Wednesday, November 13, 2013

Value Added Tax (VAT) is viewed by governments as an attractive option it taxes both goods and services

VAT: A regional perspective

Bahamas behind region in implementation of VAT

Guardian News Editor

A 15-minute video on the impact Value Added Tax (VAT) has had on the twin-island state of St. Kitts & Nevis has been making the social media rounds in recent weeks, posted and re-posted by many Bahamians linked in the online community.

The video, moderated by Rev. Conrad Howell of the Turks and Caicos Islands (TCI), was created ahead of what had been the planned April 1, 2013 implementation of VAT in TCI.

The video features a number of prominent citizens of St. Kitts & Nevis, including business leaders, former Minister of Finance Richard Caines, and also everyday citizens outlining the “negative” impacts VAT has had on their economy since its implementation three years ago.

Business leaders speak of having to close their businesses, of the sharp and sudden rise in the cost of living.  Other citizens speak of the stunning decline in their quality of life.

Such reports have increased fears among an already worried Bahamian population preparing for the introduction of VAT at a rate of 15 percent on July 1, 2014.

In the absence of information on the likely impact of VAT on their way of life, and on their economy, many Bahamians view this video as a model of things to come, notwithstanding recent reports from the International Monetary Fund (IMF) that St. Kitts & Nevis is seeing signs of an economic recovery.

Calvin Cable, executive director of the St. Kitts & Nevis Chamber of Industry and Commerce, told National Review that VAT had a “multiplier effect in terms of hardships on the populace”.

Cable said a consumption tax was removed and the VAT of 17 percent was introduced.

Two other taxes, the customs duty and the customs service charge, were retained in addition to the 17 percent VAT, he explained.

“It was tremendous on the cost of living,” Cable said. “You could have felt it in the number of packages being taken out by householders out of the supermarkets because the prices of goods went up pretty high, maybe about 25 percent overnight.”

As a result of VAT, many people in St. Kitts & Nevis cut back significantly, he said; many of them eliminated all luxuries.

“People stopped going out to restaurants to eat and that sort of thing because it was proving to be too much to carry,” he said.

VAT is viewed by governments as an attractive option as it taxes both goods and services.

The current narrow based tax system in The Bahamas has long been in need of an overhaul, according to government officials and various international agencies examining The Bahamas’ tax structure.

Cable also noted that prior to the implementation of VAT, there were very few charges or taxes on services in St. Kitts & Nevis.

“And so, what the population had to deal with now was that services were being charged VAT, which was not the custom before,” he said.

“For instance, doctors fees, lawyers fees, services in the tourism sector — and I know The Bahamas is big on tourism.  For instance, rented cars had to pay the 17 percent.”

Cable said VAT provided a “windfall” for the government in taking from the services sector, “but most of that was coming out of the local population”.

“So the amount of disposable income that they had on their side was drastically reduced and the buying power was drastically diminished,” he said.

In St. Kitts & Nevis, VAT is credited with bolstering the government’s fiscal position, but Cable said it happened “on the backs of the local people”.

Prior to the implementation of VAT, the country experienced debt levels above 200 percent, which made it one of the world’s most indebted countries.

The debt to GDP ratio is now inching closer to the 100 percent mark.

St. Kitts and Nevis’ Minister of Information Nigel Carty previously pointed to the “herculean effort that has been exerted to bring great relief to the country’s fiscal position at such an economically challenging time”.


While The Bahamas’ debt situation has not been as dire as that of St. Kitts & Nevis, it has reached a position where it is now unsustainable.

The Bahamas government has outlined its own efforts to bring relief to this country’s fiscal position.

As we noted in this space last week, government debt as at June 30, 2014 is projected to be $4.9 billion, compared to $2.4 billion as at July 2007.

Over the last two fiscal years, the government has seen a total deficit in excess of $500 million.

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.

With a significant change in the country’s tax system on the horizon, The Bahamas government has not yet produced any studies to show the likely impact VAT will have on the cost of living.

In every sector, there are understandably questions about how this new regime will affect business.

The man and woman on the street are equally concerned, as they already exist in a climate of high unemployment, where many are finding it hard to meet their obligations and disposable spending has been stretched to the limit.

The government is now asking citizens to shoulder the burden of reversing a burdensome debt situation.

Again, there is no doubting that it is time for action.  The chosen route is of course value added tax, which the government says is a central element of its tax reform strategy.

A new IMF report “Tax Reforms for Increased Buoyancy”, which was prepared for the government, notes that The Bahamas has low taxes compared to the rest of the world, excluding Central American countries.

It points out that many countries in the region have already introduced VAT, thus providing “a stable source of tax revenues”.

The report notes further that almost all the countries in the region have taxes on income and profits.  Furthermore, they have high excises on petroleum products.

While The Bahamas is only now moving in the direction of VAT, several of its Caribbean neighbors — among them, Barbados, Jamaica, Trinidad & Tobago — implemented VAT more than a decade ago.

Speaking of the Barbados experience, Lalu Vaswani, president of the Barbados Chamber of Commerce and Industry, described VAT as a “very efficient means of collecting tax as it increases the base on which the taxes can be collected”.

“I think it has been a positive impact, although it was not without its challenges,” Vaswani said in an interview with National Review.

Vaswani said that prior to the implementation of VAT in Barbados in 1997, the country had as many as 11 different types of duties or imposts that could be charged on imports.

“The increased effectiveness of collecting revenue gave the government more scope to do their development projects,” Vaswani said.

“From a business perspective, there are always anxieties associated with changes, and it is always desirable that there is a maximum amount of consultations even when the final positions are not known.

“So there is an understanding from ground level what are the goals, specific objectives and how you propose to do it because very often what you theoretically are trying to do may have a unique challenge, which may be identified before it is implemented and resolved and prevented.”

Former Barbados Prime Minister Owen Arthur noted in a 2010 interview with Erasmus Williams, press secretary to the prime minister of St. Kitts and Nevis, that high debt levels are inevitable in the absence of a tax base to generate the revenue needed to run a country.

“I supported the VAT when I was in opposition in Barbados because I thought it stood the test of reasonableness, but it was absolutely necessary,” said Arthur, whose administration introduced VAT.

“You’re living in a set of countries where year by year, period by period, governments will have to remove import duties.  What are you going to replace them with? And that is the basic question.”

Arthur said VAT created the basis for sustained growth “without fiscal difficulties”.

“It allowed us to be able to introduce programs to aggressively mount and sustain policies to eradicate poverty and we did that by creating the base for sustainable growth in the country,” he said.


The most recent Caribbean country to implement VAT was St. Lucia, which did so just over a year ago at a rate of 15 percent.

Gerard Bergasse, president of the St. Lucia Chamber of Commerce, Industry & Agriculture, noted that VAT pulls more people into the tax net.

“When you are relying on other forms of taxation, they are not as broad based, so you have a much narrower tax base, which means that the tax on those people has to be higher to achieve your revenue targets,” Bergasse told National Review.

“But when you have a broad based tax like VAT, it means that everybody is contributing, so it makes it fairer.  And it does not take the fiscal tool out of government’s hands because they can still zero rate items, or zero rate a basket of goods that they feel would help less advantaged people.”

The Bahamas government’s White Paper on Tax Reform notes that zero-rating a supply implies applying a zero VAT rate and allowing credits for VAT paid on inputs.

It says that zero-rating should definitely be applied to exports as a VAT is designed to tax only domestic consumption.  Other than that, zero-rating should be strictly limited, if utilized at all, the document says.

Bergasse said that based on anecdotal evidence, many people would say that VAT was a necessary evil in St. Lucia.

“I still believe that VAT was the right thing for the government to have done and it’s moving in the right direction,” Bergasse said.

He said while the government is not now experiencing a huge windfall, as far as he is aware its revenue targets have been met.

Bergasse said the Chamber of Commerce supported the implementation of VAT from the beginning and was a part of the government’s pre-implementation VAT team.

Bergasse pointed to the need for proper consultations ahead of the implementation of VAT.

But he recognized that making VAT understandable to a cross-section of people is “very difficult”.

“I will warrant that there are still business people in St. Lucia who still do not understand VAT,” Bergasse said.

“...It is a bit of a complicated tax, so it does take people a while to wrap their heads around it and it does make a difference the way your legislation is structured.  We didn’t get the legislation until very late in the day and even after we got the legislation there are the regulations that go along with it that are very important, because the legislation is the ‘what’; the regulations are the ‘how’.”

He noted that the fundamental change created by VAT is that the business community is changed from being solely taxpayers to being tax collectors.

When properly structured, VAT is a tax on consumption, not business.

In The Bahamas, the proposed VAT legislation and regulations have not yet been released to the public, so the specifics are still unknown.

The government, meanwhile, is planning on increasing public education and awareness in a series of meetings set to begin this week.

Prime Minister Perry Christie has said the July 1 implementation date is not set in stone and he, as minister of finance, needs to be satisfied that businesses and the country at large are ready for the implementation of VAT.

As the government prepares to intensify public education on VAT, it is hoping to quiet what appears to be growing public sentiment against VAT.

November 13, 2013