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Fear of VAT price ‘imbalance’ for VAT registrants

VAT consultants suggest there will not be major switch to non-VAT registrants
Guardian Business Editor

Published: Sep 27, 2013

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Service professionals have expressed fear that the value-added tax (VAT) will create a price “inequality” that will lead to a switch in consumer preferences to non-VAT registered businesses once VAT is applied, given that one group is expected to sell their services with VAT applied and the other is not.

Melanie Roach, president of the Bahamas Society of Engineers (BSE), suggested to VAT consultants at a meeting between the government’s VAT unit and the BSE on Thursday that VAT-registered providers would experience a loss of business as a result.

“When you have a profession such as the engineering profession, you may have some people who are under the $100,000 threshold (and are therefore required to be VAT registrants) and some who are over.

“You are now going to be creating an imbalance because the same clients who are going to be looking at selecting an engineer, why would they now go to select an engineer that they have to pay an extra 15 percent for, when they could go down the road and select someone who is not registered and who they do not have to pay that extra 15 percent for? How is the government going to address those inequalities?” asked Roach.

Government VAT consultants Ishmael Lightbourne and Pauline Peters said that businesses should not be too concerned by this prospect.

Peters, a former head of Inland Revenue in Grenada with chief responsibility for the

implementation of VAT on that island in 2010, told Guardian Business that in the Grenadian experience there was not a significant amount of “switching of service providers” based on who were VAT and non-VAT registered.

Overall, she felt that while customers had a choice of going to a non-VAT registered provider, “quality’ was the primary driver of consumer decisions, rather than price.

To the extent that there was a “switching” to non-VAT registered providers, those non-VAT registrants who fell under the revenue threshold to be VAT eligible would - if they received enough business - then become VAT eligible, suggested Peters, evening out any “imbalance” highlighted by the BSE president.

Lightbourne suggested that there would not be as distinct a difference in the pricing of VAT and non-VAT registrants as implied by Roach, as VAT registrants – while required to charge 15 percent VAT on their services – could also reclaim VAT paid on their inputs.

Non-VAT registrants would pay VAT on inputs, but would not be reclaiming VAT.

“In terms of the professional services, everything is really going to have to come out in terms of the ultimate pricing. Bearing in mind that the registered business does have the benefit of claiming all of its input tax that it has paid on value-added tax and those input items extended to all of your capital items.

“If you’ve bought machinery for your business, if you bought specialized equipment, all of those you pay VAT on but when you bill your customers, you collect VAT and all of what you’ve paid on those capital items also becomes reclaimable, so there’s a business incentive.

“I don’t think there’s going to be that level of inequality whether its in the services sector or the goods supply sector, because the pricing operation will operate and there is the fact that the registered business does have the opportunity to reclaim all of its VAT.”

In this regard, Lightbourne rejected a claim in a recent Nassau Institute report on VAT and its economic consequences that there would be “non-VAT affected” businesses. “There is no such thing,” he told the BSE.


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