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VAT Hike Brings Loss Of Confidence

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Former Governor of Central Bank and former State Minister of Finance, James Smith says that the greatest impact of an increase on Value Added Tax in the country is a  loss of confidence. 

Appearing as a guest on Love 97’s radio talk show Jones and  Company yesterday, when asked by show’s host  Wendall Jones about the impact of the increase in VAT from 7.5 percent to 12 percent, Mr. Smith said that the loss of confidence in any and every economy is more important  than anything else.  

“When a guy gets up in the morning and decides or he has to make a decision should I take my savings and increase the size of my operation; build an extension to my plant or factory; hire some more people, he wants to do that in a predictable environment.

“He does it on the basis of asking  is the economy going to grow? Are we going to see better things, more tourists  coming in. 

“And once you increase your major tax like VAT by 60 percent,  you create a new level of uncertainty,” Mr. Smith said. 

Sharing an anecdote with the hosts and listeners, Mr. Smith inferred that major developers in Real Estate, particularly in upscale areas in the country are nervous to the change in the VAT system. 

“I was at a meeting two days ago with some developers who are developing in one of our upscale areas; condos, and they are saying could you help us understand what’s happening here, because we have already pre-sold a lot of units and we’ve got some in the pipeline.

“And this has to do more with the change of the VAT,  where VAT used to apply seven and a half percent for Real Estate transaction and two and a half percent stamp duty; it used to be five, five. According to the paper, the new ruling is we will simplify this, put it back to what is was, 10 percent; where the buyer pays five and the seller five, but it’s not zero rated.

“So, what happens is they told me even on their project they had several hundred thousand dollars owed to them by the government from the VAT; the input, that’s gone now and they’re priced on that going forward.

“This happens straight throughout the economy and I don’t know if that was intended. The Real Estate sector is really nervous.  So anybody who might have been talking with their banks and this sort of thing,  will have to sit back and wait to see whether they are going to adjust this; whether it stays and if it stays as it is,  they are going to have to find a way to adjust pricing. 

“These guys are selling not just in The Bahamas, Hong Kong, North America, Europe and Latin America,” Mr. Smith said. 

“You have a condo in The Bahamas, the guy tells you a million dollars and then he calls you three months later and tells you something or the other. I don’t think that was intended,” he said. 

Mr. Smith added that he thought the most critical of the VAT increase is the timing of it. 

“As we all know, increase in the price level the price will go up for everybody and everything and of course if you raise prices and don’t raise incomes you are going to have a reduction in demand. You’re going to have redistribution of the income that you have on other goods and supplies. So this could have some impact on your imports and I suspect it will compress the returns from customs as well as the VAT itself. 

“And so, if the projection is to get X amount,  I suspect the government won’t make it and if they do make it, you got to have larger deficit and I’m sure that’s not what they wanted,” Mr. Smith said. 

Mr. Smith noted that with the final stage of Baha Mar completed last month, employing some 4,000 people, the government should wait to see if the bounce back is sustainable. 

“Last month you had the final stage of the Baha Mar that’s been so controversial for 10 years coming late, but it’s doing what it said it would do. 

“You have a $4 billion infrastructure for your major industry tourism. According to their data, you had 18 percent increase, I think in air arrivals; the most important component. All of this tells me that the economy had bottomed out and is on its way up. 

“Even if you want to come with the tax, six months down the road you might say I don’t really need 12, but you’ll have at least a data set, a very current one to depend on. 

“But by doing it now you’re robbing yourself of the opportunity of seeing what the turnaround of the economy would have brought to you and that’s where I find the tragedy of this,” Mr. Smith said. 

During the 2018/2019 Budget, Deputy Prime Minister and Minister of Finance, Peter Turnquest announced that VAT would increase from 7.5 percent to 12 percent a hike of 60 percent. 

Written by Jones Bahamas

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