EDITORIAL - Merit to move on Junior Market

We expect that there will be a fair bit of debate and even loud criticism of the Government's intention to phase out the Junior Market of the Jamaica Stock Exchange (JSE). The more correct formulation, perhaps, is that the Government will remove the tax incentives that entice presumably small firms to list.

However the issue is posited, this newspaper supports the move by the administration, in the context of the new tax and business-incentive regime unveiled by Finance Minister Dr Peter Phillips.

We, of course, appreciate the position of those who want the incentives that facilitate the Junior Market to stay.

Indeed, as JSE officials have noted, in the three and a half years since its establishment, 19 firms have listed on the Junior Market. Their initial public offerings (IPOs) have raised more than J$2.5 billion.

This means that in an economy where businesses often finance new or expanded operations with debt, people are able to employ more equity capital, giving the ventures more breathing room and a better chance of success. This is important in an environment in which, as several global surveys often remind us, it is neither easy nor competitive to do business.

There has been a cost to the national coffers, and, therefore, the capacity of the Government to finance projects for the public good from its support for the Junior Market.

The firms that listed in this market - their market capitalisation is capped at J$500 million - are exempt from profit taxes for five years. For another five years, they are allowed a rebate of 50 per cent of their taxes.

According to Dr Phillips, companies currently listed on the Junior Market, or which do so up to the end of this year, will continue to enjoy these benefits until they would normally expire.

But firms that list from the start of January 2014, until the end of 2016, "will be able to enjoy full relief from income tax for a period of five years from the date of listing". In other words, the incentive scheme will come to an end in 2021.

NOT HAPPENING IN A VACUUM

We do not question that the economy may have benefited from firms using their IPO capital and tax savings to invest in new equipment and in expansion that created jobs. They may also have paid more indirect taxes.

But the planned removal of the incentives is not happening in a vacuum. The employment tax claw-backs, zero tariffs on capital goods, and other inputs for most enterprises, plus accelerated tax write-down of plant equipment, will lower the transaction costs in the economy. It is estimated that these measures will lower the effective tax rate of some firms to as low as 17.5 per cent, against the current rate of between 25 per cent and 33.33 per cent for corporate income tax.

We agree with Dr Phillips that firms could not expect to enjoy these benefits while having those afforded by Junior Market listing. Enterprise cannot only be on the basis of special initiatives.

The removal of the incentives, however, need not mean the death of the Junior Market. The logic of raising equity capital remains unimpeachable. It can't be beyond the capacity of the managers of the stock exchange to devise means of making the logic attractive to small firms.

The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.