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Tuesday, February 26, 2013

Value Added Tax (VAT) and The Bahamas: ...Moody's International Credit Rating Agency has assigned value-added tax (VAT) a credit positive ...and estimates it could account for a third of The Bahamas' government revenue by 2016

Moody’s assigns VAT credit positive

Moody’s projects new tax could make up third of govt revenue by 2016, serving as ‘significant catalyst’ in economic reform effort

Guardian Business Editor
Nassau, The Bahamas

An international ratings agency has assigned value-added tax (VAT) a credit positive and estimates it could account for a third of government revenue by 2016.

Moody's official assessment, released yesterday morning, found that VAT will likely be revenue neutral in the first one or two years. The government recently announced it would implement the tax by July 2014. This delay in revenue is due to a large set of zero-rated or tax-exempt goods and services, according to the report, and the elimination of other taxes such as select excise duties and business licensing fees.

"Fiscal revenue gains will become apparent as the VAT system matures," Moody's stated.

"We estimate the gross contribution of VAT revenue will expand to six percent of GDP annually by 2016. This will be a significant catalyst for the government's fiscal consolidation efforts."

Indeed, other countries in the region with VAT systems in place, such as Barbados, Belize and Jamaica, report overall fiscal revenue contribution of about 30 percent, or around eight percent of GDP.

"The ultimate effect of tax reforms, including the VAT, on The Bahamas' creditworthiness will depend on the government's willingness and ability to embed them in a broader fiscal strategy that also begins to reign in the government's current expenditure commitments," the report continued.

Moody's explained that the government's tax base currently stands at less than 20 percent of GDP, which is small compared to other countries in the region. The ratings agency referred to trade-related customs duties as "volatile", and yet it made up 50 percent of the total revenue in 2012.

Most significantly, it noted that this revenue source will likely "shrink" as duties are phased out with World Trade Organization (WTO) ascension.

Moody's also highlighted the "significant tax concessions" in tourism. As a result, this area accounts for only 10 percent of fiscal revenues.

In his mid-year budget communication yesterday, Prime Minister Perry Christie hinted that these concessions could be scaled back as part of the government's aggressive strategy to right the economy.

Last year, according to the government, trade tax made up 9.3 percent of GDP. Property tax accounted for just 1.4 percent, tourism-related taxes 2.1 percent and non-tax revenue 1.4 percent.

"Other tax" made up 4.1 percent, bringing the total revenue composition to less than 20 percent of GDP.

"The VAT is a key element of a broader set of structural reforms introduced this year to expand and diversify the tax base. The reforms reflect the government's commitment to fiscal consolidation," the report said.

Interestingly, the ratings agency made no mention of the government's plan to bring the tax on board by next year. The Christie administration has been criticized for assigning an overly ambitious timeline, most recently by the Council for Concerned Bahamians Abroad.

James Smith, a former minister of state for finance, emphasized yesterday that VAT is not a new idea for The Bahamas. The first study, he said, was conducted in 2002 with the International Monetary Fund (IMF).

"It would appear starting fresh you would need more time. But a lot of the ground work has already been done," he told Guardian Business.

Of all the reforms introducing by Prime Minister Perry Christie in recent times, Smith said VAT is the most significant.

"It's something we have never done before, where we expand tax to cover services. For us, I think it is a dramatic change," he added.

February 26, 2013