03/05/19

BAHAMAS: Evasion loopholes hitting VAT target, fears ex-minister.

As published on tribune242.com, Thursday 2^nd May, 2019.

 

A former finance minister yesterday urged the government to examine whether the VAT shortfall had resulted from the introduction of exemptions opening up fraud and tax evasion loopholes.

James Smith, also a former Central Bank governor, told Tribune Business that while the Minnis administration’s decision to implement multiple VAT exemptions with the 2018-2019 budget “sounded good” it really had the effect of undermining The Bahamas low-rate, broad-based model.

Pointing out that the private sector, as well as international experts, had warned the government against doing this, Mr Smith said the exemptions also made VAT more complex to administer, gave tax breaks to wealthy Bahamians and others who did not need them, and opened it up to potential abuse by tax dodgers.

Suggesting this may be one factor behind VAT’s underperformance during the first nine months of the 2018-2019 fiscal year, the former finance minister told Tribune Business: “I’m still waiting to see if they will do some particular analysis of the exemptions.

“They were warned by the international agencies and some local experts that you don’t want to start doing that. It sound good; it’s a good feeling to say you’ve given away a VAT exemption on baby food and formula so that poor people don’t have to bother with it, but wealthy people have babies too.”

Besides hiking the rate to 12 percent, the Government last July eliminated VAT on all so-called “breadbasket” items apart from sugar; medicines; residential property premiums; and monthly electricity and water bills that come in under $100 and $50, respectively.

Some of these, especially the breadbasket items and medicines, are zero-rated meaning that no VAT is payable throughout the supply chain. However, Mr Smith yesterday voiced concern that besides giving up significant revenue the Government may have also opened the door to tax evasion and avoidance.

“Exemptions sound good,” he reiterated, “but sooner or later the buyers scam the system. Customs duties are never fully collected at the port because of what happens around the table, on the table and under the table. VAT is no different.

“The framers of VAT wanted to collect all payments due. The idea was to collect everything going in. If you decide to make baby formula VAT free, there are those who will bring in different things under that basket in collaboration with service providers from outside the country and collaborators on the inside who make sure the books look OK.

“One of the reasons advanced against exemptions was precisely that. If you want to target groups for preferential concessions, you do it by direct subsidy because once you do exemptions the benefits go to the non-poor,” Mr Smith added.

“I never understood that. Once you open up that hole you are one step behind them on fraud. I think they need to look at that. They opened up the hole and introduced exemptions, and this is happening at a time when we’re getting increased imports from the rise in tourism.”

The Government has acknowledged the VAT-related shortfall compared to 2018-2019 full-year Budget estimates, but has largely attributed this to the transition period granted to the hotels and construction industries, plus the “adjustment” made by consumers to the higher rate.

It has made no mention of the exemptions, despite collecting just 55.6 percent of the 2018-2019 full-year VAT forecast during the first nine months or three-quarters of the fiscal year.

The government’s nine-month fiscal “snapshot” and budgetary performance report, released earlier this week, showed that VAT revenues for the period to end-March were up year-over-year by almost $100m - a 20.2 percent increase.

The rise, from $490m to $589m, is well short of matching the 60 percent hike in the VAT rate - something that is likely to be seized upon by the government’s political opponents. They have consistently argued that the magnitude of the rate increase will not be matched by a corresponding surge in VAT revenues. The year-to-date figures are well short of the $1.062bn full-year projection with just three months of the 2018-2019 fiscal period left.

Assessing the impact on the bigger picture, the government’s report showed it had collected some $1.689.1bn or 63.7 percent of its full-year total revenue target during the first three-quarters of the 2018-2019 fiscal year, providing further confirmation it is highly unlikely to meet the $2.651bn goal by the end-June fiscal year close.

It would have to collect $962m between April and June to make up this gap, and trends for the fiscal year-to-date suggest it could come in as much as $300m below the full-year goal - a level much higher than the $185m underperformance flagged by K P Turnquest, deputy prime minister, during the mid-year budget in February.

The Government collected just 38.1 percent of the full-year revenue target during the first half of the 2018-2019 fiscal year, meaning that the “revenue rich” third quarter from January-March produced about 25.6 percent - or just over one-quarter - of the full amount.

This translates into $678.8m in revenue generated at the peak of the economic cycle - a sum almost $300m less than the “gap” between the nine-month collection and full-year objective.

Based on the first-half generating 38.1 percent of full-year revenues, a repeat of this performance in the 2018-2919 fourth quarter suggests it will generate between 19-20 percent of the full-year sum. This would bring government revenues to around 83-84 percent of target, or around $2.2bn, leaving them some $450m below budget projections.