For decades The Bahamas has proven to be an oasis for wealth generation (Grabovac, 2018). This archipelago strategically sits in a bed of crystal-clear water approximately 80km off the coast of Florida (Grabovac, 2018). This proximity proved to be very beneficial during the bootlegging era when the island of Bimini was used as a transshipment point for alcoholic beverages entering the United States after the outlawing of alcohol consumption in 1919 (Elizabeth, 2013). From 1919 to 1933 the island of Bimini experienced a financial boom as American bootleggers settled in and employed Bahamian boatmen to smuggle alcohol to the coast of Florida (Elizabeth, 2013). Although the bootlegging industry was short lived, this period made clear the immense potential that existed within these islands (Deans, 2009). As time progressed, the islands of The Bahamas continued to experience periods of economic booms and busts as Governments searched for ways of achieving sustainability (Albury, 1994). It was not until the late 1950s that the potential of these islands to become a leading nation in tourism was realized (Albury, 1994). This movement from an economy hinged on agriculture and fishing to a tourism and financial services destination is accredited to Sir. Stafford Sands; who is known by many Bahamians as the father of tourism (Albury, 1994).
From then to now, tourism has remained the country’s number one industry and in 2014 statistics revealed that 98,000 jobs were accredited to the industry; this accounts for 51.6% of total employment (Hartnell, 2015). However, in recent years, there has been a significant declined in the amount of revenue generated from tourism (Hartnell, 2017). This is due in part to many factors, including, the global recession of 2008, coupled with the increase in hurricane frequency and intensity hitting the shores of The Bahamas (Hartnell, 2017).
All of these factors have significantly impacted and weakened the country’s economic pillars which lead to excessive borrow and subsequently to the growth in debt (Evens, 2018). Thus, the implementation of Value Added Tax in 2015 came as a means of balancing this rapidly growing debt (Eleutheran, 2015).
A budget communicate presented March 25th, 2015 by immediate past Prime Minister Perry G. Christie revealed that the all intent and purpose for funds generated from VAT is to reduce the country’s rocketing debt and stabilize the economy (Eleutheran, 2015). Yet, his attempt at justifying the introduction of a tax into an already struggling economy was widely rejected by both business owners and consumers (Virgil, 2013). Thus, this paper seeks to explain the Value Added Tax system employed by The Bahamas and discuss the impact it has on Bahamian businesses.
What is Value Added Tax
According to the General Value Added Tax (VAT) Guide issued by The Bahamas Department of Inland Revenue (2017), VAT is a special tax applied to most goods and services offered by businesses that are both registered and in compliance with the Value Added Tax Act 2014. VAT was introduced on January 1st, 2015 at an initial rate of 7.5% (Delaney Partners, 2015). However, on July 1st, 2018, just three and a half years after its introduction VAT was raised by 4.5% under the current administration and now totals at 12% (Brown, 2018). However, the public has been informed that the goal is to eventually raise VAT to 15% in the coming years.
So how exactly does VAT work? All businesses providing goods and services that are considered taxable supplies and whose sale value exceed the VAT threshold of 100,000 must register for VAT (Ministry of Finance, 2017). Registered businesses are required to pay VAT on goods and services obtained from their suppliers and charge VAT on the goods and service offered to their consumers; this should offset the tax that was paid to suppliers (Ministry of Finance, 2017). The difference between output taxes and input taxes is remitted to the Comptroller; who is the Government.
Why Value Added Tax?
The White Paper on Tax Reform to Secure Adequate Revenues for The Future (2013) give a detail outline of the proposal for VAT. Additionally, it presents a contrast between VAT and other tax vehicles, i.e. sales tax and income tax. This document also included a projected figure of the amount of revenue that could be generated if VAT was adopted by the Government. According to this documents VAT had the potential to generate approximately $100-160 million in government revenues; which exceeded that of the other tax vehicles. Thus, it was evidently clear as to what steps should be taken by the Government.
Before VAT, the Government of The Bahamas relied primarily on customs duty/boarder taxes as its main source of revenue however, this method was incapable of sustaining the country’s growing debt (Delaney Partners, 2015). The Hon. K. Peter Turnquest, Deputy Prime Minister of The Bahamas and Minister of Finance revealed in budget communication to the house of assemble that all moneys generated form VAT is intended to be used to address the fiscal gap and assist in the avoidance of further economic crises (Brown, 2018).
The Effect of Value Added Tax on Consumers
Value Added Tax is a consumption tax and therefore the primary group affected is consumers (Christie, 2013). According to Aaron (1981), the adoption of VAT normally raises price levels to the extent that the VAT is incremental to replace other taxes. Additionally, a report from Ernst &Young (2011) posits that an increase in price levels with wages remaining unchanged will lead to consumption decline. Therefore, two things can be concluded from this; the first is that consumers will become frugal in their spending and the second is that they will opt to purchase goods and services form VAT-free vendors (Godsell, 2013). Additionally, it can be inferred that as a result of price levels raising consumers will require even more assistance from the government which is defeating the purpose of implementing VAT (Godsell, 2013). In an interview with The Bahama Journal (2018) Allan Butler, Director of Retail for Milo B. Butler and Sons, explains that increasing taxes with low employment and an already struggling economy will only lead to greater dependency on the government because unemployed induvial will not be able to afford the goods.
The Effect of Value Added Tax on Business
For a very long time The Bahamas was considered a tax-free haven for investors wishing to operate businesses within the country (Galanis, 2016). However, the implementation of VAT has brought an end to many of the concession that were once given (White Paper on Tax Reform to Secure Adequate Revenues for The Future, 2013). This can have serious implications on whether or not investors decide to conduct business within The Bahamas and with an already struggling economy the country simply cannot afford to discourage potential investment (Halsbury Chambers’, 2015).
Many local business owners have also expressed major concerns about the future of their businesses as well (Bahamas, 2018). According to Director of Retail for Milo B. Butler and Sons, Allan Butler, the implementation of a 7.5% VAT had greatly impacted their business and the company expects and even greater impact with the increase to 12% (Bahamas, 2018). Butler further asserts that the application of both customs duty and VAT on instore goods have decreases the customer’s ability to spend freely (Bahamas, 2018). Butler also predicts that this increase in the cost of purchasing goods in country will only encourage persons to shop abroad. Mr. Rupert Roberts, President of Super value, in his interview with The Bahamas Journal (2018) stated that when customers see the prices of product they reconsider and many items are discarded at the checkout cashiers. Roberts explains that in many cases costumers are only purchasing if they absolutely have no other choice but to buy the item.
Similar situations have happened in other countries that have adopted VAT (Godsall, 2013). Case-in-point, The International Monetary Fund (2010) records that when Ireland increased its VAT from 10 to 18%, consumption fell by 7.1%. Additionally, Alm and El-Ganainy (2012) in their paper which discusses additional implications of VAT records that countries can expect a 1% drop in consumption for every 1% increase in VAT. Thus, one can infer that as The Bahamas move towards a 15% VAT that consumption may also decline by up to 15%. This is something that must be taken into serious consideration if The Bahamas truly want to survive these tough economic times.
The Bahamas is currently faced with a swelling budget deficit, a decline in employment and a crashing economy (Hartnell, 2013). This current state cannot be attributed to any political part in particular but, it comes as a result of poor management of funds and failure to stimulate economic growth (Godsall, 2013). Yes, it is factual that VAT has the potential to increase government revenue however, under the current economic climate, this may only force the Bahamian economy into further decline (Bodie, 2014).
At this time, rather than restoring the economic foundation of the Bahamas through deficit and debt reduction, the adoption of VAT may only raise additional economic concerns in the long hall (Godsall, 2013). It is apparent that empirical research must be conducted to reveal the true impact VAT is having on all sectors of the economy. It is the author’s belief that in order for true tax reform to be achieved, the government must first address the issues of overspending and wastage that currently exist. Simply applying a tax to an already struggling economy without addressing existing problem will only create more problems. Further, the author suggests the diversification of the economy through the promotion of natural resources considering the fact that the tourism product is not uniquely Bahamian but is shared by many countries in this region.