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Halkitis remarks on VAT Bill

Minister of State for Finance Michael Halkitis made remarks during the Second Reading of the Value Added Tax Bill 2014 in the House of Assembly August 19, 2014. Read his statement here. 

Wednesday, August 20, 2014
Wednesday, August 20, 2014

Here follows remarks by Minister of State for Finance Michael Halkitis during the Second Reading of the Value Added Tax Bill 2014 in the House of Assembly August 19, 2014. The following is reproduced verbatim:

Mr. Speaker,
I wish at this time to move for second reading and committal of the Value Added Tax Bill.

To that end, I will in this contribution make observations on a number of vitally important matters in respect of the Bill that I trust will serve to promote an enlightened and effective discussion of the Bill.

I will, specifically, touch on the following issues:

  1. Setting the new VAT and tax reform more generally within the context of the Government’s overarching national development plan;
  2. Outlining our concerted efforts to reform and modernize the administration of the major, existing taxes in order to enhance revenue collection performance;
  3. Reviewing, once again, the many initiatives that we have launched to better contain and control public expenditure;
  4. Expanding on the key elements of the VAT policy and administrative framework that are featured in the VAT Bill;
  5. Elaborating on the reductions that have been announced for various tariff and excise rates and plans for the future in these areas; and
  6. Updating Honourable Members on progress to-date on the VAT implementation plan and our state of readiness for VAT introduction on January 1 of next year.

The Government’s National Development Plan

Mr. Speaker,
The VAT Bill before us is about the introduction of a new broad-based tax on consumption in The Bahamas. However, it is critically important to properly situate this initiative in the broader context of the Government’s overall plan for national development. This plan, appropriately so, is about much more than tax reform and the introduction of a new source of taxation.

Indeed, as the Government moves ahead with the fundamental reforms that it was elected to implement, including fiscal and tax reform, focus must be maintained on our overarching plan for economic renewal, job creation and social progress. And very importantly all of these within the context of a nation of islands; citizens in all the islands and in the smallest settlements have a right and an expectation of access to government services.

The details of that plan were presented in the Government’s Charter for Governance and, subsequently, the Speech from the Throne. In it, we explained that our country’s need for change is widespread and that we simply cannot afford to continue with business as usual. We spoke of our commitment to a national development plan grounded in a vision of a stronger and more prosperous Bahamas of the future.

Our plan offers new and innovative solutions for the wide range of economic and social challenges facing the nation. To that end, we have charted a course of change with the specific goals and targeted actions that we will implement over the full course of our mandate.

Our plan is multi-faceted and it is targeted to fighting crime and bolstering national security, strengthening the economy and creating jobs, enhancing health and education and social development generally as well as promoting the further development of our Family Islands.

We fully recognize that the challenges that confront us are numerous and complex. Our plan of action is commensurate with those challenges. We are steadfastly committed to its full implementation for the sake of a better life and future for all Bahamians.

The achievement of the objectives that I mentioned above clearly is clearly dependent on stronger economic growth going forward. To that end, our plan encompasses a variety of measures including strengthening our key tourism industry; promoting additional foreign direct investment across the country, and particularly in Grand Bahama and the Family Islands; exploring avenues for further diversifying our economy, especially in the agricultural area through science and technology to improve our competitiveness in food production. We are also committed to further diversifying our financial services sector; the further development and expansion of our yachting and shipping registries; expanding our investments in education; and strengthening national training through the National Training Agency to establish a competency based training and job placement system that is flexible and responsive to the requirements of the workplace.

We have focused our attention on these and the other major areas of our change and growth agenda and we will persist in planning and further developing initiatives that will get our economy growing more strongly in the years ahead.

From the outset, we have been guided by the hard reality that the finances of the Government need to be returned to a position of sustainability if we are to strengthen confidence in the Bahamas as an attractive and secure place for investment, not only by foreigners but by Bahamian entrepreneurs as well.

If confidence is eroded by lax fiscal policies, we all bear the consequences: credit downgrades and higher interest rates for the Government and Bahamian businesses and citizens, as well as the potential for further downgrades and higher interest rates if we fail to act decisively and stop mortgaging the future to support today’s spending. History of deficit financing.

We have made it clear that we will implement priority initiatives within our plan to the extent that we can do so in a fiscally responsible manner while remaining faithful and focused on the commitments made in our Charter for governance.

We have also stressed that we will strive to reform and rebuild the basic structure of the public finances such that, over time, we return them to a self-sustaining basis with no need for continued annual deficit financing and borrowing.

At the same time, by putting the level of government debt on a downward path back toward more desirable and appropriate levels, we will recreate the fiscal room necessary to finance the full complement of our national development plan, including economic renewal and stronger job creation. Seen in this light, fiscal reform is at the heart of the Government’s plan for national economic and social development.

In turn, tax reform is a critical component of fiscal reform. These reforms are critically necessary to allow the Government to follow through in making its national development plan a reality.

For the sake of complete transparency, full disclosure, accountability and credibility, we set out the details of the various components of our fiscal reform strategy in the form of a Medium-Term Fiscal Consolidation Plan through 2016/17. This plan was published in February 2013. The plan consists of four key parts: growing the economy; restraining expenditure; enhancing revenue administration; and securing new sources of revenue. Many who still persist in the view that the government is focusing only on taxation.

Through this plan, and in combination with our actions to strengthen economic growth, we are fundamentally and, in a balanced way, reforming the structure of both Recurrent and Capital Expenditure as well as the structure of Government Revenues. This will allow us to:

  • eliminate the unsustainable imbalance between Recurrent Expenditure and Revenue with a target of 2015/16;
  • significantly reduce the GFS Deficit and set it on course to complete elimination; and
  • arrest the growth in the Government Debt burden and move it onto a steady downward path to more prudent and sustainable levels.

Reform and Modernization of Major Existing Taxes

The Government’s actions on the revenue front begin with measures to improve the collection of existing taxes in line with what is rightfully due to the Government. We are fully cognizant that our revenue system is seriously deficient and we are moving to remedy this situation through a number of targeted reform and modernization measures. As I spoke at length to our actions in respect of Customs and Real Property Tax at the time of the 2014/15 Budget debate, I will merely recap these at this time.

Customs Operations

Mr. Speaker,
Since coming to office, we have been pursuing an aggressive plan of action in respect of Customs, to bring its practices and procedures up to best international standards.

Business Process Re-engineering
In the area of business process re-engineering, the final Inception report has been prepared and monthly reports have commenced. A cloud-based project management software has been set up to monitor activities, timelines and milestones.

As for enforcement, the consultants conducted their first mission and are developing preliminary findings for the “As Is” reports. This work should conclude by September 12, 2014.

Customs Network Infrastructure
The final report assessing the Customs Network has been reviewed. As well, the Terms of Reference for the new Customs Network have received approval from the IDB, which is providing financial support. Work is underway on the RFP to solicit bids for the new customs network inclusive of IP phones, Network Topology, Network Equipment, Installation, Maintenance, Warranty and Standardization.

Mobile Communications Equipment
The procurement of some of the mobile communications instruments, such as handheld radios, Wifi solutions in port zone and PDA’s, is underway.

Marine Unit
Mobilization of the Marine Unit is proceeding with the RBDF guiding the procurement of the boats and maintenance management.

K9 Unit
Mobilization of the K9 Unit has been agreed and the RBPF/HMP will guide the procurement of the canines and maintenance management.

Portable Scanners
Customs is proceeding with the procurement of portable scanners and has identified several Family Island sites for deployment.

Human Resources Consultancy
The RFP for the HR consultancy is in development and bids will be solicited with a view to engaging a firm.

Training Sites Renovation
Customs is proceeding with the training sites renovation. They have identified several training sites for key Customs Operations on the Family Islands.

In the audit area, proposals are being reviewed and evaluated.

Modernization of the Real Property Tax System
As for progress being made on the modernization of the Real Property Tax system, concerted efforts are being focused on the following major initiatives in the Property Tax Unit of the Department of Inland Revenue:

  • Introduction of a new Property Tax Management and CAMA System that will enable the RPT Unit to improve the coverage ratio of the tax system, provide accurate tax information, manage arrears and collections and lead to an overall enhancement in the efficiency of the department; the Government recently signed the contract with Tyler Technologies with respect to replacing the Real Property Tax System;
  • Development and implementation of a General Re-assessment of properties on the register in the Fall of 2014, in order to get property values up to date, by either indexing or trending existing valuations to achieve better horizontal equity;
  • Implementation of an Arrears Action Plan utilizing private collectors to assist with the collection of outstanding property taxes;
  • Delivery of an effective programme of Taxpayer Education to inform taxpayers on the various aspects of the Real Property Tax; and
  • Amendments to the Property Tax Legislation to ensure that it is in line with best practices.

Enhanced Containment and Control of Public Expenditure
As for measures to contain and control public expenditure, Honourable Members will recall that I spoke at length, during the Budget debate, on the numerous concrete actions that this Government has initiated since it came to office and which it is actively pursuing.

In summary fashion, on the Recurrent Expenditure front, we are taking a variety of measures to restrain the growth of spending and make that spending more efficient and effective.  The overall framework for strengthened public financial management is taking place within the scope of the new Financial Administration and Audit Act. The Ministry of Finance is, in a determined fashion, enforcing strict expenditure discipline and accountability across all Government Ministries, Department and public corporations.

In this regard, the Government is committed to a fundamental review of its operations and its expenditure and revenue control mechanisms, seeking to instill best practices wherever feasible. The Ministry of Finance, in particular, is being restructured and strengthened to enhance its capacity to more effectively monitor the operations and expenditures of Government Ministries, Departments and public corporations. We are vigorously striving for higher levels of accountability and efficiency.

As regards public corporations, the Ministry of Finance is exerting more direct oversight of their financial affairs to ensure that they strive for greater levels of efficiency and effectiveness and that they are subject to greater accountability to the Government. This will allow our budgeting process to be more comprehensively informed by the budgets of public corporations, such that a truly comprehensive approach to fiscal discipline is achieved. The Government has asked subsidy dependent corporations to better align their expenditure plans with the resources that are available.

In addition, our planning function is being strengthened such that new investments and projects are reviewed in an economically and financially sound and effective manner. The government is also introducing new Public Sector Procurement procedures which impose greater controls and greater efficiency on public spending for goods and services for all public entities including public corporations.

Appeal for cooperation
As well, we have bolstered our approach to the management of government debt. Through the Debt Management Committee comprising representatives of Finance, the Treasury and the Central Bank; a new debt management policy framework has been developed to minimize the financing costs of Government debt while also minimizing risk.

Through these actions, Recurrent Expenditure will be allowed to grow in dollar terms through the medium- term to allow the financing of new and emerging priorities such as the hiring of doctors and other staff for the new mini-hospitals. However, the plan does signal the Government’s commitment to a reduction in Recurrent Expenditure relative to the size of the economy; this will require the setting of clear spending priorities going forward.

Having said this, I believe it is important to delineate again the factors underlying the year-over-year increase of $103 million projected for Recurrent Expenditure in 2014/15. For one thing, not unexpected, debt servicing requirements next year will be up by $40 million from 2013/14, with public debt interest payments up by almost $30 million and debt redemption higher by $10 million. Of course, it goes without saying that the large cost overruns, under our predecessors, on the New Providence Road Project have been an important factor in the higher interest payments for which we have had to make provision.

Capital Expenditure over the last few years has been at exceptionally high levels relative to historical trends. However, due to the fiscal exigencies, our Medium-Term plan calls for these expenditures to be returned to their more traditional level of 3% of GDP. Given emerging requirements, this will require strict prioritization and timely profiling on the part of the Government.

How long do we ask people to wait? (cont’d)

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The Bahamas government announced this week it will build a multi-purpose motorsports complex by 2016. The circuit will be used for police, security, ambulance and other driver training, motorcycles, cycling and numerous events, including providing a circuit-approved racing oval for the iconic Bahamas Speed Week Revival.

Minister of State for Finance Michael Halkitis made remarks during the Second Reading of the Value Added Tax Bill 2014 in the House of Assembly August 19, 2014.

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