The fiscal reform series: About that VAT
The views and commentaries on the proposed value-added tax (VAT) system have been as diverse as they have been inconsistent. What makes the discussion even more interesting is that the divergent opinions have come from economists, experts in this form of taxation and industry leaders.
There is often the tendency for facts to either be lost or manipulated in a prolonged debate, with the loudest or most frequent message being perceived as the ultimate truth. It is therefore important that we filter out the proverbial noise in the market and unravel the actual facts that will enable us to develop our own opinions on the proposed VAT framework. In this article we briefly consider the various utterances made by both local and foreign individuals as they chimed in on the ongoing debate on VAT in The Bahamas. We will subsequently embark on the tasking journey of understanding VAT and what it means for the average Bahamian.
The Barbados experience
It was reported a number of weeks ago that the Governor of the Central Bank of Barbados, Dr. Delisle Worrell, had indicated that VAT is an anti-tourism tax and had hurt that country’s local industry. Worrell was also reported as stating that the tax is very complicated and suggested his preference for a simple sales tax. We will examine sales tax as an alternative later.
A few days after the aforesaid report on the comments of Worrell, The Nassau Guardian quoted Lalu Vaswani, president of the Barbados Chamber of Commerce and Industry (BCCI), as saying that VAT has been good for the economy of and businesses in Barbados. Vaswani noted the level of concern and anxiety within Barbados prior to the implementation of VAT; an experience that seems similar to the current pre-VAT environment in The Bahamas. Of particular note was his reference to an adage that a rope in a dark room feels like a snake. More recently, Mark Shorey – a VAT expert out of Barbados with about 20 years experience in VAT consultancy and a member of the VAT implementation unit – weighed in on the VAT debate in The Bahamas. Shorey remarked that anti-VAT hoteliers will not be satisfied and indicated that training closer to implementation may be more effective. In the end, Shorey suggested, the implementation of VAT in Barbados was successful and is a model that could help The Bahamas.
Chronicles of the local commentaries
Comments attributed to past and present government officials with responsibility within the Ministry of Finance have been consistent insofar as they relate to the urgent need to address our fiscal imbalance. These individuals have also been backed by some locally respected professionals who have cautioned that we are between a rock and a hard place with the window for remediation closing with each passing day. A common concern has been the rate at which VAT is introduced, with recommendations for a rate lower than the proposed 15 percent.
The main opponents of VAT from the business community have been fervent in their campaign against this form of taxation, arguing that it is not appropriate for The Bahamas and would increase the cost of living while further shrinking the middle class. A study of jurisdictions that have implemented VAT will show that the fear and anxiety being expressed is not unique to The Bahamas, nor is it unusual for various interest groups to voice their concerns. The emergence of groups that purportedly represent the populace and average citizens has also inserted a unique dimension to the ongoing debate on VAT.
WTO accession and a replacement tax
We know that the government requires among other measures on the expenditure side, additional revenue to correct our structural recurrent deficit. However, the recent revelation by the co-chair of the Coalition for Responsible Taxation that the group was not aware that the reduction in tariff rates has to be immediate and cannot be phased in as The Bahamas seeks to join the WTO is indeed food for thought. This raises the question of how effective the government has been in explaining the link between our efforts to join the WTO and the introduction of VAT.
It appears that the case for our urgent accession to the WTO has not been adequately presented to the average Bahamian. It can also be argued that not enough has been said to sensitize the public to the fact that VAT is intended to replace the significant amount of revenue the government will be forfeiting as tariff rates are reduced to facilitate our accession to the WTO. Perhaps this is an indication of the oft manifested culture of addressing matters in vacuums or isolation without due attention to the bigger picture. It follows therefore that if VAT on goods is expected to replace existing tariffs on goods, the introduction of VAT should be neutral in relation to government revenue. This will not however be the case as the government expects to raise some $200 million in additional revenue from VAT on services which have been untaxed for quite some time even though our economy is for the most part service based.
The progressive aspect of a regressive tax
There is no doubt that VAT cannot be classified as a progressive form of taxation and is generally regarded as a regressive tax. In this regard, there have been numerous criticisms of this proposed tax system and suggestions for alternatives which are deemed to be more progressive in nature, including income tax.
Warren Buffett – the man often referred to as the Oracle of Omaha and regarded as one of the greatest investors of all time – has been a proponent of the rich paying more taxes in support of the philosophy of U.S. President Barack Obama. Locally, businessman Tennyson Wells has been quoted as stating a similar view, albeit from the perspective of a different school of thought on welfare, allocation of the tax burden and the trickle down paradigm. Nevertheless, as research has shown that individuals who are more well off spend a higher percentage of their income on services than goods when compared to the less well off, one can conclude that the introduction of VAT will increase the amount of taxes paid by the upper class in our country over that paid by the lower class. It should be noted that this does not eliminate the expected increase in the cost of doing business for companies, though this will ultimately be borne by the consumer.
VAT versus sales tax
The complicated nature of a VAT system has been a major component of the concerns raised by the private sector with preference for a sales tax being expressed. The government had documented its rationale for proposing VAT as opposed to other forms of taxation in the white paper released in February 2013. While the paper did not provide ample details on the analysis conducted on each type of tax prior to the selection of VAT, the superiority of VAT over sales tax in terms of enforcement mechanisms is apparent.
It is therefore understandable why the government would prefer VAT over a simple sales tax. It is a known fact and Shorey confirmed that VAT has inbuilt self-policing and compliance features which reduce the level of resources that the government will have to allocate to its compliance efforts. In effect, VAT creates a level of accountability, responsibility and transparency that makes registrants and in some cases consumers, agents of the Central Revenue Agency with significant incentives and penalties ensuring that the government receives VAT payments. On the other side, it is expected that businesses will prefer a sales tax system which is easy to administer because it requires the collection of taxes at the point of sale instead of throughout the production/value chain as required in a VAT regime.
The German-born American artist Hans Hofmann famously stated that "the ability to simplify means to eliminate the unnecessary so that the necessary may speak". It is time to rid ourselves of the unnecessary commentary in the VAT debate and focus on the facts necessary to move the discussion on fiscal and tax reform forward. Only then can a constructive discussion about the VAT that has become associated with fear and uncertainty, as well as proposals for viable alternatives, begin. Next week we will take a deeper dive into the features of VAT and the contents of the draft VAT Bill and regulations. In the interim, the various stakeholders need to disclose all the relevant details and simplify the information necessary for all to comprehend.
• Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to firstname.lastname@example.org.
April 01, 2014