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Thursday, January 2, 2014

Value Added Tax would be a critical element of tax reform in The Bahamas the country battles significant fiscal deficits ...and alarmingly high debt

VAT storm builds

Year in Review

Guardian News Editor
Nassau, The Bahamas

In recent months, concerns about value-added tax (VAT) have been mounting.  The debate over VAT has emerged as one of the most significant stories in 2013 and the expectation is that it will also be an important story in 2014.

The government has announced that VAT will be introduced on July 1, 2014.

The tax system would be a critical element of tax reform in The Bahamas as the country battles significant fiscal deficits and alarmingly high debt.

Financial Secretary John Rolle has said repeatedly that the cost of inaction would result in an unchecked rise in debt, less capacity to borrow for emergencies, which increases our vulnerability to shocks like hurricanes and sudden contractions in foreign economies on which we depend for tourists.

“There will also be a credit downgrade and eventual loss of access to credit markets,” he warned. “This will result in one outcome: Much higher tax increases, larger reductions in spending, possible reduction in public sector employment [and] scrutiny of the exchange rate parity.”

The Bahamas’ financial future faces a crisis.

On our current path, it is no understatement that we are doomed without action.

Government debt as at June 30, 2014 is projected to be $4.9 billion, compared to $2.4 billion as at July 2007.

The Bahamas has a legacy of high budget deficits.

Over the last two fiscal years, the government has seen a total deficit in excess of $500 million. The projected deficit at the end of 2013/2014 is $529 million.

The government intends to borrow $465 million to finance the projected revenue shortfall in the 2013/2014 fiscal year. This would add to the $650 million the current administration already borrowed.

Almost one out of every four dollars in revenue collected by the government must be allocated to pay the interest charges on the public debt and cover the debt repayment.

This current state of fiscal affairs is worrying on many levels, and it is unsustainable.

In the government’s white paper on tax reform, Prime Minister and Minister of Finance Perry Christie notes that the government’s revenue base is extremely narrow and ill-suited to the expanding needs and demands of modern Bahamian society.

The country’s tax system is out of balance as it predominantly focuses on goods, he pointed out.

It does not share the tax burden with those who are providing services in a way that is either fair or adequate.

The government has decided to go the way of value-added tax to secure an adequate revenue base in support of modern governance.

According to the white paper, the government intends to effect the eventual reductions in import duty rates that will accompany The Bahamas’ accession to the World Trade Organization (WTO), and reduce excise tax rates to compensate for VAT.

As a consumption tax, VAT provides a broader base for government revenue; imposes taxes on goods and services equally and imposes greater discipline on businesses, the white paper says.

It also says it encourages investments by providing incentives to business on capital expenditure, and the audit trail that would be required promotes greater efficiency in the collection of taxes.

In its look at various options for tax reform, the white paper highlights VAT as a more favorable option than a sales tax, which is a tax imposed at the final point of sale.

Agriculture and fisheries; social and community services; health and education services are among the areas that will be exempted.

But exemptions will be kept “to a bare minimum”, the government has advised.

The effectiveness of the tax is tied to many factors, including how it is implemented, tax experts and others with experience in effecting tax reform have said.

The VAT legislation and regulations are now in circulation, but it is unclear when they will be introduced in the House of Assembly.

Christie has said that while July 1 is a target date for implementation, it is not set in stone.

December 30, 2013