What Is VAT and Why Do We Need It?

Value Added Tax BahamasValue 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?

Join the conversation leave your comment  below

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  • Gareth Ferguson

    It was inevitable that there would be a time when more would be required from the people of Bahamas. However, from my observation, this is yet another reaction to be added to the series of quick fix solutions that the government of the Bahamas decided to introduce because of the lack of foresight and innovation on our elected leaders behalf.

    You have to question if the deficit that is shown by your research is because of wasted governmental expenditures such as road works, referendums, and perhaps entertaining basketball teams. Also, there is the possibility that governmental services may be contributing to the slump whereas the methods that are currently being use are more costly due to the inefficiencies of an outdated system. And then there is the growing population that introduces thousands of persons annually out in the world that needs a source of income. In addition to this, the majority of these folks are not going to pursue a higher education which leaves them qualified for a life of bare minimum. Sad to say but they are not going to stimulate economic growth as their pocket books are not large enough to grow businesses that depend on their patronage. So you have a continual systemic collapse of profits that is shown by your research.

    Our government has not introduced anything different and innovative that causes systemic growth for some time now. New hotels are great and all but should not be used as the basis of building a flourishing economy
    as it is solely dependent on the performance of other countries. It should be something like “an addition to the collection of other great money makers in the Bahamas”. Nevertheless, since tourism is a good thing, we should become masters of it; creating unique attractions that would keep our country in the forefront of the Caribbean as it relates to tourism. I personally think Downtown is a start.

    The government also needs to realize that its job isn’t to spoon feed the general public with solutions to combat poverty or mediocrity but to establish mediums and the capability for Bahamians to invest in
    themselves. By this I mean that if you have a dream to let’s say compete with a software company such as Facebook, you wouldn’t have to leave this country to make your dream come true. This is because you knew how to write code from primary school because it was in the school’s curriculum, you had government backed institutions dedicated to technology for increasing your technological know-how, and you had a healthy pool of persons you can recruit to help build your social empire. Now imagine how this would have boosted the economy. So you can understand that we don’t have much opportunity in the Bahamas to aspire to greatness unless we perhaps open a tax free number house.

    So to think that new taxes are the solution to all of our woes is a fallacy. There are many holes that need to be clog in the form of governmental wasteful spending and uninspired citizens before we introduce new taxes to the already dependent public. We need money to come into the country
    not appropriate the little what is already here. Number houses are already
    doing a good job at that… but that’s another topic.

    • http://www.straighttalkbahamas.com/2012/01/welcome-to-straight-talk/ GR Wilson

      Excellent commentary. I agree with you entirely.

    • http://www.straighttalkbahamas.com/2012/01/welcome-to-straight-talk/ GR Wilson

      Gareth, I think you may find this article interesting, if you haven’t seen it already http://www.weblogbahamas.com/blog_bahamas/2013/10/a-tourist-destination.html

      • Gareth Ferguson

        Actually I haven’t. I am thankful for the link.

  • http://nevydames.blogspot.com/ Neavada Dames

    Nice article. Initially,
    my primary concern with VAT was weather or not the government would continue to
    implement custom duties, but I recently ‘skimmed’ the “White Paper on Tax
    Reform To Secure Adequate Funds For The Future” and it appears that customs
    duties will be discontinued. Now, I find
    myself wondering about the other tariff on imports that our government has put
    in place. For example: to import oil or
    other selected non-biodegradable/ non-consumable products, an ‘environmental
    tax’ has recently been implemented.

    I tell people all the time, my concern with our government
    never comes with the decisions they make, but more so, how they choose to implement
    certain processes. To be more clear; I
    do not personally oppose the notion of VAT (not that we have that choice), but I
    worry that poor or improper management of this system will cause sever
    socioeconomic damage to our country.

    • http://www.straighttalkbahamas.com/2012/01/welcome-to-straight-talk/ GR Wilson

      To my understanding custom duties will be eliminated “eventually”. Initially they will be slashed across the board by 17%.

      The little add-on taxes are troubling and have already caused businesses to shut down and are affecting prices.

      I agree with you on VAT, its the implementation that’s always been a problem in this country and I have no confidence they will get it right this time.

      • http://nevydames.blogspot.com/ Neavada Dames

        Yes, it’s a very troubling thing to sit back and watch. A 17% cut in customs will not help much when taking the current rates into consideration. I always try my best to stay positive…but I have little faith as well.

  • Fuka De Goberment

    If the government would stop lining their pockets and their friends pockets through contracts and unneccessary spending, we wouldn’t need MORE money.

  • Geoff

    Before worrying about VAT maybe we should fix what we have. A poorly run and inefficient system. If they can run what they have now, how in the world will they be able to run something they truly do not understand.

    We can only make so much money, there is a limit. There is no magic cookie jar. Stop the spending. It is going to hurt but we created this problem. Own up to it. We allowed our government to do what they wanted with no repercussions. We created this beast now it is up to us to put a leash on it.

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