Smart tax-policy reform

Charles Johnston, Contributor

The Government's Green Paper on Tax Reform for Jamaica is timely, as the last major tax-policy reforms were carried out in 1991. The Green Paper proposes some positive changes such as the reduction in the General Consumption Tax (GCT) rate in order to stimulate consumption, the reduction in corporate and personal income-tax rates in order to encourage compliance and make doing business in Jamaica less onerous, and the institution of the compulsory filing of income taxes by all, as is done in most developed countries.

The proposal to reduce the Common External Tariff (CET) to 20 per cent on the 600-or-so tariff lines on which a rate of over 20 per cent currently applies, however, is most alarming to the agriculture and manufacturing sectors, if handled in a broad-brush manner.

The Government of Jamaica needs to decide whether it is more important to support the country's productive sectors, agriculture and manufacturing — which employ 55 per cent of the population and produce many export products necessary to earn foreign exchange — or its trading sectors, imports for resale, which are net users of foreign exchange.

At present, under the CET, items such as fruit, ground provisions, spices and pepper sauces have a rate of 25-40 per cent. As a general rule, the CET ranges from 0-20 per cent for industrial goods and up to 40 per cent for agricultural products, with exceptions for the Organisation of Eastern Caribbean States countries and sensitive products to each member state.

WTO Trade Policy Review

According to the World Trade Organization's (WTO) 2010 Trade Policy Review of Jamaica, the country's average most-favoured nation (MFN) tariff was 9.4 per cent. When stamp duties are taken into account, the average border protection rises to 11.5 per cent on average - 7.4 per cent for non-agricultural items and 30 per cent for agricultural items.

About 58 per cent of all Jamaican tariff lines are duty free: 24 per cent of the tariff lines range from 15 to 20 per cent, and about 0.5 per cent of the lines have a tariff greater than 40 per cent.

Seeing that during the Uruguay Round Jamaica bound its tariffs at 50 per cent for industrial products, 100 per cent for agricultural products and other duties and charges at 80 per cent. In all instances, our tariff rates are well below the agreed ceiling.

For the sake of comparison, the WTO carried out trade-policy reviews for Barbados and the Dominican Republic in 2008, and the comparative figures are as follows.

The average applied MFN tariff for Barbados was 16.2 per cent, with the average tariff for non-agricultural items of 12.8 per cent and 33.7 per cent on agricultural items. Only about five per cent of Barbados's tariff lines are duty-free.

During the Uruguay Round, Barbados bound all its tariffs except on fish and fish products, with agricultural products being bound between 100 per cent to 233 per cent, and non-agricultural products are bound at rates of at least 70 per cent.

In contrast, the Dominican Republic's average applied MFN tariff was 7.5 per cent, with agricultural products averaging 14.2 per cent, and non-agricultural products 6.3 per cent.

About 55 per cent of tariff lines in the Dominican Republic are duty free, and the country has bound almost all its tariffs at a rate of 40 per cent, with notable exceptions being dried beans bound at 89 per cent, onions at 97 per cent and rice, chicken and garlic at 99 per cent.

Although these two countries' outlooks on tariff structure are very different, in both cases it is obvious that they have selected sectors they wish to protect, and have exercised their right to do so.

Trade liberalisation

Note that the last WTO policy review for Trinidad was carried out in 2005 and the figures may no longer be valid. However, at the time, their average applied MFN tariff was 9.1 per cent, with average protection for agricultural products at 17.1 per cent, and for non-agricultural products at 7.6 per cent. Also, bound rates for most agricultural goods were 100 per cent with most industrial products bound, and 50 per cent with certain exceptions bound at 70 per cent.

In the Green Paper on Tax Reform, the reduction of the CET is listed under the aim of simplifying the overall tax system. However, the Government must realise that the reduction of the CET is not only a tax-simplification measure, but also a trade-liberalisation measure.

It would be foolhardy to open the floodgates to cheaper imports that seriously challenge our productive sector, simply in order to gain tax simplification. The Government has underscored that this proposal would first have to be approved by CARICOM, but I am sure that even if it is approved by CARICOM for Jamaica, it is unlikely that most of our CARICOM partners will jump on the bandwagon.

I am not saying that no CET tariff lines should be lowered to 20 per cent. There are many products that we import that are not produced in Jamaica and do not compete with our own products, and could be lowered - items such as maple syrup (40 per cent), wigs (25 per cent), and cutlery (25 per cent) readily come to mind.

This is the point. The Government must carefully examine those 600 tariff lines in order to determine which can be lowered to 20 per cent without putting the productive lifeblood of our nation in jeopardy.

Charles Johnston is chairman of Jamaica Producers Group.charlesj@cwjamaica.combusiness@gleanerjm.com