Vat 'Straw To Break Back' Of Food Retail
By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
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
