Value-added tax (VAT) is a very attractive form of taxation for most governments simply because of the "catch all quality" of this particular tax mechanism.
VAT is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution.
Manufacturers remit to the government the difference between these two amounts, and retain the rest for themselves to offset the taxes they had previously paid on the inputs. The purpose of VAT is to generate tax revenues to the government similar to the corporate income tax or the personal income tax. The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT collection remittances to the government and credits for taxes already paid occur each time a business in the supply chain purchases products. It's also self-regulating as resources used in its collection provide a minimal input by a government-maintained revenue collection service. VAT therefore by its very nature is prone to manipulation as it depends on the honesty of business to account for their revenue intake from VAT.
A common criticism of VAT is that certain industries or services tend to have easier VAT avoidance. This happens where there is an industry where cash sales are predominant. In some countries VAT has even been seen as a cause of the increase in cash transactions, as it is very hard to capture VAT in these types of transactions. The Bahamas is just beginning to see positive growth in regards to electronic and check transactions outside of big business and it's expected that VAT will cause cash transactions to be viewed favorably by persons and companies trying to avoid or evade VAT.
In discussing VAT with various business persons throughout The Bahamas during the past year, it's clear the general feeling is that VAT is going to not only be burdensome, and but will also be a cumbersome addition to an already tough business climate. Several persons even went so far as to state emphatically their positions on evading and defrauding the government in this exercise. I don't personally or professionally believe that persons or companies should engage in fraud. Given the preliminary draft VAT legislation making the rounds I actually applaud the government of The Bahamas on its draconian penalties, which should help deter these types of activities.
The International Monetary Fund (IMF) in a working paper released in 2007 states "like any tax, the VAT is vulnerable to evasion and fraud. Its credit and refund mechanism does offer unique opportunities for abuse and this has recently become an urgent concern in the European Union (EU)".
In the EU various types of fraud schemes have been developed in regards to VAT, but the most common is the missing trader scheme. This scheme involves a person or company buying goods from a country where VAT is not charged and then selling the goods in a country where it is; charging the consumer the tax and then pocketing the revenue without paying it to the government. You may wonder how that may work in The Bahamas. Well bear in mind that Grand Bahama may be a tax free zone; a company can simply import items there, ship them to Nassau and have them sold with VAT included and not turn over the revenue. It will require a bit of creative accounting but then again Bahamians are notoriously creative. Businesses therefore must practice a bit of their own "know your customer" or this case "company policy". Ensure that the company or vendor you're purchasing from is reputable; that they are compliant with regulators and are paying their VAT. Consumers likewise can also check with the Central Revenue Agency and the Consumer Protection Department, whom I am sure will create a fraud hotline for persons and businesses to report suspected fraud.
It will therefore be up to us to effectively combat VAT fraud by being vigilant. If the government cannot collect the needed revenue from VAT because of fraudulent practices, you can rest assured that they will add more taxes to cover the shortfall and therefore to quote Winston Churchill, "There is no such thing as good tax". So keeping them to a minimum should be everyone's goal.
So, as always, be aware and be safe.
o Gaylord Taylor is the managing director of AGT Security Services.

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