 46.8 percent of the budget. And taxes on international trade, despite the Dorian-related breaks and relief granted under the Government’s various “exigency orders”, beat prior year comparatives by $25.3m or 12.3 percent to hit $231.8m.
“The outcome benefited from the seasonal firming in imports associated with heightened year-end holiday demand, as well as the enhanced revenue collection initiatives,” the report added. “Immigration-related fees and services charges softened by $1.1m (2.7 percent) while general registration fees and health fees reported more muted declines of $0.5m (17.7 percent) and $0.4m (85.3 percent), respectively.”