April 30, 2014
A day after the government confirmed that it plans to delay value-added tax (VAT) implementation at least until the last quarter of this year, one of the visiting consultants from New Zealand proposed that a "realistic" date for its introduction would be later -- on January 1, or possibly April 1, 2015.
Don Brash, a former leader of the opposition political party in New Zealand and former governor of the Reserve Bank of New Zealand, also backed the need for the Bahamian government to "put in place a framework for accountability" in public finances to accompany a VAT.
"I totally agree that increasing, getting more revenue, isn't an end in itself, an adequate answer to a fiscal problem," Brash said yesterday.
"Also, some other things have to be done: People have to pay the existing taxes and you have to have some kind of mechanism to keep control of the spending. I agree with the Chamber of Commerce completely on that point."
After just over a week in The Bahamas during which he and former PricewaterhouseCoopers (New Zealand) chairman and VAT specialist, John Shewan, assessed the country's readiness for VAT, Brash said that even an October 1 deadline for VAT implementation would be "very, very challenging", given that there has been "no substantial education program put in place" so far.
Brash, also a professor of banking, economics and finance and a leading businessman, was a leading private sector figure in New Zealand's implementation of a VAT system in 1986.
He headed a committee that was appointed to liaise with the private sector on the tax after the government published a white paper on VAT in 1985.
His comments were made on Island FM's Morning Boil talk show yesterday morning and later repeated on Guardian Radio with host Jeffrey Lloyd.
On Friday, Shewan said that he felt a July 1 implementation date would be "extremely challenging".
Also following Shewan's comments, Minister of State for Finance Michael Halkitis told The Nassau Guardian on Monday that the government could confirm that it would indeed delay the introduction of VAT.
Halkitis said that if VAT comes on stream this year, it would not be until the last quarter, beginning October 2014.
Speaking on Island FM yesterday, Brash said: "I think realistically probably The Bahamas needs to think about January 1, 2015, or April 1.
"It's more important to get it right than to get it started three months too soon. We've heard a lot about rating agencies, rating agencies, the IMF; the rating agencies, I don't suspect, will care if there is a three month or six months slippage, provided they can see that the government is serious about gathering more revenue."
Fiscal responsibility Brash noted that, in New Zealand's case, a white paper was released in March 1985 on VAT.
The committee that he headed was set up, and received feedback from the private sector on the tax, resulting in adjustments to the legislation.
The tax was implemented on October 1, 15 months later; a private sector-led VAT education committee continued education efforts and gathering feedback on the tax and its impact on various sectors for 12 months afterwards.
"I think even an October 1 date would be very, very challenging (in The Bahamas). For both the public sector and the private sector," Brash said.
"The public sector, in some respects ,it's readier to implement this tax than I suspect the private sector is, and that's because there's been no substantial education program put in place so far."
"At the moment there's a lot of misunderstanding about how it works. One of the things we've recommended to the government is to devote some serious effort to an educational program, preferably run by some people respected in the private sector.
"They are the perfect people to explain the tax. We've met a number of people here in The Bahamas who would be excellent at that, respected people who recognize the government needs more revenue, recognize that VAT is the least bad tax, and are happy to help put this in place, but the government has to engage them.
"If it's simply a public sector bureaucratic exercise, this is going to be much less effective." Speaking for the need for fiscal responsibility to accompany the tax, Brash pointed to the role of the passage of a Fiscal Responsibility Act in his country in 1994.
He pointed to the legislation as playing a major role in New Zealand's success in moving from running deficits in the public finances to running surpluses continually from the early 1990s until the middle of the last decade, when the country was hit by a major earthquake and the global financial crisis.
"We're nearly back to surpluses now, which, given the circumstances, is pretty good," he added. Brash appeared on Island FM alongside Dionisio D'Aguilar, president of Superwash and former president of the Chamber of Commerce.
D'Aguilar suggested that he views the merits and de-merits of VAT as less important than issues like improving compliance rates for existing taxes and fiscal reform.
"The conversation has been about 'VAT, VAT, VAT'. The conversation now needs to move over to how do we bring about fiscal reform? How do we make the system work better? How do we make the government work better? How do we drive compliance? "If you don't have any checks and balance (in government finances), it's just, 'Man, if you need the money, go borrow it.'
"But if you say, 'Look, you can't raise the debt above this level -- 60 percent of GDP', or put a cap in place, or say you can't run deficits period or for too long, then it will force the government to say, 'Look, I can't keep borrowing, so now I really need to collect what I need to collect'.
It motivates compliance; it motivates them to do what's right. "If they introduce VAT and get a 60 percent compliance, that doesn't solve the problem.
They'll have to raise the rate and then those who comply will just have to pay more and more and more at a greater rate, and those who are not complying will continue to not comply, and that just [is not] right."
D'Aguilar said he supports the New Zealand approach to VAT, which calls for as few exemptions as possible. Brash and Shewan said that approach allows for lower compliance costs, and a lower rate.
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