By KHRISNA RUSSELL
Tribune Chief Reporter
THE Davis administration’s much anticipated value added tax decrease to 10 percent will be implemented by no later than January 1, Prime Minister Philip “Brave” Davis said yesterday.
But with the two percent reduction will come the elimination of the zero VAT rating on a variety of items.
According to Mr Davis, a draft bill for the reduction from the current 12 percent rate should have been laid on the table of the House of Assembly yesterday, but drafters did not complete the legislation.
However, Mr Davis said by next week, the document would be presented to Parliament. The House will meet again on Monday.
“The latest will be the 1st of January because we need time for businesses to recalculate their systems,” Mr Davis said following the morning sitting of Parliament when asked for a specific date for the reduction of VAT.
When he addressed the matter in the House of Assembly earlier yesterday, Mr Davis revealed the government’s decision to eliminate the zero-rating under VAT on certain items. He did not say which items this includes, but breadbasket items and medications are currently free of VAT at the point of sale.
An International Monetary Fund September 2021 study has said narrowing the base of the VAT through zero rating and exemptions reduces efficiency, lowers revenue and increases administrative compliance costs.
The study deemed exemptions and zero ratings as an inefficient way of achieving redistribution objectives as the bulk of benefits accrue to high-income households. Redistributive goals are best achieved through targeted cash transfers to households, according to the IMF.
“I am very pleased to announce we are moving forward with this reduction in the VAT rate,” Mr Davis said in his 2021-2022 supplementary budget statement.
“I believe it will help Bahamians and help our economy. And the reduction is being managed in a way that is fiscally responsible.
“The Ministry of Finance team has worked long hours, along with some of the brightest minds at the University of The Bahamas and the government and Public Policy Institute, as well as with international consultants, to perform extensive modelling and financial analysis to ensure that the VAT reduction does not adversely affect our fiscal position.”
He continued: “With the reduction in the VAT rate, we are eliminating the zero-rating under VAT on a variety of items. Price controls are in place to ensure breadbasket items will be fairly priced. The VAT exemption for electricity bills and the special economic zones are untouched.”
Mr Davis said when the tax was initially introduced to the country in January 2015 by the Christie administration, it was deliberately simple in design. However, he said the tax policy has moved away from the original plan and intent.
“The implementation of VAT in The Bahamas was efficient, and we were praised internationally for our very successful launch,” Mr Davis said. “In recent years, however, the country’s tax policy has moved far away from the original plan and intent. Indeed, through the actions of the previous administration, the VAT base has been eroded by the implementation of many classes and types of items being zero-rated.
“These changes were considered by experts to be ill-advised and poorly executed, who believe zero rating schemes are an ineffective and inefficient way to provide relief to the vulnerable in society.
“Instead, there is a preference for targeted relief such as conditional cash transfer programmes. My government is committed to increasing direct cash transfers to families who need the support with the reintroduction of the RISE programme, about which you will hear in more detail from the Minister of Social Services and Urban Development (Obie Wilchcombe).
“Based on the modelling and analysis conducted by my team, we are confident that with the elimination of zero-rating categories, and the economic uplift to consumers, government revenues are protected.
“The model and the analysis of the results will be published on the government’s budget website. I requested that the modelling with respect to the 2018 increase in VAT also be published, but I have been advised that it is conveniently no longer available,” Mr Davis said.
VAT was initially introduced at a rate of 7.5 percent, but later increased to 12 percent by the Minnis administration in 2018.