Value Added Tax (VAT) is coming to The Bahamas July 2014. It means a major change in how businesses and indeed the government operates. Unfortunately we know that we don’t do well with change in this country.
Predictably the announcement by the government has led to a lot of talk about the VAT and what it means for us as a country but more importantly what it means for each of us personally.
I have to admit that the VAT seems confusing and a bit scary, because obviously no one wants to pay more taxes. But before I start bashing it I decided to do a little research and try to understand it better. So I want to start with two basic questions;
Why Do We Need VAT?
It may make sense to first say what VAT is but I want to start with this question .
Based on my research there are three main reasons we need this tax;
1. The Government is spending more than they are making and the gap has been increasing; $182Million (2006/2007), $361 Million (2008/2009) and now $550 million (2012/2013)
2. To Broaden The Tax Base: currently the majority of government taxes are collected from customs duties. The problem with this is that customs duties are only paid on goods not services and services make up 91% of our economy. Secondly, customs duties ties up merchant capital by requiring them to pay up front.
3. International Agreements: The Government has signed on to various international agreements that require us to do away with tariffs within a certain time frame. for example the EPA requires us to get rid of all tariffs on EU imports by 2014.
So there you have it that’s why the government is so keen on introducing VAT.
What Exactly is VAT?
Unlike Customs Duties which taxes goods at the point of entry, Value Added Tax is applied at the point of sale on every stage of the product where value is added. As an example;
Lets say Government VAT is 15%
A Television Manufacturer sells a TV to a Wholesaler for 100 +15% = $115
$15 VAT is remitted to Government by TV manufacturer.
The Wholesaler Sell the TV to a Retailer for $200 + 15% = $230
$30 VAT belongs to Government, But because the wholesaler has already paid $15 VAT when purchasing from the manufacture, they get to deduct that from the amount owed to Government. So the Wholesaler remits only $15 to Government.
The retailer decides to sell the TV to consumers for $300 + 15% = $345
$45 VAT belongs to Government, but because the retailer already paid $30 VAT during the purchase from the wholesaler, they get to deduct that amount and remit the difference to Government. The retailer remits $15 to Government
The final cost to the consumer is $345, $45 of which is VAT. The Government received 15% at each chain of the process where value was added.
This is a basic example of how VAT Should work in theory, but it obviously leads to some other questions. However I will attempt to answer those in another post.
Do you understand the basic VAT example? What questions do you have about VAT? Do you think there is a better alternative the government should consider?
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