Former Barbados PM warns Bahamas that VAT may erode tax base

NASSAU, Bahamas — The former prime minister of Barbados has urged The Bahamas to conduct in-depth studies to determine the likely impact of value-added tax (VAT) on “prices, revenues and the productive sector” since any erosion of the tax base could cause it to fail to generate sufficient revenue.

In a speech to the Grand Bahama Chamber of Commerce on Monday night, Owen Arthur said that the features of the VAT system proposed by the Bahamas government “meet best standards and practices” found in VAT taxation in countries in which it is the primary form of tax.

However, the former prime minister, who implemented VAT in Barbados during his tenure, warned that tax base erosion via VAT’s implementation, or failure to secure broad-based compliance, would hinder the tax’s effectiveness.

He called upon the Bahamian government to undertake significant public outreach and consultation on the legislation, to encourage “strong stakeholder sense of ownership of the new tax”.

His comments in this regard should strike a chord with many in the Bahamian private sector, who have complained about a lack of information and consultation in relation to VAT implementation plans.

“No matter how perfect its features are in their conceptual design, the success of the new tax will depend on the strength and sensitivity surrounding the planning and administration of its introduction,” said the former prime minister.

Arthur also warned of the need to maintain fiscal expenditure discipline after the tax is imposed. “Because of its very nature, the VAT tends to introduce a higher level of buoyancy to the tax system. The growth in revenues will tend to outstrip the growth of the GDP. There will be the appearance that the state is flush with cash, and that extraordinary expenditure claims on the Treasury can be made and sustained. Fiscal disorder can in consequence ensue, triggering in turn a need for adjustment to the VAT rate.”

Speaking in support of the idea of a VAT in The Bahamas in theory, Arthur said that he sees the introduction of a VAT regime as necessary to avoid problematic levels of public debt in The Bahamas and to allow The Bahamas to meet its international obligations to organizations such as the World Trade Organization (WTO).

Arthur said his confidence that The Bahamas can implement VAT well draws upon the fact that VAT was introduced in Barbados “under more challenging circumstances than currently faces The Bahamas as you contemplate its introduction”.

He said: “The VAT was introduced in 1997 at the same time as Barbados started to apply the program of trade liberalization which had been agreed to when it acceded to membership of the WTO in 1994. Its introduction also coincided with the implementation of its obligations, as part of the CSME (Caribbean Single Market and Economy), to reduce its extra-regional tariffs from a high of 45 percent to 20 percent.

“It coincided with the OECD (Organization for Economic Co-operation and Development) Harmful Tax Initiative threat to the functioning of our international business and financial sector that helped to reduce the growth prospects of our economy.

“Above all, the scale of fiscal adjustment that was intended to be accomplished by the move to a VAT by Barbados, far exceeded that now intended in The Bahamas. In Barbados, the VAT was used to replace 11 forms of indirect taxes, and 44 kinds of fees as a means of raising revenue.”

Nonetheless Arthur noted that in The Bahamas a unique situation exists in that the VAT system is intended to replace a system of very high import taxes and there is at the same time “no intention to introduce taxes on income or corporation taxes as exists in other jurisdictions in the Caribbean”.

“The resulting new tax regime will therefore only succeed in generating an equivalent amount of revenue to that which it replaces if great care is first taken to accurately estimate, and then even greater discipline is exercised in maintaining the proposed broad base. To be precise, the introduction of a VAT in The Bahamas will broaden the tax base especially by bringing a number of activities, particularly services, into the tax net.

“But in so far as income and profits will continue to be free of taxes, the overall tax base against which revenue is raised in The Bahamas will be smaller, in relative terms, than that of other CARICOM countries which have a VAT as well as taxes on income,” noted Arthur.

“The proposed rate of the VAT in The Bahamas will be the same as in most other Caribbean countries. With the proposed lowering of the rates of import duties, a VAT at the standard 15 percent rate will only serve its revenue generating objectives if discipline is exercised to maintain its base that it is given to begin with.”

Arthur noted that another major concern would be to ensure compliance.

“The challenge is that the VAT is intended to simplify the tax system, but it is itself a complex tax to design and to administer. To address this challenge, no effort should be spared to design and to have in place a fully competent VAT implementation unit before the VAT is introduced. In addition, the most comprehensive public relations outreach program has to be undertaken.”

Noting the tendency for VAT to hit the pockets of the poor disproportionately, Arthur said it is important to build “special discriminatory features” into the structure of the tax that will allow these proceeds to be redistributed to their advantage.

You might also like