It was quite apparent from many of the e-mails received, that Bahamians are craving simplified information about the VAT.
Even when this is provided there will always be the question of whether VAT will be the appropriate form of taxation for The Bahamas.
The truth is that countries sometimes have necessity imposed upon them, either because their economies require restructuring in a manner with which the principles of a VAT seem commensurate or because they are forced to do so by external influences.
Alan Tate, an International Monetary Fund (IMF) official and a foremost writer on indirect taxation noted that countries adopt a VAT because they are dissatisfied with their existing tax structure.
He also stated that this dissatisfaction falls into one, or possibly all of four categories:
(1) the existing sales taxes are unsatisfactory;
(2) a customs union requires discriminatory border taxes to be abolished;
(3) a reduction in other taxation is sought;
(4) the evolution of the tax system has not kept pace with the development of the economy.
Apart from the dilemma posed by the pending Free Trade Area of the Americas (FTAA), fiscal problems have been afflicting many economies, especially small developing states, with a consequential effect on public financing.
This state of affairs has led several countries around the world to restructure their tax systems.
In fact, the European Union (EU) requires that all of its members institute a VAT system. It is also anticipated that the FTAA will not be tolerant of tax systems that allow imposition of customs import duties.
Therefore, the gradual process of import tariff reductions will be accelerated to complete abolition in the near future; perhaps as soon as 2005.
As more of The Bahamas’ trading partners move over to this form of indirect taxation the pressure on this country to change will gain momentum. Perhaps this time is rapidly approaching.
A review of the history of the implementation of VAT in the Caribbean and elsewhere reveals that most countries which went this route did economic impact studies to determine whether pertinent economic indicators were favourable to its imposition.
Using Barbados, Trinidad and Tobago and Jamaica as examples, some of the considerations uppermost in the minds of authorities included: the likely impact on the industry sectors; the likely impact on the price of basic food items; the likely impact on tourism; the level of Gross Domestic Product (GDP); the amount of revenue needed; the standard rate necessary to achieve the revenue needed; the number and types of goods to be zero-rated and the services that should be exempted.
They also did reviews of the existing tax system to determine what taxes should be abolished or reduced in favour of the VAT and whether there would still be a shortfall.
In the case of The Bahamas, it is not likely that a VAT with an acceptable standard rate of about 15 per cent to 17 per cent would compensate for the removal of import duties and other consumer taxes if imposed only on goods, whether imported or locally produced.
However, as was stated in last week?s column, VAT being a tax on goods and services will have a broader base, falling on goods and services that had hitherto not been taxed. It is this broad base that makes VAT so effective as a revenue earner.
Being a broad-based tax, it can be applied at a low rate and yet have a high yield. It can therefore be used to simplify a tax system by rolling the several and different rates of consumption taxes and other indirect taxes into a single tax.
Again, it is important to note that only business persons of the size and capability to adhere to good record-keeping should be in the VAT system.
Such persons are chosen on the basis of the size of their annual sales.
In Trinidad and Tobago, person making annual gross sales of $100,000, in Jamaica persons making $144,000 in annual gross sales and in Barbados persons making $60,000 in annual gross sales are registered for the VAT system.
However, the law may set conditions under which persons operating below the threshold level can be registered.
There will naturally be fears that people and businesses in The Bahamas may try to avoid paying VAT.
It is important to note that VAT, once efficiently managed, is difficult to evade because it is self-policing. In order for a registrant to satisfy a claim for input tax, he or she must have relevant invoices.
Because The Bahamas is heavily dependent on tourism and its ancillary services, at a time when global competition in the tourism industry is so acute, there is need to carefully monitor the impact of cost on the industry.
In most tourism destinations like Barbados and The Bahamas the principal concerns are with accommodation and food.
There is some thinking that once the cost of accommodation is kept at acceptable levels, other costs can be allowed to follow market forces.
Indeed, some countries have employed this approach and have either introduced a special rate on accommodation in hotels and guest houses. In any event, it is accepted hat hotel accommodation should be taxed.
This approach, however, is affected by the recent phenomenon of all-inclusiveness which can include not only accommodation and food but also ancillary services like marine entertainment.
The Bahamas should be forewarned that governments? insistence on segregation of costs is usually met by stubborn resistance from the private sector.
The presence of casinos also plays an important role in tourism in The Bahamas. This is the type of industry that does not lend itself easily to a VAT and to some extent it should be exempted, with the regular licence fees or similar impositions forming part of the revenue structure.
In any event, an economic review of the current tax and revenue structure should be geared towards avoiding a reduction of revenue from this and similar concerns like eco-tourism.
In almost all countries, The Bahamas being no exception, certain goods like petroleum products, tobacco products and alcoholic beverages have traditionally been high-level providers of revenue.
Most countries introducing VAT have adopted measures within the VAT system to maintain this high level of revenue.
In any system involving a VAT there are at least four options available to government.
These are: the application of the standard rate, application of a special rate, exemption of the service and zero-rating of goods and services.
The standard rate is normally the highest rate and is applied to those goods and services from which it is considered appropriate to raise maximum revenue. Consumer durables and luxuries like television sets and jewelry fall into this category.
The special rate is normally applied to goods and services which it is believed should contribute to the revenue but whose continued viability could be seriously impaired by application of a high rate of taxation.
It is generally accepted that hotel accommodation should carry a tax but in most instances the standard rate of tax is considered too high for the health of the industry.
In Barbados where the standard rate is 15 percent, a special rate of 7.5 percent or half of the standard rate is applied.
In Trinidad and Tobago where the standard VAT rate is also 15 percent, hotel accommodation is not affected by VAT but is taxed at a lower rate under a different tax regime.
There are some goods and services that because of their significance as basic to the health, peace and infrastructure of the society, it would be unproductive to risk a price rise by virtue of taxation.
Medicines and most basic food items like milk, rice, potatoes and vegetables pay zero percent.
Taxing goods at the rate of zero percent creates a distinct advantage over any other treatment. Absolutely no tax stays with the business offering goods and/or services for sale because the business is in the system and is allowed to submit returns and to claim all input tax paid. This would ensure that tax paid on things like electricity, telephones, capital goods and so on, is refunded.
Where it is difficult or impossible to determine ?value added? or where it is not deemed necessary to refund the minimum collateral tax impacting transactions of the services, they are placed in a category known as “exempt”. Financial services and medical services usually fall in this category.
In the case of exempt services, the business is not permitted to register for exemptions and even if is also engaged in the sale of taxable goods and/or services, it normally gets no credit for exemptions except in special circumstances to be decided by the authorities such as the Customs Department on a case-by-case basis.
If The Bahamas introduces a VAT, the principal challenges to the business community here will be in record-keeping.
VAT requires precise and extensive record keeping and invoicing. This may mean expenditure by several business houses, especially the smaller ones, to bring their record keeping capacity up to an acceptable level. Some people see this as a good thing for business generally.
VAT is known as an accountants? dream. On the assumption that The Bahamas adopts a VAT, you will perhaps see a proliferation of accountants here as there is in Barbados.
Government will also have to ensure that the cost of developing, staffing, equipping and managing the system does not get out of hand.
Most government, especially in developing countries, would want to keep costs of managing the system below two percent of revenue.
Some Caribbean governments have adopted measures like tax credits through their Inland Revenue Department to persons with incomes below a certain level. Charitable and sporting organisations have also been given exempt consideration.
These are just general observations based on a critical analysis of VAT in the rest of the Caribbean.
It is against this background that I truly believe that despite the present concern, fears and opposition to its introduction, a VAT would be a wonderful thing for The Bahamas.
By Hayden Boyce, The Nassau Guardian
