A group of obviously concerned and jittery Bahamian business leaders got a sobering message recently from Financial Secretary John Rolle: The country would suffer a "bloodier and more painful" experience in a few years than it currently faces with unsustainable debt levels if it does not move quickly to reform its tax system.
The government has announced that Value Added Tax (VAT) will be introduced on July 1, 2014.
Rolle said the cost of inaction would result in an unchecked rise in debt, less capacity to borrow for emergencies, which increases our vulnerability to shocks like hurricanes and sudden contractions in foreign economies on which we depend for tourists.
"There will also be a credit downgrade and eventual loss of access to credit markets. This will result in one outcome: Much higher tax increases, larger reductions in spending, possible reduction in public sector employment [and] scrutiny of the exchange rate parity," he warned.
The nightmare scenario presented by Rolle should be enough to wake every Bahamian up.
The Bahamas' financial future faces a crisis.
On our current path, it is no understatement that we are doomed without action.
Government debt as at June 30, 2014 is projected to be $4.9 billion, compared to $2.4 billion as at July 2007.
The Bahamas has a legacy of high budget deficits.
Over the last two fiscal years, the government has seen a total deficit in excess of $500 million. The projected deficit at the end of 2013/2014 is $529 million.
The government intends to borrow $465 million to finance the projected revenue shortfall in the 2013/2014 fiscal year. This would add to the $650 million the current administration already borrowed.
Almost one out of every four dollars in revenue collected by the government must be allocated to pay the interest charges on the public debt and cover the debt repayment.
This current state of fiscal affairs is worrying on many levels, and it is unsustainable.
At a recent gathering of business leaders hosted by the Bahamas Chamber of Commerce and Employers Confederation, Marla Dukharan, senior economist with RBC Caribbean, revealed a startling reality.
The Bahamas' financial capacity to cover its import needs is the lowest in the region -- at just seven weeks worth of import cover, or around half of the regional average, and significantly below international "prudential" benchmarks for external reserves.
Dukharan views taxation reform for The Bahamas as "quite critical" at this stage in the evolution of the Bahamian economy and suggested the alternative could be a "spiraling" debt situation.
For the government, continuing to do things as it has been doing is not an option.
"You'd be surprised of where you could end up if things don't work out," Rolle told business leaders.
"I know there is the thinking that [we should] leave the revenue side alone. But are you prepared to have a bankrupt government? Are you prepared to change the value of your currency?
"Are you prepared for the social consequences of what happens when a government runs out of resources and can't even find the money to provide support for the poor and those who may get angry when they run into tough times?"
REFORM
The government is not prepared for any of these consequences, and it is unlikely that the citizenry is either.
No reasonable Bahamian armed with the facts of the current situation would deny there is a need for reform.
What many do not agree on is what reform option the government should pursue and the timeframe for implementation.
In the government's white paper on tax reform, Prime Minister and Minister of Finance Perry Christie notes that the government's revenue base is extremely narrow and ill-suited to the expanding needs and demands of modern Bahamian society.
The country's tax system is out of balance as it predominantly focuses on goods, he pointed out.
It does not share the tax burden with those who are providing services in a way that is either fair or adequate.
The government has decided to go the way of Value Added Tax to secure an adequate revenue base in support of modern governance.
According to the white paper, the government intends to effect the eventual reductions in import duty rates that will accompany The Bahamas' accession to the World Trade Organization (WTO), and reduce excise tax rates to compensate for VAT.
As a consumption tax, VAT provides a broader base for government revenue; imposes taxes on goods and services equally and imposes greater discipline on businesses, the white paper says.
It also says it encourages investments by providing incentives to business on capital expenditure, and the audit trail that would be required promotes greater efficiency in the collection of taxes.
According to the white paper, the primary distinctive feature of a VAT as compared to a traditional sales tax is its unique method of collection, which also represents its main attraction relative to a sales tax.
VAT is collected and remitted at each stage of the production and distribution chain. VAT paid at each stage is credited against VAT owing at the next stage, and only the difference is remitted.
As such, a VAT system has a built-in mechanism to encourage compliance, the white paper notes.
A VAT registrant expects the buyers of his product to claim credits for VAT paid to him, thereby discouraging him from attempting to hide VAT receipts.
In its look at various options for tax reform, the white paper highlights VAT as a more favorable option than a sales tax, which is a tax imposed at the final point of sale.
It says that while relatively simple to administer, a sales tax suffers from important drawbacks. As a single stage tax, it is susceptible to evasion if it is imposed at a rate in excess of 10 percent, the document notes.
Professor Gilbert Morris, who chairs the Turks and Caicos Resort Owners Economic Council, said what the Bahamas government is effectively introducing amounts to a sales tax "with all the complications and inefficiencies of a VAT".
"You bring in something, you sell that to a wholesaler, or you bring in something if you're Solomon's and you sell and you are going to charge VAT on that. Where is the value added? There is no value added. We didn't do anything to the product," said Morris, who served as an observer during the implementation of VAT in several African nations, and now sits on the Turks and Caicos Islands' commission on future tax needs.
"If you look at the government's white paper, it actually describes a manufacturing process using a farmer, something that's not particularly relevant to The Bahamas."
In that example, a farmer cuts down trees and sells them to a lumber mill, charging 15 percent VAT, which he remits to the government; the lumber mill transforms the trees into wood and sells to a furniture manufacturer, charging 15 percent VAT.
The lumber mill deducts the amount of VAT it paid to the farmer and remits the difference to the government.
The manufacturer transforms the wood purchased from the lumber mill into a chair and sells the chair to a retailer, charging 15 percent VAT.
The manufacturer deducts what he paid the lumber mill in VAT and remits the difference to the government.
The retailer then sells the chair to a client and charges 15 percent VAT. He deducts what he paid in VAT to the manufacturer and remits the difference to the government.
Rolle shared with The Nassau Guardian what is perhaps a more practical example in the Bahamian context.
A retailer imports a refrigerator. He pays a now reduced customs duty and 15 percent VAT on that product.
When he sells this refrigerator to the consumer at a higher price, he charges 15 percent VAT and remits to the government the amount of VAT he paid at the time of import.
VAT, properly structured, is a tax on consumption (both good and services), not a tax on business.
Agriculture and fisheries; social and community services; health and education services are among the areas that will be exempted.
But exemptions will be kept "to a bare minimum", the government has advised.
The effectiveness of the tax is tied to many factors, including how it is implemented, tax experts and others with experience in effecting tax reform have said.
In a 2010 interview with Erasmus Williams, press secretary to the prime minister of St. Kitts-Nevis, former Barbados Prime Minister Owen Arthur warned that VAT could result in "very serious defects" if its implementation is not properly managed.
Arthur said that once properly managed, VAT could be of tremendous benefit.
He noted that ahead of the implementation of the tax system in Barbados in 1997, there had been fears and concerns among some.
One leading businessman, for instance, put out an ad warning consumers that Hurricane VAT was coming.
"Everybody wants to go to heaven but nobody wants to die," the former prime minister said.
"I think it's a minor miracle for a country to believe that you can have a well developed set of social services but you have no tax on income, and no tax on consumption.
"I wouldn't know how to run a country in that way and people have to understand that if you want to have social benefits they have to be paid for."
UNCERTAINTY
The Bahamas is roughly eight months off from implementing VAT. With each passing week, fears over the pending tax seem to be rising.
No legislation or regulations have been released as yet, and there is a lack of specifics and answers to key questions from everyday consumers and the business community, which will be responsible for collecting the tax and remitting it to the government.
Kevin Burrows, senior vice president at CFAL, suggested that as a tax, VAT is a good option.
"Fundamentally, there is nothing wrong with a VAT if the economy has enough time and leeway to be able to know what's coming," Burrows said.
"VAT is only a problem if we have such a tight timeframe like we do now. I think that's more of a problem than the VAT itself."
Many business people fear the complex auditing that will accompany VAT will be onerous, and they want enough time to understand the new system.
Worries over VAT's likely inflationary impact are also apparent.
Morris pointed out that when the new system is implemented, the cost of living will "absolutely" rise.
"It's basic first year economics," he said.
Rolle admitted that, "On the cost of living there will be some initial impact from the VAT but that initial impact will disappear in a very short timeframe, over six, eight years. That is not long.
"...You can look at other international experiences. A country typically has a single response in the price the year after.
"Their inflation goes back down to the normal level and in some cases it goes lower. The fact that your inflation is lower in subsequent years means that on a compounding basis, eventually the prices under the VAT system fall behind the prices that were being paid without VAT."
He made the comment at the recent Chamber event, but it did not appear to provide comfort to the many members of the business community who were gathered.
Pressed on the cost of living issue, Rolle said while some estimates had been prepared, the government was not yet prepared to release them as they were being looked over.
Also pressed on a timeline for the availability of legislation, he gave "two weeks" as an answer. If that is true, it would mean legislation would be ready this week.
In a letter to Prime Minister Christie on October 16, the Bahamas Chamber of Commerce and Employers Confederation's Coalition for Responsible Taxation requested the release of "critical information": the proposed VAT Act; VAT regulations; the revised Customs Tariff Schedule and the financial modeling that justifies the financial claims being made by the introduction of VAT.
Given the "seismic change" in the country's taxation system and the delays in the release of critical information, the Coalition strongly recommended that the government postpone the intended date of implementation of VAT "to a date that is not less than 12 months" from the release of that information.
On its current track, VAT appears doomed to be a difficult birth.
While Rolle has been making the rounds and has started the discussion with the business community and other groups, the desperately needed public education campaign has yet to start in earnest.
Toward the end of the year, the government will likely lose the attention of the business community and the public generally as the holiday season tends to create distractions.
With so much unknown about how VAT is intended to work in The Bahamas, the so-called education process is hobbling along with a couple of broken limbs.
While more information is likely to be out by the new year, this might raise more questions that need to be addressed.
The government will have to have two messages: One for the business community and one for the consumer. VAT is a complex issue. The challenge is to simplify it and provide assurance that it is being handled properly.
With all the matters that now concern the government, perhaps no one in government thought of the fact that the VAT public education campaign will take place simultaneously with a promised constitutional referendum education campaign.
That referendum has already been postponed twice and is now scheduled to take place by June. This is a lot to put on the public. It is a lot to digest.
Taxpayers will be worried about their wallets. Businesses will be worried about their profit margins. In some instances, projects will be placed on hold and it is likely too that some businesses will place a hold on hiring, if not shave their staff count.
With such a short window before July 1, the government has a lot to consider.
It is asking the Bahamian people to make an investment in the country's longer term economic health.
Such an investment is vital, of course. It is in nobody's interest for VAT to fail.
As the financial secretary opined, "If it doesn't work, we're all going down with it."

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