Bahamas Financial Secretary John Rolle made a presentation explaining Value Added Tax (VAT), which is due to be implemented July 1, 2014, to a group of Abaconians during the Abaco Business Outlook held at the Abaco Beach Resort on September 25.
Mr. Rolle explained that the VAT is a replacement tax that rebalances Government revenue without introducing any new taxes on the Bahamian people. He said it would lower the average rates of customs duties and excise taxes by imposing the 15 percent VAT on these goods and a range of services. He said that new revenues from services will offset reduced customs revenue and generate additional net revenue.
On July 1, 2014 government will lower the average rates of customs duties and excise taxes and impose the 15 percent VAT on these goods as well as impose VAT on a range of services. According to Mr. Rolle the new revenues from services will offset any reduced customs revenue plus it will generate additional net revenue.
VAT is levied at each step in the production or distribution of a good or service and is a tax on consumption that is ultimately paid by the end consumer.
He explained that VAT is an input tax on intermediate purchases of goods or services and an output tax for sellers of good and services. The seller collects VAT and remits it to the government after taking credits or deductions for taxes paid on inputs (purchases).
Mr. Rolle said that a VAT Registrant’s sales must exceed a threshold to be able to charge and collect VAT from the consumer.
Mr. Rolle gave an example how VAT will work. First an importer would buy a quantity of food items from the United States. He would then pay VAT (input tax) on the invoice, duty and CIF (cost, insurance and freight). The importer then sells supplies to local restaurant with a markup and charges VAT (output tax) to restaurant. The restaurant then sells meals to customers with markup for profit and operating costs and they in turn charge VAT (output tax) to the customer.
He said that there must be an audit trail to claim credits and to justify that government collects its right share of taxes. Additionally businesses must adapt accounting and IT systems to monitor VAT liabilities, must file monthly VAT returns, must keep good records to justify credits claims and must issue VAT receipts. He added that non-registered firms could face stiff penalties and fines if they attempt to collect VAT from customers
He said that VAT is not to be treated as an operating cost for the registrant because its inputs are netted from the VAT collected from customers and the difference is remitted to Government. He said that Exempt firms may not charge VAT and receive no credit for taxes on input taxes because customers pay VAT indirectly. Additionally since VAT is zero rated, sales attract no VAT, but firms are entitled to input tax credit.
Mr. Rolle explained that participation in trade liberalization makes economic sense and because of this the government must reduce reliance on trade taxes. Additionally the tax base needs to become broader and better linked to the growing sectors of the economy, while strengthening a culture of tax compliance and ensuring that the quantity and quality of government services provided measures up to the expectations of a populace of a high average incomes.
Alternatively Mr. Rolle indicated that the cost of not rebalancing the tax system would lead to an unchecked rise in debt, less capacity to borrow for emergencies, increased vulnerability to shocks like hurricanes and sudden contractions in foreign economies on which we depend for tourists and credit downgrades coupled with an eventual loss of access to credit markets.
According to Mr. Rolle the outcome of this would lead to a much higher tax increase, larger reductions in spending, and possible reduction in public sector employment.
He said that the Government must continue to address cost efficiency issues, but the pace of expenditure adjustments must also be managed, given the likely impacts on private businesses and private sector employment.
He said that by 2017 the government needs to grow annual revenue by at least $500 million relative to the current level of collections of which VAT must provide at least $200 million, other direct measures and reforms need to give at least $200 million and economic growth provides remaining $100 million. The government must also maintain a tight control on spending.
He said that VAT is the choice because it fits into the program of Fiscal Consolidation, it broadens the tax base, increases equity, is superior to sales taxes in collections and enforcement efficiency, is efficient in collection and it is helped by self-compliance.