Saturday, August 31, 2013

What will be the impact of Value-added tax (VAT) on the cost of goods and services in The Bahamas?

Preparing for VAT

The Nassau Guardian Editorial

The government has set July 1, 2014 as the date for the biggest change to the Bahamian tax system in recent memory. It plans to bring forward a value-added tax (VAT), to create a central revenue service and to cut many customs duty rates.

To inform the people of what will take place the government has published a white paper on VAT that is available for all to see on its website. The government has also pledged a significant public relations campaign to help educate the Bahamian people on the proposed new tax.

The government will have challenges with this education effort. In its white paper, it admits that VAT is one of the more complicated taxes. It involves multi level taxation up the chain of production and distribution and it also includes rebates for some.

The Bahamas has challenges with education. The public school system in New Providence has an average in the national exams somewhere not too far from an F. The technical language of the white paper is inaccessible to the overwhelming majority of our population.

Sweeping tax reform requires the understanding and consent of the people. If the people think something they don’t understand is being forced on them, and it leads to a higher cost of living, the political party that did the deed will pay at the polls. The Progressive Liberal Party (PLP) administration should know this.

While one challenge for the administration will simply be breaking VAT down for regular Bahamians to understand, there are some fundamental questions that will be asked by those who do understand. These are questions the white paper does not answer.

It remains unclear how the imposition of VAT will impact the cost of goods and services across the board.

In fact, the white paper acknowledges that the government is unable at this time to indicate comprehensively either way.

“The effect of VAT on prices will vary as between goods and services and, within the goods category, the effect will depend on the current taxation of individual goods.

The final impact on the price of goods will depend on the extent of reductions in import tariff rates flowing from accession to the WTO,” according to the white paper.

The government attempts to reassure the public by saying that agricultural, food and certain other products that currently benefit from duty free status under the Tariff Act will also be exempt from VAT.

“Similarly, the services also proposed to be exempt from VAT, such as health and education services, etc., should experience no direct change in price under a VAT system,” the white paper adds.

However, Bahamians will simply want to know how much more expensive items at the grocery store will be as a result of this proposed change. How much more expensive will clothing and electronics be? Is there a tax for using the already expensive services of lawyers? Will there be a 15 percent tax at restaurants on top of the 15 percent charged for gratuity?

To answer some of these questions, the government would have to announce its full range of cuts to customs duties. Other answers may be so unacceptable to the people that the government may have to alter its position.

When the official education campaign begins, business owners and professionals will have many questions for the government and its representatives, as will concerned citizens who can understand the magnitude of the change. It is necessary for the government to ensure that it works out the answers to the obvious questions Bahamians will ask before it starts the talking and education tour.

Prime Minister Perry Christie led the government’s communications effort on gambling. He was not well versed on the subject. He confused the issue and said things that were contradictory. The people noticed and rejected the referendum – an initiative the governing party hoped Bahamians would support.

Government bureaucrats and the PLP should not just assume Bahamians will accept VAT because international advisory agencies said we should try it. The people have to think it is better for them and the country. They know little of the details of this move now. If this tax reform is to succeed they must know more and agree to it by the implementation date.

August 31, 2013