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Vat Rate Hike Slashed Consumption By $2bn

• Auditor General: Consumer spend nosedived by 34%

• ‘Phenomenal’ drop-off but magnitude is questioned

• Inland Revenue collected just $27m more at 12% rate

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Consumer spending shrank by $2bn in the year after the Minnis administration hiked the VAT rate to 12 percent, the Auditor General’s Office calculated in a newly-released report.

Assessing the rate increase’s impact on VAT performance in the 2018-2019 fiscal year, the report said total tax filings submitted to the Department of Inland Revenue showed that money spent on goods and services in the Bahamian economy nosedived by 34 percent year-over-year.

The Auditor General’s Office said that comparing total filings by VAT registrants for 2017-2018, when the tax rate was 7.5 percent, with the following fiscal year’s returns showed that the “consumption value of VAT-able goods and services” fell from $5.945bn to $3.943bn in 2018-2019 after the 4.5 percentage point rate increase was introduced.

Defining consumption value as “the amount of money injected into the economy”, the Auditor General’s Office said the “total” value - which combines the worth of imported goods with what consumers purchased in the domestic economy - fell by $1.6bn or 18 percent year-over-year to $7.47bn as compared to $9.07bn in 2017-2018.

The more measured decline in that indicator resulted from Customs valuing VAT-able imports at $3.522bn for 2018-2019, which represented a 13 percent or $404.056m increase upon the prior fiscal year.

Yet, despite the rate hike, the report by the Auditor General’s Office showed that the Department of Inland Revenue (DIR) collected just over $27m more in VAT in 2018-2019 than it did the prior year when the rate was still at 7.5 percent.

The DIR’s collections grew by 6 percent to $473.155m, which was only slightly ahead - by just over $50m - of the $422.587m gained by Bahamas Customs. The latter agency saw its VAT collection jump by 80.7 percent year-over-year, rising from $233.813m in 2017-2018 to $422.587m.

“Overall, the importation value of goods increased while the consumption value of VAT-able goods and services declined in the domestic market,” the Auditor General’s Office report concluded.

The “incredible” findings are likely to stoke fresh debate, and controversy, about the merits of the former administration’s VAT rate hike and whether it choked-off potential economic growth just prior to Hurricane Dorian and then COVID-19. It also raises questions as to whether the Public Treasury will see diminished yields once the VAT rate is increased beyond a certain point.

The timing of the report’s release coincides with a fresh back-and-forth on the newly-elected Davis administration’s move to slash the VAT rate to 10 percent, and return to the original broad-based, exemption and zero-rating free model, which is coming under intense attack from Opposition accusations that the move will “harm” lower income Bahamians (see other articles on Page 1B).

Gowon Bowe, who headed the private sector’s Coalition for Responsible Taxation (CRT) prior to VAT’s introduction in January 2015, told Tribune Business yesterday it was little surprise consumer spending fell as a result of the rate increase although he questioned the magnitude of the decline as stated by the Auditor General’s Office.

Suggesting that there may not be “a linear relationship” between the VAT rate increase and plunge in Bahamian consumer consumption, he explained that “there are other factors that may contribute” to reduced spending such as oil price increases.

“The gist is one I wouldn’t dispute, but the assessment in terms of percentages may be exaggerated,” Mr Bowe said, speaking after the report was tabled in the House of Assembly yesterday.

“The truth is that where tax rates are increased, and this is not done on elasticity, there will be a natural decline in consumption because you’re taking tax money out of the purchasing power of individuals and putting it into the Government’s coffers. If government consumption is not commensurate with that of citizens, there will always be a reduction...

“To increase the tax rate, although you have introduced multiple exemptions, leads to people reducing consumption - particularly when there are other cost pressures taking place, like oil.” Adding that he has “great respect” for the Auditor General, Mr Bowe said there was sometimes a tendency to “over simplify” analysis.

“The thrust of that message is correct, but the specifics are something we have to look at in more detail because there are other contributory factors,” he concluded of the “$2bn” finding. Basing the calculations on filings by VAT registrants and taxpayers also meant they were exposed to the errors, omissions and evasion associated with such returns.

Meanwhile Rick Lowe, an executive with the Nassau Institute think-tank, said of the Auditor General’s Office findings: “That’s incredible. That’s phenomenal. I’m speechless. That’s very intriguing and is a drastic decrease. What could contribute to a $2bn year-over-year reduction?

“I wonder if people were doing cash business and not invoicing, or if people had stopped buying locally to buy more from Amazon and things like that? People buying online would indicate an increase in Customs collections. There’s any number of issues that impact that.”

Meanwhile, the Auditor General’s report revealed that gross VAT revenue collections for 2018-2019 came in some $135.558m below forecast to stand at $1.045bn. This accounted for more than one-third of the revenue shortfall that year, which came in $369.41m or 13 percent below the total $2.79bn Budget forecast.

Customs duties and Excises taxes were below Budget estimates by $51.715m and $54.88m, respectively, although real property taxes beat collections targets by $78.323m to come in at $247.619m compared to a $169.296m target.

The year-over-year comparisons, aided primarily by the VAT rate hike to 12 percent, were better. Total tax revenues were up by $467.38m or 28 percent compared to 2017-2018, although non-tax revenue dropped by $83.41m or 27.04 percent compared to the prior year’s $307.04m.

“VAT, the highest source of government revenue, generated $896.56m (41 percent of the $2.42bn recurrent revenue),” the Auditor General’s Office said. “VAT revenue increased by $215.98m (32 percent over $680.58m in fiscal year 2017-2018).

“It is important to note that the $422.58m VAT collected by the Customs Department accounted for 47 percent of the $896.56m. The importation VAT with the 12 percent standard rate accounted for an 81 percent increase over $233.81m in fiscal year 2017-2018.”

Comments

bahamianson 1 month, 2 weeks ago

There is no incentive to spend money in this country. Goods and services are generally super expensive and sub par.

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sheeprunner12 1 month, 2 weeks ago

“I wonder if people were doing cash business and not invoicing, or if people had stopped buying locally to buy more from Amazon and things like that? People buying online would indicate an increase in Customs collections. There’s any number of issues that impact that.”

Is Rick Lowe suggesting that there is a sizeable increase in the black/informal/underground economy of The Bahamas???????

If that is the case, it will only get worst as the inflation rate and cost of living for the lower and middle class Bahamians continue to rise as compared to wage increases. The Covid19 and supply chain whammy have tag teamed ordinary Bahamians to make household expenditure explode and disposable income to all but disappear.

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realitycheck242 1 month, 2 weeks ago

The Auditor General dept as professional as they may be, may just be a little bit over their heads to come up with a figure of $2bn Consumption slash because of the rate hike. Mr Gowon Bowe explanations are more creditable. The Gov would do well to let a private sector independent accounting firm do an analysis or many would tend to conclude that this is simply one government trying to make a previous government look bad. Something that happens after every election.

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FrustratedBusinessman 1 month, 2 weeks ago

It may sound crazy, but I don't believe that this number is far off the mark. You don't just nearly double your tax rate and expect consumer spending not to be impacted by it. Think about it carefully, to run a basic store in this country, you will have to pay VAT on shipping, duties on the imported goods + VAT, VAT on delivery to your store if you don't have your own transportation, and then you have to mark up your product in addition to compensating for increased VAT on electricity, water, services (call a plumber, electrician, HVAC, attorneys) and so on., Long story short, VAT gets shoved on every thing imaginable, and is ultimately passed on to the consumer. As the euphemism goes, feces flows downhill.

Remember those dreams about WTO accession and dropping duties in exchange for VAT? Remember Minnis saying that duty rates were going to be lowered following it being raised to 12% (despite promises otherwise), and then having the rates for washing machines lowered (wonder who owns laundromats here) while most other items remained the same? This guy remembers very clearly.

I wish to God that we could get a group of politicians that could understand that you can't get blood out of a stone. Robbing Peter to pay Paul doesn't work, and most Bahamians soon won't have anything left to rob at this rate. There is no way to tax ourselves out of this mess, we have no choice but to stop pissing away money or become Jamaica 2.0.

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realitycheck242 1 month, 2 weeks ago

Frustrated ....I guess we can say to you "He who feles it Knows it" I still think the auditor general conclusion is simply to justify the vat increase on bread basket items. He is showing his true political colors.

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ohdrap4 1 month, 2 weeks ago

Why would a business care about the increase in VAT.

YOU GET THE MONEY BACK.

You do not even have to wait. If you pay the plumber VAT 100, you might collect the same from your customers this afternoon.

The prices would be more reasonable if the goods were marked up excluding VAT.
Then, the local merchants might compete with amazon.

As it is, even paying the high courier charges, one can beat the retail price.

Try car parts , for example.

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FrustratedBusinessman 1 month, 2 weeks ago

I don't know a single person that has ever gotten VAT credits. The government only takes but does not give.

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FrustratedBusinessman 1 month, 2 weeks ago

Just coming back to your comment, because I think that the car example can be used to show the point that I was trying to make.

Firstly, most car parts are extraordinarily expensive/take a long time to ship because they are Japanese or Korean in origin. Who knew that shipping half way around the world costs a fortune and takes a long time? This leads to the question of why do Bahamians purchase Japanese and Korean junk vehicles that fold if you lean on them too hard, especially when we live right next door to the US, where you can go to the junkyard or part store and get it same day? Because of the asinine costs involved with getting an American vehicle here.

Go buy a car in the US for 20k, pay shipping fees + VAT, pay 65% duty rate + customs fees + VAT, and then if you are unfortunate enough to live on the Family Islands, shipping + VAT again. You do the math, you have bought yourself another car. Hence why Bahamians buy junk that would never legally be on the roads in the US or Canada.

The Bahamian government still is funded in large part from tariffs. Tariffs are not meant to be funding a government, they are supposed to be used to protect your domestic industries (protectionism), of which we do not have much. You tell me why the COL is so high in this country when we literally import every blessed thing in, and then mark it up + collect VAT the minute it gets to the port.

Bahamians think in terms of paying 12% at the cashier and that is it. The economy is lot bigger than that when you don't produce a single thing in your borders. Most people think in terms of micro and not macro, which is very important as we are completely dependent on other nations for literally every aspect of our economy.

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DWW 1 month, 2 weeks ago

um, you might be missing something. the consumer pays all the vat while the buisness pays zero VAT but collects it. It seems that you are not a very good businessman? the prices at the shelf should only increase 12%. if the business has to increase prices it would only be to cover the cost of salary for accountant. that is all

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Dawes 1 month, 2 weeks ago

I think many do not understand the way VAT works. They think of it like duty which is a cost to business.

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FrustratedBusinessman 1 month, 2 weeks ago

1.) I was primarily speaking from my position as a consumer. Believe it or not, we buy food, pay for services, and otherwise live in this country as well.

2.) Please let me know where this wormhole is to teleport goods from one side of the world to another. The Bahamas is 100% import based economy that is one of the few to feature double taxation. You are paying VAT (plus duty, which was supposed to disappear) every step of the way to bring something in, not just in getting it off the shelves.

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ohdrap4 1 month, 2 weeks ago

I will tell you what I do.

I go to amazon and look at the price of the item, the shipping weight, the shipping volume and estimate the landed cost by courier, vat, duty, etc... I slao look at the shipping or delivery time.

Then I go to a local store, or these days, look at the local online stores and compare. If the difference is negligible, I buy locally.

I have noticed that some merchants do not appear to markup on VAT, and those are winners and I usually buy from them.

Businesses which are expanding usually get VAT credits. Like when you purchase new equipment ahead of opening a new venture or while renovating a venue.

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DWW 1 month, 2 weeks ago

bunch of jokers. this entire written piece is all contradiction and hogwash. can we get a real person in the office please?

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Dawes 1 month, 2 weeks ago

This doesn't make sense as otherwise the economy would have had a massive decline during this period. Yes there would have been a decrease in consumer spending but not by the amount showing.

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