By Scieska Adderley
Nassau Guardian Business Reporter
NASSAU, Bahamas -- The Bahamas government is looking to introduce a 15 percent value added tax (VAT), which would take effect on July 1, 2014.
According to Michael Halkitis, state minister for finance, the government’s current level of revenue generation is inadequate.
“Within the proposed package of tax reforms, it is recommended that a VAT be introduced, as of July 1, 2014, at a rate of 15 percent, consistent with VAT rates generally charged elsewhere. Such a VAT rate, in combination with the other reform proposals, would ensure that the government will have access to adequate revenue streams for the future,” he explained.
Halkitis, the keynote speaker at the Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) Meet the Ministers luncheon on Wednesday, shared the government’s plans to reform the country’s taxation system outlined in the White Paper on Tax Reform.
The highly-anticipated white paper was tabled in the House of Assembly on Wednesday afternoon. Halkitis noted that the proposals in the white paper have a threefold objective: To secure an adequate revenue base in support of modern governance; to establish a tax structure that promotes economic efficiency and stronger economic growth, and to make the tax system more equitable.
Halkitis said it is also proposed that the hotel occupancy tax be eliminated. However, he said hotels would be subject to a VAT rate of 10 percent and food and beverage sales would also carry a 10 percent tax.
“This will allow hotels to claim VAT input credits on their purchases of materials and supplies and will be consistent with the current Hotels Encouragement Act regime. Hotels will benefit from lower compliance costs and the government will benefit from administrative economies of scale,” according to Halkitis.
With 16 months left before the target date for the introduction of the VAT, Halkitis said the government intends to implement an extensive public education program that would ensure Bahamians are informed.
“We think it’s necessary. We have had the same system for a long time, the world has changed and other countries are adjusting their systems,” Halkitis shared.
“We want to encourage people, especially business and consumer groups to give us their thoughts. We will take it into consideration, and we think it’s an important part of the overall financial reform process. We have been experiencing deficits, our debt has been rising, we have to make some changes and this is a part of the overall program inclusive of administration, maintaining your costs, doing this tax reform and seeking to grow the economy.
“The recent financial crisis has amplified the fact our revenue base is very narrow. The IMF (International Monetary Fund) and all of the rating agencies in their reports, they tell us that one of the risks to our economy is that we have this narrow revenue base. So this is in an effort to broaden it by being able to have the service portion of your economy taxed.”
Though the VAT figure has not been finalized, Halkitis said the government is proposing 15 percent based on a benchmark of other countries and where The Bahamas stands in relation to that.
“We benchmarked other countries around the world, looked at our economy and we figured that some countries charge much more and some charge less and we didn’t want to go too high. We didn’t want to use something that’s being implemented in other countries.
“Based on the feedback from the public, we will determine whether it should be higher or lower. Nothing is set in stone but we wanted to put in some of our thoughts and get some feedback,” he added.
According to the white paper, in setting a VAT threshold, the critical criterion is the trade-off between, on the one hand, the need to reduce the costs of compliance to business and the costs of administration to the government and, on the other hand, the revenue foregone from exempting businesses from the VAT.
“It is clearly the case that the costs of compliance with a VAT, as a percentage of sales, fall with exceptional severity on small businesses, many of which fare poorly in the areas of record-keeping and accounting,” notes the white paper.
Another key criterion in setting the VAT registration threshold is the size distribution of firms in the economy. The white paper further notes that any revenue loss should be recouped “because the tax administration will be able to concentrate its efforts where they are most needed, that is on the medium and large taxpayers who account for almost all VAT revenues.”
Republished with permission of the Nassau Guardian