While acknowledging the seriousness of the recent warning from ratings agency Standard & Poor's (S&P) that the country could face future downgrades should the government's implementation of value-added tax (VAT) not yield the projected results, Minister of State for Finance Michael Halkitis said he remains confident that the government's fiscal plan will be successful.
The government intends to implement VAT on January 1 and expects to collect $300 million in the first year.
In its latest research update, S&P warns that should VAT fail, The Bahamas could see its ratings fall below investment grade level, which would ultimately impact the country's borrowing power.
"Achieving the government's target of three percent of GDP in VAT revenues annually will be a key driver as to whether The Bahamas can meaningfully improve its fiscal balance and staunch downward pressure on the rating," the S&P report says.
The report adds that disappointment on the fiscal side or increased pressure on international reserves could lead to S&P lowering its rating by one or more notches.
But Halkitis said the Christie administration doesn't believe that will happen, despite continued resistance from some business owners over the new tax.
"Anything [S&P] says is a concern, but I would say this, in deriving our estimates of what revenue we will get from VAT, we had the benefit of extensive research by experts locally and internationally, and we have taken a very, very conservative approach to the revenue estimates that we put in the budget.
"... And secondly we are moving aggressively to put everything in place."
Halkitis noted that the government has a wider fiscal reform program, which includes growing the economy, collecting taxes and controlling expenditure.
"Each one of those elements working together are going to be very important as we move to improve our rating," the minister said.
"In their report, they make certain comments about what would be required for us to avoid further downgrades and to, in fact, have our ratings approved, and amongst those is the successful implementation of VAT, which we are committed to and are moving steadily ahead with. And also we have to ensure that our economy continues to grow."
The economy is estimated to grow by 2.1 percent in 2015.
And while Halkitis said the majority of businesses have come to terms with the government's plan, he said there are still some who are refusing to comply.
He noted that tax reform will always be a contentious issue.
"There will always be resistance from people who don't want to comply for various reasons. It might be philosophical; it might be they don't want to share information with government; it might be they are concerned about their business; it might be a natural fear of the unknown, or it might be a legitimate concern that they are not prepared to do it. But by and large, we have gotten support from business community."
Government officials estimated that the impact of VAT on the cost of living in the country should be no more than five percent.
Several observers have suggested that VAT will negatively impact the business community and consumer spending. But Halkitis said he believes the impact will be minimal."
He also pointed to the customs tariff reductions that will coincide with the introduction of VAT.
While the government has limited the number of goods it will apply custom rate reductions to, there are still dozens of items that will be reduced, including a variety of breadbasket items.
It will reduce the duty on over 20 categories of food items (from 10 percent to five percent), including meat, poultry, milk, cream, yogurt, cheese, curd, vegetables, fruits, nuts, coffee, tea, spices, pasta, jams, fruit juice, yeast and seasonings.
The Tariff Amendment Bill also listed duty reductions on over 100 items, including cameras (seven percent to duty free), watches (10 percent to duty free), refrigerators (25 percent to five percent), various types of apparel (25 percent to 20, and 35 percent to 20), footwear (25 percent to 20 percent), pharmaceutical goods (35 percent to 25 percent), and beauty and make-up products (45 percent to 35 percent).
Several types of building materials will be duty free or will have the custom rate applied to them cut by 50 percent.
Appliances such as refrigerators, freezers and other refrigerating equipment, which currently attract 25 percent duty, will be decreased to five percent.
The rate for the importation of clothes will be decreased from 25 percent to five percent.
Halkitis said he is confident that the government has found the "right formula" for fiscal reform and encouraged those business that are required to register for VAT to do so.
Only about 15 percent of businesses have registered, but Halkitis said the numbers are picking up.

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