Thursday, September 19, 2013

Opinions on the grim prediction of the state of the Bahamian economy ...after the value added tax (VAT) is implemented

VAT Panic Increases

By Kendea Smith
The Bahama Journal

A prominent businessman and a well-known economist have differing opinions on the Nassau Institute’s grim prediction of the state of the economy after the value added tax is implemented next year.

According to the institute’s 48-page paper titled “The economic consequences of value added tax” David Godsell, a third year PHD student of Queen’s University School of Business, who authored the paper, says labourers can expect a decline in real wages which will in turn lead to a decline in the labour supply.

He adds that the government would stand to lose $165 million in revenue and the private sector would suffer $103 million in losses.

“Businesses and employers with VAT-based sales can expect reduced demand for goods and services, which will in turn reduce their demand for labour. Under extraordinarily conservative estimates biasing towards heightened government revenues, we forecast VAT adoption will lead to a $165 million decline in government revenues,” he said.

“Simultaneously, we estimate VAT adoption will burden the private sector with $103 million in annually recurring compliance costs and an average of $4,300 in compliance start-up costs for each VAT registrant.”

The report concludes by pointing to failed VAT adoptions in countries similar to The Bahamas and by highlighting contemporary efforts to reduce budget deficits through reductions in government spending.

Upon hearing the news, former Chamber of Commerce President Dionisio D’ Aguilar said this report fuels the concerns of the business community that already fears the tax.

“The government has not made the case where the introduction of value added tax is not going to create an inflationary situation. I can’t see where it is not going to cause prices not to go up. And everybody is talking about prices going up from anywhere between 10 and 15 per cent in order to accommodate this increase in value added tax especially those in the service industry,” he told the Bahama Journal in an interview.

“For companies that don’t import a lot you are now having to collect 15 additional per cent. You either add it on to your price or you eat a portion of it because your customer just isn’t willing to pay an additional 15 per cent for the service that you are selling. So there is no doubt in my mind that it is going to cost an inflation effect because when prices go up and wages don’t budge you are going to have a decrease in economic activity.”

Mr. D’Aguilar pointed out that most businesspeople understand that the government needs to create more revenue because it is spending more than it is taking in.

But he said economists should come together to find other ways to achieve that goal.

“Instead of borrowing the money they want to just get it from tax revenue. So basically you are taking it out of the economy to pay for what you are already spending. It is not as if the economy is going to increase because it is already spending that money. It is running huge deficits,” the businessman said.

“No one is excited about the introduction of new taxes. Anytime you increase taxes there is a huge pull back. The government has one of two choices – it can either increase what it brings in or reduce what it spends. Now, if it reduces what it spends one might argue that that too can cause an economy and cause a recession. The fact of the matter is I agree to a certain degree with what the Nassau Institute has to say. All of these businesses now have to change the way that they do business. You have to pay more taxes to the government, you have to track it more and it is very depressing for a businessperson. It doesn’t get me excited to expand my business.”

But State Minister for Finance James Smith disagrees.

He argues that the government has no choice but to introduce a new tax system because the government’s spending habits cannot be sustained.

“No services are now taxed directly and the VAT will now take into account so at the very least you will be taxing both goods and services. So the government should get more revenue. No one can predict the outcome of the introduction of a new fiscal regime – involving a new tax. But it is highly probable that the government would receive increased revenues and that is likely to reduce the overall deficit,” he said.

“There are a couple of things that are being overlooked. The government walked into a huge deficit and huge build up in debt. If that continues and nothing is done about it the country would be worst off, even the ones that are complaining will complain more if you have to devalue you currency or because of a series of downgrades from international agencies or the inability to even borrow money or that you cannot put in place the necessary things that governments do – like education, health care and law and order.

“You can have a form of chaos if we continue down the road we are going.”

Mr. D’ Aguilar is now urging the government to present the information on VAT as soon as possible to decrease the panic among businesspersons.

“They need to get ahead of this and explain and say look this is what we think is going to happen. The fact that they are just letting it out drips and drabs of information is annoying. For example, what is the rate of duty going to be once we introduce VAT? That is a critical number. Get it out there,” he said.

“We are eight months away from this thing being introduced and it is still very fuzzy on how this is going to work.”

Prime Minister Perry Christie said back in February that, “Intended with the introduction of this new system it is also proposed to affect the eventual reduction in import duties that will accommodate The Bahamas’ accession to the WTO, to reduce excise tax rates to compensate for the VAT, eliminate the business licence tax as currently structured and to replace the hotel occupancy tax.”

The prime minister said the new proposed tax system will also level the playing field for the poorest and wealthiest Bahamians.

VAT is expected to come into effect on July 1, 2014.

September 18, 2013

Jones Bahamas