The government has made no commitment to implement a Value Added Tax [VAT] as an alternative to the current customs based duties, Acting Prime Minister Cynthia Pratt declared in the House of Assembly on Wednesday.
But she said the country will eventually have to adopt such a tax within the next five to 10 years because of international and domestic pressures.
“This government has no intention of implementing a Value Added Tax,” she said. “It is as simple as that.”
Minister Pratt, who is also the Acting Minister of Finance, explained last week in her budget communication that there is a national consensus that The Bahamas should not adopt an income tax system. Therefore, reform of the revenue structure would mean the implementation of a VAT or a similar tax, she said at the time.
Her rationale was that no government would be able to implement a VAT at short notice because it is a complex measure requiring careful planning and preparation, extending over several years.
“The studies from the Ministry of Finance will continue, but there is no commitment to implementing a VAT. In any event, any government intending to implement a VAT would need several years to consult with Parliament and with the community to put in place the necessary administrative apparatus,” Minister Pratt told her parliamentary colleagues yesterday.
Tax reform is one of the most pivotal national issues under consideration as Bahamian government officials make moves toward joining trade groupings like the World Trade Organization [WTO], the Free Trade Area of the Americas [FTAA] and possibly the Caricom Single Market and Economy [CSME].
Value Added Tax is a “http://en.wikipedia.org/wiki/Sales_tax” o “Sales tax” sales tax levied on the sale of goods and services. In some countries, this indirect tax is known as “goods and services tax” or GST and is collected from someone other than the person who actually bears the cost of the tax.
Before the transition to a new system of tax is completed, Minister Pratt conceded that the Bahamian public and civil servants will have to be thoroughly informed and trained for the eventual transition.
There is a realization that there will be pressure on The Bahamas to reduce and simplify its Customs Duties, meaning that a satisfactory replacement will have to be adopted to yield the same level of revenue.
The original estimated revenue of import and export duties for the 2004/2005 fiscal year was $479 million, according to the 2005/2006 Draft Estimates of Revenue and Expenditure. The projection is that another $28 million will be collected in this area – $507 million – during the next fiscal year.
Tax revenue on motor vehicles was estimated at $27.7 million for this fiscal year, with a projection of $29.8 million for the 2005/2006 period.
“I do not expect to hear during this debate much concern about VAT. Any such concerns would be premature since implementation of a VAT is not envisioned in 2005, 2006 or in the near future,” Minister Pratt said.
The Bahamas Chamber of Commerce and the United States Embassy last year facilitated dialogue about tax reform, hosting a number of economists and tax specialists from the Caribbean region and the United States who gave different perspectives on the issue.
The experts appeared to endorse The Bahamas adopting the VAT system emphasizing that The Bahamas would have to carefully craft its tax legislation, educate its populace, and develop an administration process that would ensure efficient tax collection.
At the forum, Ben Arrindell, managing partner at Ernst and Young Caribbean, shared the experiences of businesses in Barbados following the conversion to the VAT in 1997.
The tax expert said that even though a VAT would incorporate services, currently not taxed in The Bahamas, it was unlikely that this would have an impact on the cost of doing business. He noted however that should the VAT completely replace import duties, there were certain pricing issues with which local businesses would have to deal.
He also identified another potential problem for businesses, particularly those in the tourism sector that may be locked into long term supply contract, as the inability to reflect the increased cost of inputs arising as a result of VAT charges on services into fixed rates.
A tax adviser for the Caribbean Regional Technical Assistance Centre [CARTAC], Paulo Dos Santos, also said at the time that implementing a VAT system with a 15 per cent rate in The Bahamas, and enforcing 100 per cent compliance, would result in government revenues equal to 8.6 percent of gross domestic product (GDP) or about the same as it currently receives from customs duties.
Additionally, he detailed the results of a survey on Caribbean tax systems that CARTAC conducted, suggesting that in the Bahamian economy there was room for harmonisation and improvements to the existing tax structure.
He also suggested that small increases to the hotel and property taxes, with a heavy emphasis on compliance, would see modest increases in government revenue
In The Bahamas, just under 50 percent of government revenue comes from import duties.
The consumption tax, which sometimes comes in the form of a broad-based Value Added Tax, has been implemented in 120 countries around the world. Created in France, the tax system was first implemented in Brazil and now accounts for some 25 per cent of the world’s revenue.
By: Tameka Lundy, The Bahama Journal
