Saturday, November 30, 2013

National Anxieties over Value Added Tax (VAT)

Young Man's View: National Anxiety Over Vat


TODAY, as national anxieties are being expressed about Value Added Tax (VAT) and our country faces uncertain times, I’ve decided to take a cursory glance at this hot button topic with a view to expanding the discussion from various angles, from the local and international perspectives to more technical and scientific points of view, in a series of columns in the next week and thereafter. Yes, while one recognises that we’re facing an unsustainable debt to GDP ratio and, moreover, that we must reform our system and restructure our broken methods of tax collections, the government’s thrust to implement VAT on July 1, 2014 is nonsensical and absolutely farfetched.
There is no question that the perpetual gap between expenditure and revenue has put us in a very precarious position, a position that demands some type of real action but VAT is only one potential solution. Notwithstanding the fact that one of the PLP’s election mantras centred around ‘no new taxes’, to introduce a form of taxation such as VAT, without enough lead time to allow for proper dialogue, has created uncertainty in the country, not only among the business community but everyday, average Bahamians. The aforesaid, combined with an incongruously optimistic, impulsive approach to tax reform has forced the government into what appears to be a schizophrenic economic ramble where Bahamians are now being forced to hastily take a bitter pill.
As one learned friend of mine told me: “The debate on VAT forces those of us in the so-called responsible element of society to abandon the ‘I told so posture.’ And so, we’re now finding ourselves in the awkward position of having to provide the government with the ideas that they ought to have had and which they claimed to have possessed on day one. Thankfully the Bahamian citizenry have responded in such a way and are providing enough creativity that they just might bail this hapless crew out of their dilemma. It’s my hope that Bahamians remember this when it is time to punish them!”
And so, why VAT? Thus far, I haven’t seen any feasibility study showing where the government set about comparatively analysing the various forms of taxation. I know that in a paper a few years ago the IMF suggested that the Bahamas’ government “strengthen administration of existing property and trade taxes, review FDI (Foreign Direct Investment) incentives and shift the tax base to domestic consumption--endorsing the adoption of a broad-based VAT.” So, is the choice of VAT simply based on the IMF’s recommendations or did the government explore other options, say income tax or, for that matter, simply organising and launching an internal revenue service that collects all outstanding government debt and, even more, passing legislation that proffers serious penalties for tax cheats. It seems to me that rather than explore all our options, the government has capitulated to the international credit agencies!
Why can’t we look for creative means to forego or prevent our descent down the slippery slope on which many countries have found themselves?
Make no bones about it, in the absence of proper controls relative to corruption and waste, VAT will be a disproportionately painful experience for the Bahamian middle class. As a friend told me, “so much for believing in Bahamians!” The most conservative VAT impact estimate predicts anywhere from five to 10 per cent increase in the cost of living and a similar reduction in disposable income. What’s more, financial analysts forecast that the implementation of VAT will be revenue neutral or negative for the first two to three years! Frankly, such a tax manoeuvre, with no direct impact for two to three years, while the cost of living and doing business increases, could cause unrecoverable economic impairments and perhaps result in drastic fiscal measure being taken, for example, the much dreaded devaluation of our dollar. And so, we should not introduce such a radical change in tax structure without a proper impact assessment study and some idea of how to mitigate damage!

In my view VAT is being brought to the public in a haphazard, clandestine and non-transparent fashion and it appears that the only people who know what VAT will entail, once rolled out, are key Cabinet members, not even backbenchers and definitely not the Opposition.
In a 2009 column, I wrote “the antiquated Customs Management Act must be amended to protect the revenue base in Freeport, loopholes in the Business License Act must be closed and casino and local/foreign-owned real property taxes must be collected. According to a 2007 Auditor General report, there was nearly $400 million in outstanding real property taxes owed to the government. This amount has no doubt increased and, if the reigns of revenue collection are tightened, the country could unquestionably achieve a budget surplus. A corporate tax and taxes on profits, revenues and/or assets under management of international clients/companies must also be levied.”
One knows that the implementation of VAT, in any form, could only be as good as the collections agency assigned to ensure that taxes are paid to the government!
Consecutive governments have historically benefited by providing political patronage by condoning non-payment of gazetted government fees, whether at the Mortgage Corporation, the National Insurance Board, BEC or elsewhere. These administrations have created a culture of entitlement, even in instances where the benefits are paid for by the public purse. Frankly, before any new tax is introduced, we have to destroy the culture of entitlement and demand that all citizens, rich or poor, FNM or PLP, pay their way according to agreed terms. This very point has been the hot potato that Bahamians have taken advantage of and, quite honestly, the losses to the public treasury amount to billions of dollars.
There is a sizeable 8,000 pound gorilla that we refuse to acknowledge, that is, that a portion of the loss of government funds is, I believe, due to some form of corruption.
Bahamians will need to decide if we prefer to maintain the benefit of a few at the expense of huge financial pain for the many!
Accusations of corruption must be dealt with at all levels or any new tax, including VAT, will find itself with the same headaches as all the others. In the Bahamas, the cost of business and accrued costs to government is inflated by graft and accusations of bribery!
While it is commonly bandied about that the net exposure of the Bahamas government sits at 4.9 billion dollars, it is more in the order of 6.9 billion when one takes into account government guarantees. Indeed, it’s high time that outstanding taxes be collected, from the $400-$500 million in outstanding property taxes to the accounts receivables at the Princess Margaret Hospital that are in the order of one billion dollars to millions of dollars owed to NIB to millions in unsettled customs duties to debts of $70 million owed to the Mortgage Corporation to accounts receivables at BEC that sit near $100 million to millions owed to Water and Sewerage. At present, the Bahamas government is operating on an overdraft of an astounding $200 million dollars!
With all these bills outstanding and no one being forced to pay them (via court action, confiscations, etc), the only solvent “national bank” - NIB - is being forced to buy useless debt in order to keep the government afloat!
In a country of scarce resources and rampant consumerism, it is high-time that those Bahamians living beyond their means and in constant pursuit of material possessions most likely bought on credit be prudent spenders and heed former Prime Minister Hubert Ingraham’s admonition not to “hang (their) hats higher than (they) could reach.”
As a nation we must move from an economic model that seems stuck in a time-warp, which focuses on year-round tourism and financial services, to a competitive diversified model that expands public revenue and liberalises our economy.
In order to contain the ballooning deficit and strengthen the economy, the government must continue to streamline expenditures and even more, invest in teaching citizens new skills and encourage entrepreneurship.
Two of the main factors of production are human capital and entrepreneurship, with the former referring to increasing the knowledge and skills of workers through education and experience and thereby widening employment opportunities and the latter, developing new ideas, taking financial risks to develop ideas and coordinating the production and sale of goods and services.
November 25, 2013