As he defended his government’s decision to decrease value-added tax (VAT) to 10 percent and impose the tax on breadbasket items, Prime Minister Philip Brave Davis said the International Monetary Fund (IMF) recommended to the previous government that if it did not change its VAT structure, the tax would need to be raised to 15 percent.
“I want the Bahamian people to hear me very clearly,” Davis said as he led off debate on the supplementary budget and VAT Amendment Bill, 2021.
“When we came to office, analysis performed by the IMF indicated that if the government didn’t change its VAT structure, VAT would have to be raised to 15 percent. Imagine that.
“Now, I know you all remember that the member for Killarney told the Bahamian people that he went to election eight months early because the country faced headwinds and tough decisions.
“We said at the time that he wanted Bahamians to vote before he raised their taxes, and this major tax increase appears to be what he had in mind. Raising VAT to 15 percent would have turned headwinds into a hurricane.
“Raising VAT to 15 percent wouldn’t have been just a tough decision, it would have been a terrible decision that would have plunged our economy into a downward spiral, past the point of no return.”
Former Prime Minister and Minister of Finance Dr. Hubert Minnis recently said he decided to call an early election because difficult times were ahead for the country and the government needed a new mandate to make some “very, very difficult” decisions.
He said some “headwinds” are coming and that in order to manage those “it was essential to have a new mandate because very, very difficult decisions have to be made”.
Minnis did not explain what headwinds he was referring to or what difficult decisions he was going to make, but it is likely connected to the ongoing fiscal crisis and the health crisis that dealt a blow to the national economy.
He led the Free National Movement to defeat in the September 16 election, with the party winning just seven of the 39 parliamentary seats.
On a point of order yesterday, Minnis said his administration had no plan to increase VAT.
But Davis argued that Minnis never disclosed to the Bahamian people that the IMF recommended an increase in taxes.
“You know, there are a lot of flies on walls and they are very busy and they fly around a lot,” he said.
“Sometimes, they land on the wrong wall. And guess what? Flies could talk, too. So, what I said is that he talked about tough decisions having to be made after the elections.
“…We said that it was our belief that they were going to raise taxes. I am now pointing out that there is a basis for that belief and the basis for that belief was the IMF recommending to them to raise it to 15 percent.
“Now what they intended to do or not is another matter because the Bahamian people took care of that.”
Given the fiscal reality, Davis said there is simply no way that increasing the VAT rate to 15 percent “just to keep a few exemptions and for the government to pay VAT for wealthy foreign companies was a good idea”.
“As Bahamians say, we just couldn’t make it make sense,” he said.
“The IMF review of the Bahamian tax system implemented by the previous administration described the kind of exemption-riddled VAT regime with the government paying VAT for wealthy foreign companies, as reducing efficiency, lowering revenue, and increasing administrative and compliance costs. To retain that approach would have been counterproductive and wrong.
“Making matters worse, the report indicated that exemption and zero ratings are an ‘inefficient way of achieving redistribution objectives,’ which is another way of saying that paying VAT for rich foreign companies on select items is detrimental to working-class and low-income households.”
The Value-Added Tax (Amendment) (No.2) Bill, 2021 is scheduled to come into force on January 1, 2022. It will reduce the VAT rate from 12 percent to 10 percent and remove the zero-rated application from several items known as breadbasket items.
Additionally, it removes the zero-rated application from medicines and medicinal drugs, the majority of which already attracted VAT.
The prime minister said his government’s decisions on VAT are supported by “data, research and consultations with local and global experts”.
“We considered every scenario possible and, at the end of our research and consultations, we were confident that we were making the right choice,” he said.
Davis said the bill does not impose VAT on home insurance or on the rental of noncommercial properties.
“What the proposed bill does is make the purchase of fuel for private planes a VAT-able expense,” he said.
“That was not the case under the previous administration.
“They don’t like to talk about how they made the government pay the VAT on fuel for private planes. VAT was originally exempt on transshipment services, which means they didn’t have to pay VAT and the government, therefore, didn’t have to refund it. That is the international standard.”
He said the Minnis administration changed this treatment, so the government had to give a refund on services that did not generate VAT in the first place.
“In essence, Madam Speaker, the government had to pay the VAT on these transshipment services,” Davis said.
“These foreign companies experienced a windfall of millions and millions of dollars on the backs of Bahamian families and companies.
“This was a classic move by the previous administration. Tax breaks for themselves, their wealthy supporters and favored foreigners, tax increases on the backs of ordinary Bahamians.”
Davis said the supplementary budget seeks to stabilize the country’s finances while also “providing some relief for the Bahamian people”.
“Our supplementary budget recognizes there is an urgent need for change in this country that cannot wait for the next fiscal cycle,” he said.
He added that, despite the difficult times, there are reasons to be optimistic.
“Real GDP is expected to return to positive growth this year, to 2.0 percent, and is expected to peak at 8.0 percent in 2022,” he said.
“To keep the nation headed in a positive direction, to take advantage of the rebounding of the Bahamian economy, we must take immediate action to foster and sustain stronger economic growth.”