Wednesday, April 9, 2014

Value Added Tax (VAT) would likely change the retail grocery industry in The Bahamas “for the worst” ...says Philip Beneby, the Retail Grocers Association’s president

Vat 'Straw To Break Back' Of Food Retail

Tribune Business Editor

Food prices would have increased by more than 7 per cent under a 15 per cent Value-Added Tax (VAT), with a sector body warning this tax in any form will be the “straw to break the back of our industry”.

Philip Beneby, the Retail Grocers Association’s president, in a February 2014 letter to the Coalition for Responsible Taxation, warned that VAT would likely change the industry “for the worst”, pointing out that a net eight food stores had closed across New Providence and Grand Bahama since 2009.

The letter, obtained by Tribune Business, has come out as the food retail and wholesale industry prepares to hold another meeting today with Shane Gibson, minister of labour and national insurance, over potential price control reforms to mitigate VAT’s impact.

Mr Beneby, speaking to this newspaper yesterday, confirmed the meeting amid industry hopes of an increase to the 43-year gross margin on price controlled items of 18.67 per cent.

“We are hoping we have a positive response from him in that regard, as far as the increase to the price control gross margin,” he told Tribune Business. “We are looking for, pushing for a mark-up increase from 23 per cent to 39 per cent. That’s what we’re pressing for.”

In his letter to Coalition co-chair Robert Myers, the Retail Grocers Association president said price control restrictions “meant that our businesses are slowly being strangled”. The 18.67 per cent permitted gross margin fell well short of the 25 per cent cost structures maintained by many retailers, turning these items into loss leaders.

The meeting with Mr Gibson comes amid other concerns for the industry, which include Business Licence fees that have more than doubled, plus hefty real property tax payments.

The Government’s Business Licence Unit has to-date rejected the food retail/wholesale industry’s request that it be allowed to pay the annual fee in stages.

Yet Mr Beneby conceded that some members felt they were being treated unfairly, and were subject to ‘double standards’, as they were hearing other businesses and industries were being allowed to make ‘phased’ Business Licence fee payments.

“They’re feeling it,” he told Tribune Business of the Business Licence fee increases. “It’s really difficult for them to find one lump sum payment, especially with having to deal with real property tax, National Insurance Board and all these other things and payments at the same time.

“All these things have to be in line before you get the Business Licence. With the way the economy is, the way business is and all these other operating costs, it’s difficult.”

Rupert Roberts, Super Value’s owner and president, told Tribune Business that the Government’s policies were effectively subsidising food purchases by the rich, “millionaires and billionaires”, and making 60 per cent of their purchases duty-free.

He reiterated that the combined effect of VAT ($6 million at 15 per cent); the increase in Business Licence fees to $3.1 million; and real property tax would be to increase Super Value’s annual tax burden by around $12 million.

In his February 2014 letter, Mr Beneby said the premise that duty reductions would offset VAT’s impact did not apply to the food retail and wholesale industry, which operates on gross margin dollars - not percentages.

“Our expense base is expected to increase with the introduction of VAT, and we will be required to produce the same level of gross margin dollars from a lower cost base,” Mr Beneby told the Coalition’s co-chair, Robert Myers.

“In order to achieve this, we have calculated that overall grocery prices will increase approximately 7 per cent, although this increase will be much higher on non-price controlled items to offset the restrictions on increased prices on bread basket items.”

Mr Beneby confirmed that the Government had dismissed the Association’s plea to impose a flat 7.5 per cent VAT rate across all food and grocery sales, expressing particular concern about the plan to classify the majority of the industry’s inventory as ‘VAT exempt’.

By applying this treatment to products that are ‘breadbasket items’ and/or price controlled, the Retail Grocers Association chief said food stores would be unable to reclaim the VAT ‘input tax’ payments they make in proportion to these supplies.

As a result, food retailers will be unable to recover between 50-80 per cent of their VAT ‘input payments’ on costs such as rent and utilities. If VAT had been introduced at 15 per cent, they would have seen such costs increase by between 7.5 per cent to 12 per cent.

“A review of the sales mix indicates that approximately 50 per cent to 60 per cent of current sales generated by the larger retail grocery stores, and 75 per cent to 80 per cent of sales generated by the smaller retail grocery stores, will be classified as Exempt (under the draft legislation), thus reducing the reclaimable VAT on overheads by the same percentage,” Mr Beneby warned.

“The impact of this issue will be the increase in overhead costs such as rent, utilities, security, marketing, office, repairs and maintenance, etc, by 7.5 per cent to 12 per cent.

“ Our businesses are in no condition to absorb these costs and they will be passed on to consumers in the form of higher prices. This increase will be in addition to the 7 per cent noted earlier.”

Mr Beneby’s letter described the Association’s three VAT-related meetings with Ministry of Finance officials as “a waste of time, as the officials are simply not listening to our concerns and suggestions, nor to the supporting information we have provided that contradicts much of their positions.

“It is extremely frustrating to have individuals, who have never operated a business, never have had to worry about meeting sales targets, or ensuring payroll is financed, dictating to us what is best for our business,” he added.

“From our perspective, they are not concerned about the well being of our businesses and the many thousands of Bahamians that are, directly and indirectly, employed by us and whose jobs and livelihoods are at risk.”

Summing up VAT’s likely impact regardless of whatever rate was chosen, Mr Beneby said: “It should be noted that 16 major food stores have closed in New Providence/Grand Bahama since 2009, with only eight of them re-opening. We know that some of our members are currently incurring losses, and unfortunately we expect further store closures with the implementation of VAT under its proposed format.

“Our customers are already under duress, as can be seen in the shift in their spending habits, and lack the ability to absorb significant increases in the cost of groceries. The implementation of VAT, under its proposed form, or indeed any form, may be the straw to break the back of our industry, and we are in no doubt that the face of the Bahamian retail grocery landscape will change for the worst.”

Mr Beneby warned that the industry was opposed to shelf pricing that ‘broke out’ the amount of VAT payable by consumers. He pointed out that in most countries, VAT was included in the total price, with the tax amount shown on the receipt.

Railing against shelf pricing that was exclusive of VAT, he said: “Many Bahamian consumers lack the capability to budget, and will not be able to relate their spending ability to their desired purchases.

“VAT exclusive pricing will lead to mass confusion at registers, with inevitable delays and disgruntled customers. We recommended that the pricing of goods be inclusive of VAT, but this was dismissed.”

Mr Beneby also described the Government’s ‘bonded warehouse’ plan, designed to prevent ‘double taxation’ and ease the VAT transition, as “completely impractical” and lacking support from the Association’s members.

The concerns, he added, related to “space restrictions, the burdens that will be imposed on the ease of business, the lack of confidence in the Department of Customs to execute, and the costs of inspections far outweigh any benefits to a bonded warehouse”.

“Without a credit system in place of duty already paid, larger importers and wholesalers will reduce bulk purchases or will temporarily cease importing food items – this will lead to increased prices or food shortages,” Mr Beneby warned.

“We recommend that businesses have their auditors provide a certificate for tax credits as at June 30, 2014. This certificate and the supporting information would be made available for audit by the Department of Customs.”

Mr Beneby also noted that food retailers and wholesalers had suffered a 20 per cent increase in freight costs, something they blamed on the “monopoly” created by the new Arawak Cay port.

“The increase in operating costs has come at a time when middle and lower income consumers are dramatically shifting their shopping habits to spending less and focusing more on bread basket items, while upper income consumers are abandoning Bahamian retail stores to shop on-line with US based establishments,” Mr Beneby added.

April 07, 2014