New Tax Plans Eyed - 1-, 2004 – 30: 1
With selective taxes such as Customs duties, Gaming and Departure providing the bulk of government revenue that at least three alternative tax impositions are being reviewed.
As The Bahamas considers becoming part of world trading blocs, Minister of State for Finance, Senator James Smith said Thursday, consideration was being given to: a sales tax, a payroll tax and a value added tax (VAT), considered part of a "level playing field" required for individual countries to receive the full benefits of global trade.
Addressing the Abaco Chamber of Commerce on "Tax Alternatives under Trade Liberalisation," Senator Smith said while the country's existing revenue system has served well, "the time has come to critically review it to determine whether it meets the needs of a modern Bahamas."
It is widely accepted that a tax regime should be evaluated in terms of its efficiency and fairness in the process of raising revenue as well as the cost of administration and the cost to the taxpayer.
Moreover, expert studies have concluded that the existing system of customs and stamp duties are distortionary and certainly not well structured for the development of local production nor increasing the efficiency of local commercial and industrial activities in the long term.
"It would not be prudent to ignore these findings," Senator Smith said. "Indeed, we are duty bound to consider seriously any sound technical advice which we receive."
Reviewing the alternative tax options against the government's policy background of no taxes on income or capital and the nature of the Bahamian economy, Senator Smith gave brief outlines of: sales taxes, payroll taxes and value added taxes (VAT), sometimes referred to as goods and services taxes (GST),
It was noted that the VAT option is used in some form, in more than 120 countries, including Barbados, Jamaica, Trinidad and Tobago, Haiti, and Great Britain, where it was introduced in 1971. It has been described as a difficult-to-understand and challenging system.
Value-added tax is a general consumption tax assessed on the value added to goods and services. It applies to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer, and not companies.
"All governments of The Bahamas, including the current administration has made it clear that there will be no taxes levied on income or capital nor would a tax regime be introduced that would adversely affect the competitiveness of our financial services sector," Senator Smith said. "Therefore, any attempt to alter or change our tax regime to comply with the dictates of trade liberalisation, has some built-in restrictions for The Bahamas."
Most of the expert advice the country has received on reforming its tax system is introducing, over time, a VAT, which is consistent with World Trade Organisation and Free Trade Area of the Americas requirements.
The Bahamas has Observer Status in the WTO, and has submitted the first draft of its accession report with a view towards full membership, shortly. The government is also "actively" engaged in negotiations for the FTAA, and is making a determination with regard to its status in the Caricom Single Market and Economy (CSME), Senator Smith said.
"Indeed, even if The Bahamas elects not to participate in any of the trade arrangements, there is, in my opinion, still a need to seriously consider reforming our tax regime in order to expand the tax base, reduce economic distortions and ultimately, stabilise public finances," he said.
Under a VAT system, the tax rate is likely to be considerably lower than existing customs and stamp duties because it would be levied on a wider range of goods and services, he noted.
"Most of it could still be collected at the border by our existing Customs administration; it would certainly reduce the cost of living for Bahamian households and businesses; and it could make our tourism sector more competitive," Senator Smith said.
He explained that the VAT is not applicable for exported goods and services, with some goods and services being exempted, such as food, education, health and social and financial services as well as small businesses.
The rate for the VAT varies between 10 per cent and 20 per cent and the rate selected for The Bahamas would depend on how much revenue needs to be raised to replace the traditional taxes, he said.
"If The Bahamas adopts a value added tax regime, it must necessarily absorb some existing taxes into the VAT such as the hotel room tax and part of the business licence fee," the minister of state said.
"Above all, consideration would be given to lessening the burden on lower income households either by exemption or taxing at a reduced rate," he said. "Capital investments are also generally exempted from the VAT."
If designed and implemented properly, Senator Smith said, a consumption tax such as the VAT could generally reduce the price level. And, there would be a need for intensive training in both the public and private sectors.
The Bahamas is internationally known for its tax haven status, with no direct stringent tax controls. Taxes, by law are payable on selective services, such as: Departure; Gaming; Hotel Occupancy; Motor Vehicle; Real Property; Licence Fees; Service charge on restaurant meals, Stamp and Customs Duties.
Non-existing taxes include: Capital gains, Corporate, Estate, Inheritance, Payroll, Sales, and Personal Income.
By Lindsay Thompson, The Nassau Guardian