The existing tax regime can no longer serve the purpose of the expanding Bahamas
Tax Review Nears Completion
By Candia Dames
Nassau, The Bahamas
May/24/04
The Government of The Bahamas intends to prepare a white paper on proposed sweeping reforms to the country’s tax system, according to Minister of State for Finance James Smith.
“The existing tax regime can no longer serve the purpose of the expanding Bahamas and I think it ought to be reformed to reflect the realities and one of those realities is that The Bahamas is essentially a service industry, yet we are getting most of our revenue from taxing goods,” said Minister Smith, who was a guest on the Love 97 programme “Jones and Company” Sunday.
He added, “We need a broader base tax for goods and services and this is something that I’ve been looking into, and will be looking into over the next two or three years if God spares my life - and if I am still in this position.”
Minister Smith said he is awaiting a report from a group of consultants, which is reviewing the tax structure and formulating recommendations for change.
The Value Added Tax (VAT) experts, from the U.K-based Crown Agents group, arrived in The Bahamas several weeks ago to carry out the review.
Minister Smith said VAT or GST (Goods and Services Tax) seems to be the logical form of taxation that the Bahamas should adopt.
In introducing a VAT, the government is likely to reduce some of the existing duty, he pointed out.
“So it would call for rate rebalancing because we have to recover [those funds] somewhere else,” Minister Smith said. “So what we will do is broaden the tax base to include goods and services. In that way, we can reduce the rate on goods and use a much smaller rate on services. The Value Added Tax, if we go that way, also has provisions for tax credits.”
Everyone who is eligible to engage in this form of taxation would have to become registered taxpayers, he said.
Minister Smith explained that they would all have to have an independent tax number, probably tied to National Insurance, that identifies them straight across the board.
While noting that the government “is not re-inventing the wheel here”, Minister Smith also said “there is still a lot of work to be done.”
More than 100 countries use the Value Added Tax system.
Asked if there is a fear in raising taxes, Minister Smith said there is a belief among some people that the rate of taxes being imposed in The Bahamas are sufficiently high to do what the government has to do.
“However, the leakages are also so high that before we raise more rates or even enlarge the tax base, let’s make a really, really Herculean effort to see if we can plug those leakages and see exactly what is the maximum that we’re getting out of this. Your first attack should try and stop as many leakages that you can.”
The 2003-2004 budget contained no new taxes, but a number of revenue enhancement measures, including a plan to plug leakages.
The budget also projected a deficit of $122 million, but Minister Smith has indicated that the deficit will be more than $30 million higher, given that the government paid out $24 million in unbudgeted salary increases for public servants.
A recent report from the Central Bank of The Bahamas indicated that the deficit at the end of this fiscal year is expected to be about $147 million.
But Minister Smith noted that in international terms, the country’s budget deficit is “not that huge.”
“The important thing about a deficit sometimes – more important than the size of it – is the direction of it,” Minister Smith explained. “Are you doing anything to try and curb it because it means beyond a certain point you’d get in a sort of debt dynamics where it becomes even more difficult.
“It spins out of control and then you really have pressures to do some things that people don’t like – devaluations, cutbacks etc. So, our deficit is manageable, but I think we need to continue to do things to stop it from growing.”
He also commented on the National Debt, which, according to the Central Bank stood at $2.369 billion at the end of 2003.
“Right now, The Bahamas is in an envious position in terms of its debt,” Minister Smith said.
He pointed out that about $1.7 billion of the debt is domestic – with a substantial portion of that being owed to government-related entities.
“So if [we] run into a difficulty and [we] have to reschedule, it would not be difficult to do because [we] would be dealing with local institutions,” he said. “We go further south in the Caribbean and we’d find countries where 80 percent of the debt is foreign and [they’re] really in trouble.”
