FOR OFFICIAL USE ONLY
INTERNATIONAL MONETARY FUND
Fiscal Affairs Department
THE BAHAMAS
REVENUE ESTIMATES OF INTRODUCING VAT
Selcuk Caner and Junji Ueda
April 2014
The contents of this report constitute technical advice provided
by the staff of the International Monetary Fund (IMF) to the
authorities of The Bahamas in response to their request for
technical assistance. This report (in whole or in part) or
summaries thereof may be disclosed by the IMF to IMF
Executive Directors and members of their staff, as well as to
other agencies or instrumentalities of the TA recipient, and upon
their request, to World Bank staff and other technical assistance
providers and donors with legitimate interest, unless the TA
recipient specifically objects to such disclosure (see Operational
Guidelines for the Dissemination of Technical Assistance
Information—
http://www.imf.org/external/np/pp/eng/2013/061013.pdf).
Disclosure of this report (in whole or in part) or summaries
thereof to parties outside the IMF other than agencies or
instrumentalities of the TA recipient, World Bank staff, other
technical assistance providers and donors with legitimate interest
shall require the explicit consent of the TA recipient and the
IMF’s Fiscal Affairs Department.
3
Contents
Page
Preface........................................................................................................................................4
Executive Summary ...................................................................................................................5
I. Review of The Provisions of the VAT Bill and the Recent Amendments .............................7
A. Key Provisions of the VAT Bill ................................................................................7
B. Recent Amendments .................................................................................................8
II. Revenue Estimates of VAT Bill and Alternative Scenarios ...............................................10
A. Estimation of Overall Revenue ...............................................................................10
B. Estimation of Policy Gaps .......................................................................................10
C. Import Tax and Sectoral Breakdown of the Estimated Revenue ............................12
III. Methodology in Revenue Estimation Model .....................................................................14
A. Revenue Projection Model ......................................................................................14
B. Assumptions for the Revenue Forecast ...................................................................15
C. Effects on Overall Fiscal Balance ...........................................................................17
Tables
1. Bahamas: Key Provisions of the VAT bill Compared to VAT .............................................8
2. Bahamas: Decomposition of Revenue Estimates ................................................................11
3. Bahamas: Sectoral Breakdown of Estimated VAT Revenue ...............................................13
4
PREFACE
In response to a request from Financial Secretary of Ministry of Finance of The Bahamas a
technical assistance mission on tax policy visited Nassau from April 21−24, 2014. The
mission comprised Selcuk Caner and Junji Ueda. The mission presented estimates of the
revenue impact of implementing the proposed VAT bill and obtained updated information on
revisions to the bill.
The mission benefitted from consultations with Mr. John Rolle, Financial Secretary, Mr.
Simon Wilson, Deputy Financial Secretary and Mr. Marvin Clarke – the Project Manager for
VAT implementation.
5
EXECUTIVE SUMMARY
The main objective of the mission was on the development of a detailed VAT revenue
model that can be used by the Ministry of Finance (MOF) to develop estimates of net
VAT revenues for various policy assumptions. More specifically, the model will allow the
MOF to estimate projected revenues that will flow from the final VAT (and tax reform)
package that will be presented to Parliament for approval. As such, it must be noted that the
revenue estimates presented in the report are based on the provisions of the March 2014 draft
of the VAT Bill. The provisions of the Bill may be subject to further discussion and
revisions.
The draft bill provides the legal basis for the implementation of a broad based simple
VAT system to be implemented during FY2014/2015. The authorities are expected to
make final decisions on the issues of rates, coverage and the corresponding adjustments to
tariff rates. The mission provided updated revenue estimates and additional scenarios for
consideration by the authorities. The new estimates are expected to facilitate the final
decision-making by the cabinet.
Through tax reform, the government is seeking to raise additional revenue of at least
four percent of GDP, of which a substantial portion (two percent of GDP) is expected
from the introduction of VAT. In addition to providing additional tax revenue, introduction
of VAT will also provide a revenue cushion to eliminate and reduce some distortionary taxes
such as the business license tax, fees and tariffs.1 The implementation of VAT is expected to
start during FY2014/2015.
The mission provided estimates of the overall revenue impact of introducing VAT and
separate estimates for key provisions of the bill in order to provide guidance on the
revenue costs of exempting certain supplies and services. The final revenue impact will
depend on the government’s decision on the tariff rate reductions to mitigate the effect of
introducing VAT. Since simultaneous reduction in tariff rates will dampen the price effect of
introducing VAT, two types of estimates are provided: one for the gross revenue effect
without any adjustment to tariffs, the other net effect with a full compensatory reduction in
tariff rates (i.e., tariff rates on goods on which VAT is imposed will be reduced by the same
percentage points). The table below summarizes the total gross and net revenue effect of
introducing VAT.
In addition, the magnitude of import VAT and sectoral breakdown of the revenue are
provided. Imports are expected to be an important source of VAT revenues so that import
VAT accounts for about two-thirds of the estimated tax revenues.
1
Business license taxes will remain during the transition period.
6
Revenue Impact of Government's VAT Proposal
Tax Revenues
Millon BSD Share of GDP
1 10% standard rate with exemption of financial intermediation and casinos
2
+
Exemption of health and education
494
-19
6.00%
-0.23%
3
+
Exemption of real estate service
-11
-0.13%
4
+
Exemption of insurance service
-16
-0.19%
5
+
Exemption of transportation service
1
0.02%
6
+
Exemption of basic foods
-20
-0.25%
7
+
Exemption of pharmaceutical products
0
0.00%
8
+
Exemption of motor fuels
-15
-0.18%
9
+
Reduced rate for electricity, water and sewerage services (7.5 percent)
-10
-0.12%
10
+
Tax free shopping for jewelry and watch
-1
-0.01%
11
+
Zero rate for newly constructed dwellings
-18
-0.22%
12
+
Exemption of 30% of electricity, water and sewerage services
2
0.02%
-107
1.31%
Gross revenue
Revenue impact of reducing tariff rates and repeal of the hotel tax
Tax expenditure of exemptions
279
-279
4.71%
Net revenue
107
1.31%
7
I. REVIEW OF THE PROVISIONS OF THE VAT BILL AND THE RECENT AMENDMENTS
A. Key Provisions of the VAT Bill
1. The draft VAT bill dated March 6, 2014 envisions a VAT system that is broadbased, with fairly few exemptions and special provisions, and a general rate of 10
percent and a reduced rate of 7.5 percent for selected services. Introduction of a VAT
system is a key component of the government’s tax reform efforts through which it is
seeking to raise additional revenue of at least four percent of GDP. A substantial portion
(about two percent of GDP) is expected from the introduction of VAT. The bill is
consistent with best international practice of VAT and includes in its provisions many of
the prior IMF recommendations. Although the bill has not been approved by the cabinet
and submitted to the Parliament, very few amendments to the Bill are expected from the
government side.
2. According to the proposed Bill (March 2014), all supplies of exports and services
supplied to customers outside The Bahamas related to international commerce and
finance are zero-rated (First Schedule, Section 6). A special VAT rate of 7.5 percent
applies to supply of electricity, water and sewerage services (Second Schedule, Section 6).
A limited list of supply of goods is exempted from VAT (Third Schedule, Section 7). The
list consists mainly of essential foodstuffs and consumption items. In addition, fuel is also
exempted. There is an exempt amount of electricity, water and sewerage services up to a
prescribed amount to be determined by regulation. Exempt services include financial
intermediation, medical and education services, domestic transportation some social
services and gambling. Coverage of taxable hotel services includes accommodations and
other services such as restaurant and various activities. All surcharges and gratuities are
part of the tax base of the hotel industry. With the introduction VAT the current hotel tax
will be repealed. A single VAT rate of 10 percent will be applied to taxable supply of
goods and services.
3. The base of the VAT is broad and provides a basis for an efficient VAT system.
The Bill is consistent with the recommendations of the 2013 Tax Policy mission (Table 1).
However, in order to determine the final revenue impact of the Bill, the interaction of
VAT with tariff rates has to be resolved. The authorities’ intention is to make a
corresponding reduction in tariff rates as the VAT becomes effective. The government’s
plan is basically to reduce all tariff rates that are currently at 10 percent or below to zero
and adjust downwards other tariffs by ten percentage points. The government’s final
decision is essential in order to determine the net revenue effect of the introduction of
VAT. Therefore, revenue estimates are provided both for the case of no adjustment to the
tariff rates and an across the board reduction of all tariff rates as considered by the
authorities.
8
Table 1. Bahamas: Key Provisions of the VAT bill Compared to VAT
Recommendations
FAD VAT Policy Recommendations – June 2013 1/
Bahamas MOF Proposal 2014
Introduce VAT with a single rate.
Single standard rate at 10
percent.
Consider adopting a turnover threshold of about BSD150,000. Make adequate
provision for voluntary registration of businesses below the threshold.
Threshold proposed at
BSD100,000
Preserve the Business License Tax on businesses below the VAT threshold as a
simplified tax. For these businesses unify the rate structure.
Business License Tax is
preserved for certain
businesses.
Tax fee-based financial services under the VAT.
Fee based financial services
are subject to VAT.
For exempt financial services, maintain the Business License tax. Consider
Not proposed.
adjusting the definition of the base to wages plus salaries plus profit.
Tax property and casualty insurance under VAT. Consider taxing life
TBD
insurance. Eliminate the Business License Tax on policies taxable under VAT.
Tax gaming under VAT. Eliminate at least the portion of the Casinos tax that is Gaming is exempt from
levied as a percent of winnings. Tax telecommunications services under the
VAT. Subject to Casino
VAT, (except possibly for the cost of basic telephone service). Maintain the
Tax.
Business License Fee on mobile telecommunications.
All surcharges, gratuities, and the hotel levy should be included in the base for
Proposed
VAT on hotel accommodation. If hotel accommodation is taxed at a lower rate,
other taxable supplies by hotels should be taxed at the standard rate.
Consider replacing the real property transfer tax on transfers between VAT
Not proposed.
non-taxpayers with a tax on the gains in value-added of the property.
Consider as a temporary measure preserving the Business License Tax on all
Proposed
businesses subject to VAT (except for insurance policies that are taxed under
VAT).
1/ Caner, Grote and Krelove (2013), The Bahamas: Tax Reforms for Increased Buoyancy, Fiscal Affairs
Department, IMF.
B. Recent Amendments
4. A recent amendment to the draft bill zero rates sales new of residential property
allowing for a refund of input taxes up to BSD 50,000 if the construction is completed
within 18 months. Caribbean countries in general have exempted rather than zero-rated
such supplies. However, the United Kingdom allows for zero rating of new residential
property. In addition to expected large revenue loss, zero-rating of new residential property
may create some problems. First with the value ceiling: this may create a ‘cliff’ effect and
thus a big incentive to undervalue property sales to avoid VAT. Second, depending on the
treatment of housing over the BSD 500,000 ceiling, apportioning input tax between zerorated supplies and exempt supplies (if indeed houses over 500K will be exempt) will be
difficult and prone to abuse (If residential houses over 500K are fully taxable this issue
9
won’t arise). Third, there may be an equivalence problem between ownership and leasing.
Residential leases under the draft bill are exempt. Will residential leases also be zero-rated
rather than exempt to achieve equal treatment between renters and buyers?
5.
An 18-month waiting period to reclaim credits, in addition to being long, may
create problems of allocation because it will require builders to ‘follow’ inputs into
particular outputs, and only claims credits for those inputs that were physically
incorporated in houses that have been completed. It should be noted that the actual
refund period will be longer than 18 months given that the revenue authority will have at
least one month and perhaps longer to verify and possibly audit refund claims before
processing them. Although the intent of the authorities is to encourage registration and
payment of VAT, it should be considered as an alternative policy option to have a meanstested grant for first-time home owners? This would encourage access to housing by low
income groups.
6. A flat tax rate regime will be introduced for small medium enterprises (SME)
with turnover less than BSD 400,000. The applicable rate is to be determined by the
Commissioner of VAT based on the type of business. According to this scheme the
supplier will charge a reduced rate on its sales and will not claim an input tax. The flat tax
regime excludes capital goods. The output tax will be kept by the supplier and the
purchaser will claim it as an input tax. Flat tax regimes exist in some European countries2.
7. Some of the businesses operating in the Freeport in the Grand Bahama Island
under the Hawksbill Creek Agreement will be required to pay import VAT. The draft
VAT bill does not have any provisions regarding Freeport businesses but taxable supplies
of goods and services will be defined by regulation and guidelines. Imports are classified as
supplies, manufacturing supplies and consumable stores (See Guidelines for Hawksbill
Creek Agreement). The supplies refer to all improvements within the Port area and these
supplies are exempt from VAT. Manufacturing supplies used in production within the Port
boundaries are exempted from VAT as well. Consumable goods are subject to VAT unless
they are classified as exempted in Third Schedule Section 7. The revenue impact of VAT
on Freeport businesses is unclear as there are no data available on turnover of businesses
located within Port’s jurisdiction. Sales outside the port area are also subject to VAT.
8. Due to continued debate on the final tax rate and the corresponding adjustments
to the tariff rates, and the on-going publicity process, the introduction of VAT is
expected to be postponed to October 1, 2014 from July 1, 2014, at the earliest. This is a
2
Japan has a similar system where industry-specific input-output ratio is stipulated and can be used in
calculating input tax credit by small and medium sized companies. The result is the same as a sector-specific
flat late. It is called sector-specific deemed input rates.’
10
welcome decision under the current situation as it provides more time to the authorities in
finalizing the structure of the tax taking into account the revenue requirements of the
budget.
II. REVENUE ESTIMATES OF VAT BILL AND ALTERNATIVE SCENARIOS
A. Estimation of Overall Revenue
8. A revenue projection model is constructed in order to estimate quantitative
effects of proposed VAT legislation and alternative scenarios on gross and net
revenues.3 The gross revenue from VAT under currently proposed VAT legislation is
estimated to be BSD 386 million (4.71 percent of GDP).4 In accordance with the
introduction of VAT, the government plans to reduce the rates of import duties and abolish
hotel room tax. If the reduction of import duties by the magnitude of newly introduced
VAT rate (‘full compensation’) are taken into account, the net revenue effect from
introducing VAT is estimated to be about BSD 107 million (1.3 percent of GDP).
9. Quantitative effects of overall tax reform on net government revenue are highly
dependent on the decision about the level of reduced import duties. If the government
restrains the reduction of import duties by 70 percent on average, the net revenue effect is
BSD 182 million, which is 70 percent higher than the full compensation case. Therefore,
the rates of VAT and import duties should be decided consistently to secure sufficient
revenue for achieving a sustainable fiscal position.
10. Changes in revenue to GDP ratio are calculated by taking into account the
effects of changes in prices and nominal GDP after introduction of VAT. If VAT is
fully added to the prices of all commodities, nominal GDP will increase by the amount of
additional revenue for the government. If prices do not change due to suppressing of the net
value added in industries, nominal GDP will not change. The expected gross VAT revenue
to GDP is expressed as a range between 4.68 percent and 4.74 percent of GDP. The former
corresponds to the case with full price changes and the latter corresponds to the case with
no price changes. The net revenue is expected to be 1.3 percent of GDP.
B. Estimation of Policy Gaps
11. The estimated results of gross and net revenues can be expressed as the sum of
hypothetical revenue under minimum exemptions and no reduced tariff rates and
3
4
The methodologies and assumptions used in the projection are explained in detail in Section III.
Nominal value of revenue is represented at the price level of 2012, which is the most recent year of detailed
output and input data in the Bahamas. Revenue to GDP ratio is the average of the highest and the lowest
estimates, as explained below.
11
policy gaps due to specific treatments. The result of decomposition is shown in Table 2.
Columns (1) and (2) provide the gross revenue of VAT at 10 percent rate with only
exempting financial services and casinos both in terms of BDS and share of GDP. The
gross revenue impact under minimum exemptions is estimated to be BSD 494 million.5
Column (3) is the customs revenue loss as a result of reducing the tariff rates by the VAT
rate. Columns (4) and (5) are the net estimates with full compensation of VAT on imports
by reducing the tariff rates by the corresponding percentage points, both in terms of BDS
and share of GDP. The revenue impact with full compensation of VAT by corresponding
reduction in tariff rates is estimated to be BSD 107 million, which is the total magnitude of
policy gaps. Net policy gap can be also calculated to be BSD 63 million by taking into
account the effects of changes in import duties.
12. Major sources of the overall policy gap are: [1] zero rating for residential
construction, [2] exemption of health and education, [3] exemption of insurance
services. Those 3 treatments account 60 percent of overall gross policy gap, and more than
80 percent of overall net policy gap. As for exemption of basic foods and motor fuels, gross
policy gaps are large, but net revenue effects are much smaller because import duties are
assumed to compensate the changes in VAT duty for those tradable products. The
estimated revenue under currently proposed legislation is approximately the same as the
estimated revenue with 7.5 percent standard rate and minimum exemption. This means that
the treatments for specific products require an increase in the standard rate by 2.5 percent
point.
13. The effect of the exemption for electricity, water and sewerage service is
ambiguous. The calculation result shows that the exemption could have a positive revenue
effect. It shows the possibility that the exempted treatments for those services do not
necessary benefit final consumers.6
Table 2. The Bahamas: Decomposition of Revenue Estimates
5
6
Only financial services are exempted and no corresponding change in tariff rates.
This is because investment is larger than value added in these sectors in the benchmark year. Under the
setting, reduction of output tax due to exemption is overridden by the reduction of input tax credit for the capital
formation.
12
VAT Revenue (Gross) 1/
(1)
(2)
494
6.00%
Change in Import Duties
and Hotel Taxes 2/
Net Revenue Impact 3/
(3)
(4)
(5)
-323
170
2.07%
1. Proposed legislation
10% standard rate
with exemption of financial intermediation and casino
Full compensation
+
Exemption of health and education
-19
-0.23%
-19
-0.23%
+
Exemption of real estate service
-11
-0.13%
-11
-0.14%
+
Exemption of insurance service
-16
-0.19%
-16
-0.19%
+
Exemption of transportation service
1
0.02%
1
0.02%
+
Exemption of basic foods
-20
-0.25%
5
0.06%
+
Exemption of pharmaceutical products
0
0.00%
0
0.00%
+
Exemption of motor fuels
-15
-0.18%
1
0.02%
+
Reduced rate for electricity, water and sewerage
services
-10
-0.12%
-10
-0.12%
+
Tax free shopping for jewelry and watch
-1
-0.01%
2
0.02%
+
Zero rate for newly constructed dwellings
-18
-0.22%
-18
-0.22%
+
Exemption of 30% of electricity, water and
sewerage services
2
0.02%
2
0.02%
386
4.71%
-279
107
1.31%
4
0.03%
71
75
0.90%
390
4.74%
-208
182
2.21%
369
4.50%
-263
106
1.29%
Total
(keep current rate)
(keep current rate)
(keep current rate)
26
16
3
2. Alternative Scenario: Restriction of import duty reduction
Tariff rates reducted by 70% of VAT rates
Total
3. Alternative Scenaro: 7.5% starndard rate
7.5% standard rate
with exemption of financial intermediation and casino
1/ Revenue impact of introducing VAT at 10 percent rate with no adjustment ot tariffs.
2/ Revenue loss due to reducing the tariff rates equal to the VAT rate.
3/ Revenue impact of introducing VAT with corresponding reduction in tariffs.
Note: FAD staff estimates.
C. Import Tax and Sectoral Breakdown of the Estimated Revenue
14. Table 3 provides the magnitude of import VAT and sectoral breakdown of the
revenue impact of the draft VAT bill. It shows that two-thirds of the VAT revenues will
be collected at customs. This is due to the high ratio of imports in consumption and
proposed special treatments for domestically produced outputs, such as exemption of
health, education and zero rating for residential construction.
13
Table 3. Bahamas: Sectoral Breakdown of Estimated VAT Revenue
Total
Import
tax
Other
Agriculture
0.6
0.5
0.1
Fisheries
4.4
1.7
2.7
Mining
0.2
2.1
-1.9
Manufacturing industry
23.0
21.7
1.3
Electricity, Gas, Steam, Air conditioning supply
15.9
31.0
-15.1
Water, Sewage and Refuse Disposable services
1.3
2.9
-1.6
Construction and Repair
62.9
39.1
23.7
Wholesale trade
70.5
74.4
-3.9
Retail trade
25.8
7.7
18.1
Hotels
39.5
34.3
5.2
Restaurants
21.6
6.3
15.3
Air transportation and services allied to air
2.4
3.6
-1.2
Shipping and services allied to shipping
9.0
3.3
5.6
Land transportation
0.8
1.1
-0.3
Storage
-0.3
2.3
-2.5
Communication
10.9
14.5
-3.6
Banks
26.7
4.7
22.0
3.7
2.8
0.9
Real estate
20.4
1.8
18.6
Business services
17.0
3.0
14.0
Private education
0.9
0.9
0.0
Private health
1.5
1.5
0.1
Other services
21.4
7.3
14.1
Public administration and defence
4.9
5.2
-0.2
Public education
0.4
0.5
-0.1
Public health
1.2
1.5
-0.3
386.5
275.6
110.9
Insurance
Total
15. The sectoral breakdown will provide useful information for the revenue
authority to develop an efficient and effective operational strategy in the future. The
sectoral breakdown is, however, highly sensitive to the assumptions and also depends on
the differences in definitions between the VAT law and national accounts, such as sector
classification and the treatment of foreign trade. Therefore, further work will be needed to
provide a firm benchmark for revenue administration.
14
III. METHODOLOGY IN REVENUE ESTIMATION MODEL
A. Revenue Projection Model
Structure of Data Model
16. The objectives of the model are to analyze the revenue impacts of exemption
and reduced rates, as well as forecast the changes in revenues due to changes in
import duties in accordance with VAT introduction. In order to quantify the effects of
different rates and treatments for specific commodities and sectors, the model calculates
the potential VAT revenue in each sector by using the following formula7:


PVs  rs    M s ,c   c    Ys ,c  X s ,c    c  1  es     N s ,c  I s ,c    c 
c
c
 c

Required inputs for this model are Ys,c (output of commodity c by sector s), Ns,c
(intermediate consumption of commodity c by sector s), Is,c (investment using commodity
c by sector s), Ms,c (import of commodity c by sector s), Xs,c (export of commodity c by
sector s), τc (tax rate for commodity c), rs (registration ratio for sector s), and es (ratio of
exempted output of sector s).
17. Most of necessary data are available in supply and use tables of national
accounts provided by the Bahamas Department of Statistics (DOS). Data on Ys,c and
Ns,c are in supply and use table matrices. The most recent tables with 133 commodities
and 27 sectors are available for 2007. Therefore, the base year of the calculation for
potential VAT revenue is set to be 2007, and then the results of estimated revenue are
projected for 2012 by each sector’s output and input data. Data on Is,c, Ms,c, Xs,c are
calculated by disaggregating the gross fixed capital formation, import and export in base
year. τc and rs are determined by the assumptions discussed later, and es is calculated based
on policy assumptions for each commodity and each sector’s production.8
18. Overall potential VAT revenue can be calculated as the sum of the sector
potential VAT. For estimating actual VAT revenue, it is necessary to assume the value of
compliance gap (γ).
7
This formula assumes that VAT registrants will purchase their input from registrants only. (Non-registrants are
assumed to sell their products to either final consumers or other non-registrants.)
8
The draft VAT guideline for input tax credit shows that if the taxable supplies is more than 90% of the total
supplies all the input tax can be claimed. This 90% rule is applied in this model for each sector. It also stipulates
that VAT paid on entertaining (food, beverages, tobacco, accommodation, amusement, recreation, or other
hospitality of any kind) cannot recovered. To reflect it, the model incorporates restriction of input tax credit for
accommodation, meals and beverages served on premises.
15


VAT      PVs 
 s

Gross Revenue and Net Revenue
19. In order to appropriately estimate the revenue, the reduction of import duties
and repeal of hotel room tax should be reflected in the calculation for both gross and
net revenues. It is assumed that the rates of import duties will be reduced and the hotel
tax will be abolished at the same time as the introduction of the VAT.9 Since the values of
import duties and hotel tax are included in purchasers’ price of related commodities and
VAT base, the reduction of these values due to the changes in policies should be counted
in the calculation of both gross VAT revenue (GR) and net revenue (NR). NR is calculated
by the following formula:
NR  GR  Tariff  HT
20. The changes in effective rates of import duties must be calculated for each
commodity. In order to calculate the revenue impacts of changes in import duties, current
effective rates for each commodity are calculated by using conversion tables. For that
purpose, a table from HS2007 to CPA and a table from CPA to 133 commodity categories
are constructed by using import data in 2008, and ratio of import duties and imported
value for each commodity code is calculated.10
21. Consumer Survey Data is used to provide detailed information on commodities.
Although 133 commodities in the data model are roughly sufficient to cover the different
tax treatments in the proposed VAT legislation, there are some cases which require a more
detailed commodity classification. Where commodities are split into sub-categories, the
consumer survey data in 2006 is utilized to measure the relative size of final consumption
for each sub-category.
B. Assumptions for the Revenue Forecast
23. The draft law and regulations are dated March 6, 2014, with 10 percent
standard rate, is adopted as the benchmark for revenue forecasting, although it has
not yet been authorized by the government. The draft law and authority provides lists
of goods and services with reduced rate, zero rating, and exemption as follows:
9
Import duties include tariff, excise for import of fuels, vehicles and luxury goods, and stamp duty for import of
alcoholic beverage.
10
2008 import data are the oldest data using HS2007 classification. The calculated effective rates are applied to
the base year (2007) import data.
16
[1] Goods and services with zero rating (except for exports of goods and services)
The first sale of a residential dwelling as provided in regulations.
[2] Goods and services with reduced rates (7.5 percent)
Electricity, potable water, and sewerage services.
[3] Exempted goods and services
- Basic foods
- Laundry detergent (liquid, powder), dishwashing liquid, soaps
- Fuel for airlines, automobiles and sea-going vessels
- Electricity, water, and sewerage services in accordance with the limits prescribed
by regulations
- Prescription medicines in accordance with criteria prescribed in regulations
- Air, water and land passenger transportation
- Casino services
- Motor spirits
24. In regard to the changes in import duties, the simulation is implemented under
the assumption of ‘full compensation’ of VAT. This means that if the effective rate of
import duties is more than the newly introduced VAT rate, the effective rate is assumed to
be lowered by the VAT rate. If the effective rate is smaller than the VAT rate, the rate is
assumed to be lowered to zero.
25. The model calculates the potential VAT in 2007, and then projected to 2012 by
using sector output and input data.11 It is assumed that the ratio of gross revenue to
GDP is the same in future forecasting period. This means that the revenue projection is
based on the assumptions that the input-output structure in each sector will be the same as
the one in 2007, and the sector component in the overall economy should be the same as
the one in 2012. If there are substantial changes in the economic structure that contradicts
these assumptions, the results of revenue projection based on this model may be
inaccurate. In addition to unwarranted assumptions mentioned above, the following issues
have not been incorporated in the calculation of revenue estimation due to limitation of
data.12
11
Since sector output and input data are available until 2011, sector value added data are used for the extension
from 2011 to 2012. Alternatively, the potential VAT in 2007 can be extended to 2012 by using demand side
data of national accounts. The data model calculates the results of demand extension and checks the discrepancy
between them.
12
Between 2007 and 2012, there were inconsistencies between national accounts data and customs data as for
the values of import and import duties. It is worth specifying the effects of exempted treatment of imports at
customs and quantitatively evaluating the reason of such discrepancies.
17
[1] Zero rating for export of financial services
If financial institutions supply financial services to non-residents, it is regarded as zero
rated supply and input tax credit for the supply will be allowed. It can reduce the revenue
of VAT, but the model does not consider input tax credit in financial institutions due to
limitation of data.
[2] Cash revenue and accrual revenue
The estimated revenue is calculated on an accruals basis, without consideration of timing
of refunds. If the refund payments extend beyond the collection period, the cash collection
in the first year may temporarily exceed the revenues estimated on accrual basis.13
26. The level of compliance is assumed to be 70 percent. Since there is no data that
assists in estimating compliance level after the introduction of VAT in the Bahamas, a
middle level of compliance is assumed. The ratio of non-registrants is assumed to be 50
percent in agriculture, 30 percent in retail and land transportation, and 10 percent in
fisheries, manufacturing, construction, restaurants, real estate, total business services,
private education, private health, and other community and personal services.14
C. Effects on Overall Fiscal Balance
27. In order to evaluate the effects of tax reform on overall fiscal position of the
government, changes in other tax and expenditure should also be considered.
However, this mission has not attempted to estimate this effect. This methodology is
provided for information purposes in order to for the government to determine the change
in the fiscal balance after the introduction of VAT and adjustments to tariffs.
28.
The changes in fiscal balance relative to GDP can be expressed as:
13
The draft guideline shows that if input tax exceeds output tax in any VAT period, the excess credit should be
carried forward, and any amount of the excess is carried forward for 3 consecutive VAT periods can be claimed
for a refund. It also stipulates that claims will normally be paid by the end of the third calendar month following
the date of claims for refund.
14
The government provided the data on sales of registrants, but it was not possible to derive the estimates for
registrant transaction ratio of each sector. This is because total sales include the value of gross trades, while
national accounts data records only trade margins, and the classification of sectors does not correspond to the
national accounts data.
18
 GR  tariff  HT
FB*
FB
OT
E *   tariff  HT
OT
E 









*
*
*
* 
GDP
GDP GDP 
GDP GDP 
GDP
GDP GDP  
OT   E
E* 
 GR  tariff  HT tariff  HT   OT






*
* 
GDP
GDP*

  GDP GDP   GDP GDP 
where E stands for the overall expenditure of the government and values with * shows the
ones after the introduction of VAT.
29. If other tax items and expenditures are nominally fixed, the ratio of overall
fiscal balance to GDP is affected by the changes in nominal GDP. The first term is the
effect of the net revenue discussed above, and the second term shows the effects on the
relative size of other tax revenues due to the changes in GDP. If other tax revenue is
nominally fixed, such as for the revenues of import duties, the increase in GDP due to the
introduction of VAT will reduce the relative size of revenue. The third term shows the
effects of relative size of government expenditure to GDP. If the government controls the
expenditure after the introduction of VAT less than the GDP increases, the effects should
be positive for overall fiscal balance. Therefore, how the government react to the
introduction of VAT on the expenditure side matters for the evaluation of the effects of
tax reform on overall fiscal position.