Communication by The Honourable Michael Halkitis Minister of State for Finance The Value Added Tax Bill 2014
|Authored by:||Ministry of Finance|
|Source:||Ministry of Finance|
|Date:||July 23, 2014|
The tabling of the Value Added Tax Bill in this Honourable House is an historic moment in the history of our nation.
Following many years of study and discussion, at times heated and contentious, we are finally taking up the challenge, and shouldering the responsibility, of bringing our system of taxation up to the proper and appropriate standards of the 21st century.
Before getting into the details of our tax reform programme, VAT Bill, I would like to take a few moments initially to provide some background information on the context in which this reform has been developed. For it is clearly the case that the proposed reform of our taxation system is but one, though a central and critical, component of the Government’s broader agenda of economic and fiscal reform and modernization.
Indeed, I would remind Honourable Members that we were elected by Bahamian citizens to implement our proposed programme of fundamental change in order to develop a stronger and more prosperous Bahamas of the future. We fully recognize that the challenges that confront us are numerous and complex. Our plan of action is commensurate with those challenges. It offers new and innovative solutions for the wide range of economic and social challenges facing the nation. We simply cannot afford to continue with business as usual. Fiscal reform is thus critical.
As many have acknowledged, our tax structure is clearly outdated and inadequate for the needs of a modern Government. Taxes and duties on international trade, in the form of import and export duties, excise taxes, stamp duties and tourism taxes, constitute some 60 percent of total Government Recurrent Revenues. Unlike most countries, we do not impose personal or corporate income taxes, nor do we have a broad-based consumption tax.
In essence, the Government’s revenue base is excessively narrow and suited to another era when the economy was far less complex. The economy of today is, as in most advanced societies, heavily oriented to the provision of services but our tax structure is simply out of tune with that reality. By predominantly focusing on goods, our tax system is also decidedly unfair as the burden of taxes is not shared equitably by citizens of varying means.
Reform of the tax system and its administrative apparatus have been talked about in this country for a number of years but follow-up has been sporadic and unfocused. The time has come for decisive action.
Important reforms are now underway to improve the administration of existing taxes. Comprehensive programmes are in place to effect the modernization of both the Customs Department and the Real Property Tax Office to bring their operations up to the standards of best international practice. We are also phasing in the establishment a new Central Revenue Administration to consolidate the collection of a number of taxes and fees in a more efficient and effective manner.
The proposals for a fundamental reform of our tax structure, including the introduction of a Value Added Tax, which appeared in the White Paper of last year are another important element of our programme of change. We are confident that, when fully implemented, they will result in stronger growth of our economy and more job opportunities for our citizens. We fervently believe that a reformed tax system will provide for more equitable taxation. Just as importantly, the new tax structure will secure adequate revenues for the effective administration of Government and the pursuit of our key economic and social objectives.
As I indicated earlier, the subject of tax reform has been under review and discussion in The Bahamas for a very long time and across administrations. In the process, we have benefited from the experience of numerous other nations around the world that have reformed their tax systems over the past decades, as well as from an extensive international academic literature on the benefits and key desirable features of a VAT. Senior staff and advisors at the Ministry of Finance have also honed our reform proposal on the basis of in-house research and visits to other nations in the region.
After carefully considering the vast amount of information at its disposal and the range of potential new revenue options, the Government decided that a broad based consumption tax in the form of a Value Added Tax is the most suitable option to enhance the revenue yield of the tax system. Having said that, I will stress again that, beyond its desire to address revenue needs, the Government is fully mindful of the potential effect on lower income Bahamians and is committed to mitigating the impact of our tax reform programme on the most needy in society, through the financial enhancement of its various social assistance programmes. This is a practice that has been adopted in other countries that have introduced a VAT and it is one that we believe is most appropriate in the Bahamian context.
Moreover, the Government of the Bahamas is reviewing its entire system of consumer protection to ensure that unscrupulous individuals do not use the process of tax reform as an excuse to adopt predatory practices. The Government is committed to enhancing these protections whether through legislative measures and the provision of additional resources.
The other revenue enhancement options that were considered as a central element of tax reform include:
- an income tax;
- payroll taxes; and
- a sales tax.
Research has found that income taxes are clearly more detrimental to economic growth than a VAT. The OECD (Organization for Economic Cooperation and Development) has reviewed over 90 studies in this area and concluded that the principal drawback of the personal income tax is that it acts as a disincentive to work effort, innovation and entrepreneurship. It also discourages saving as interest income, dividends and capital gains are subject to tax. Likewise, the corporate income tax on profits discourages investment and innovation.
The study produced a ranking of tax instruments in terms of their growth “friendliness”. Property taxes and consumption taxes such as VAT are the most growth friendly. Personal income taxes are significantly inferior while corporate income taxes have the most negative effects on GDP per capita.
These negative effects, of course, grow in magnitude with the degree of progressivity of the income tax. As such, it is clear that the income tax works at cross-purposes to one of the major goals of tax reform, i.e. promoting a stronger economy and job creation.
A VAT, as a tax on consumption, does not deter work effort and entrepreneurship, nor does it discourage investment and innovation. It also encourages savings which, in turn, supports enhanced investment in the domestic economy
The imposition of tax on income can also lead to an onerous compliance burden for individual taxpayers. Employers, for their part, must withhold income taxes from the monthly wages and salaries of employees and then remit these to the government. Individuals must then file an annual tax return, declaring income from all sources and submitting all receipts required to support claims for whatever deductions are permitted. Private sector enterprises must do the same in respect of corporate income taxes.
The May Budget Communication contained a review of the evolution of the tax reform proposal since the release of the White Paper. I will briefly return to the key points in that evolution at this time as I believe that is important to a full understanding of how we have arrived at the specific elements of the current proposal. That, in turn, will be useful for the promotion of an enlightened debate on the Bills that we will have before us.
The public launch of the tax reform process began with the release of the White Paper on Tax Reform early in 2013.
Public discussions began around the White Paper in both New Providence and the Family Islands. These then intensified to include the business community, churches, school, community and civic groups, and audiences within the public sector. From the private sector the Ministry of Finance also enlisted key business groups and the Christian Council to form part of an Advisory Committee for implementation of the proposed changes to the tax system, to ensure that alongside one on one consultation, the views of industry were being constantly channeled to the Government.
Following the release of the White Paper, the Ministry of Finance engaged in the process of drafting the legislation and regulations, which formed the basis of more in-depth consultations upon their release last November.
With the release of the draft legislation the Ministry of Finance received significant feedback from private stakeholder groups. In addition, there has been increasing outreach to the Family Islands.
The full range of these meetings and discussions has led to significant clarifications and in many cases positive responses to the proposals put forward by stakeholders.
As the Minister of Finance stressed in May, our tax reform deliberations have also been most usefully instructed by the advice received from the team of New Zealand experts that visited our country. These experts had discussions with a wide range of stakeholders as well as with officials and Ministers. Through this process, they outlined what had made their fiscal reform process in their country so successful and offered observations and recommendations to us. As these inputs have proven critical to the evolution of our reform proposal, I will review them again briefly at this juncture.
The success of the New Zealand VAT, and there are important lessons for us here, was very largely due to:
- an extensive education programme aimed at both the business sector and the wider public, with the programme largely driven by respected members of the private sector;
- nbsp; a Government commitment to minimize the compliance costs involved with the new tax, particularly by having virtually no exemptions; and
- a Government commitment to offset the effect of VAT on the cost of living by reducing income taxes and, for families not paying income tax, introducing a form of negative income tax or cash transfer system.
As was explained in the Budget Communication, the government has accepted the New Zealand recommendation to enlist the private sector in the public education campaign. A three person Task Force will oversee this process and will be tasked to assist in explaining the reform process to the business community and the wider public.
I will now briefly review the key features of the Bill.
There will be one single VAT rate across the board (other than the zero rate for exports) that has been substantially reduced to 7.5 per cent from the originally proposed 15 per cent. We judge the lower rate to be desirable from both an economic and social perspective. Of course, a lower rate will yield somewhat less revenue than we had originally expected. As such, across-the-board reductions in tariffs and excises will not feasible. There will, however, be selective reductions in certain areas.
Along with the significantly reduced rate, the list of exemptions has been pared substantially. Specifically, no goods will be exempted. As for services, the list of exemptions has been tightened to include only the following:
- Financial services, i.e. credit and deposit/savings products. This covers all forms of lending and savings products issued by banks, insurance companies and other financial institutions.
- The sale or rental of a dwelling.
- Education services, specifically explicit tuition-funded courses in pre-school, primary and secondary school; and in programs of study leading to the award of graduate or undergraduate degrees at the tertiary level.
- The sale of vacant land;
- A lease of land to the extent that such land is principally used, or intended for use, for accommodation as a dwelling which is erected or to be erected on such land.
- Any services by a ministry, department, statutory body, agency, local government council, or other entity of Government, in connection with a taxable activity where the consideration for such services is —
- (a) nominal in amount; or
- (b) not intended to recover the cost of such goods or services.
- Services rendered by a daycare business, including the provision of after-school care.
- Services provided directly by a facility to persons in need of care, being persons who are —
- Health care, specifically for public services provided to “public patients” receiving free care at public facilities including children of school age or younger, the indigent, aged, government employees and other persons identified by the Minister of Health.
- Religious services by an institution of religious worship.
- Services by a recognized charity to the extent that such services relate directly to the charitable function of the charity.
The registration threshold for VAT will now be universal at turnover of $100,000 per year. As well, we will allow group registration for related groups of companies, thus eliminating the need to recognize input and output taxes on intra-group transactions.
There will be three filing periods for VAT; businesses with annual taxable sales exceeding $5 million will file monthly. Businesses below that threshold and with taxable sales exceeding $400,000 will be allowed to file quarterly. Other registrants would be allowed to file on a semi-annual basis and use more simplified cash accounting methods when compiling their VAT returns. This cash rather than accrual basis of accounting among small registrants would also eliminate working capital concerns over the treatment of bad debts.
A simplified VAT return using a “flat rate scheme” is proposed for businesses with turnover below $400,000. VAT due to Government would be calculated either as a fixed percentage of cash sales, with no need to account separately for input taxes paid; or the business would be allowed to calculate both input and output taxes on the basis of cash receipts or cash payments.
As well, businesses that qualify, including those that currently enjoy fiscal incentives on imports, may be allowed to defer payment of VAT until the return for the respective period is filed.
We will also implement less complex procedures for tax credits against bad debts and streamline the refund process, having regard to the need to be vigilant against fraudulent claims.
We firmly believe that the legislation that will be read for a first time today sets out a solid, world-class policy and administrative framework for fiscal reform that will be successful in moving our nation to a system of taxation that is both economically efficient and adequate to serve the needs of modern governance and to promote economic growth and prosperity.
We look forward to a healthy and constructive debate on this Bill in the days ahead.