Next on the agenda: Tax reform battle

R. Anne Shirley, Business Writer

Now that the passage of the First Supplementary Estimates has come and gone, the next major challenge facing the Golding administration is national buy-in to its Green Paper on Tax Reform for Jamaica.

Finance Minister Audley Shaw said as he tabled the green paper on May 11 that "the feedback from the public, especially the Opposition, is important in arriving at consensus on the measures that can be implemented in this financial year and over the medium term."

But there are already signs of resistance and agitation from some key interest groups namely, the Jamaica Manufacturers Association, major players in the agriculture industry, and the small and medium-size business sector.

They have started to raise concerns about the devastating impact of the proposed lowering of the Common External Tariff (CET) to 20 per cent on their sectors as this would make it easier for imports to flood the local markets and at the same time reduce the competitiveness of locally manufactured/produced products.

Analysts are also pointing to the fact that the lowering of the CET would allow agricultural imports from countries where the farmers receive massive production and export subsidies, while Jamaican farmers get none.

And given the higher costs of energy, lending rates, cost of security, including prevention of praedial larceny, for Jamaican producers they are cautioning Government to tread carefully on opening the floodgates for cheap imports.

BUSINESS RESPONSE

Both the current president of JMA Brian Pengelley and immediate past president Omar Azan have stressed that the proposed application of the advanced GCT payments on imports and the application of customs administration fees would lead to severe cash flow problems for their members - exacer-bating the problem caused by the proposed reduction in the CET.

Pengelley in fact noted recently that a survey of the nearly 300 manufacturers who are members of the JMA indicated that a significant number believed that the proposed tax regime being pushed by the Government could lead to the closure of businesses.

Further, the local manufacturers are also concerned with the long-term effects that the new tax regime could have on production output, and many would seriously consider relocating as a result of the tax changes.

"One hundred percent of responders indicate that proposed tax reform measures would have a negative impact on their cash flow; 96 per cent indicate that the proposed tax reform measures will impact the competitiveness of local manufactured goods, 33 per cent indicate that they would consider moving their business to another country and the primary choice was Trinidad," he said.

In terms of the proposed reduction in the GCT rate, while this has been welcome news, critics are cautioning against the elimination of zero-rate and exemptions on basic food items and other items consumed primarily by the poor as this would have a devastating impact on the most vulnerable in the society, particularly in light of the expectation of continued high food and oil prices for the foreseeable future.

PROPOSALS IN A NUTSHELL

The major policy changes proposed are:

A. General Consumption Tax (GCT):

Reduce the statutory GCT Rate initially from 17.5% to either 15% or 12.5%.

Widen the GCT Base by various means (that is, eliminate most, if not all exempt and zero-items over time). In FY 2011/12 they expect to eliminate over 10 per cent of existing exemptions.

Apply simple interest to penalties and surcharges for GCT (as opposed to the current application of compound interest) and specifically indicate that the allocation of payment on account go first to interest, surcharge, penalties, then principal tax.

Amend the penal provisions of the relevant laws to strengthen enforcement.

B. Income Tax:

Decrease the personal income tax rate;

Increase the general income tax Threshold "to a level that is at least commensurate with replacing the gratuity paid to hotel workers so these employees can access NHT benefits, etc;

Decrease the standard corporate income tax rate initially to 30%;

Amalgamate the Education Tax with PIT to simplify payroll taxes;

And phase compulsory filing of income tax returns.

C. Customs Fees and Duties:

Apply a Customs Administration Fee (CAF) on all imports, inclusive of customs user fees, procession fees, environmental levy and standard compliance fee. This would have to be WTO-compliant;

Keep the Additional Stamp Duty (ASD) separate to provide some level of protection for the Agriculture Industry;

Commercial Importers (with the exception of petroleum and bauxite) to pay advance GCT;

Reduce the CET — dependent on the agreed level of the fees subject to discussions with our CARICOM partners. This would also be applicable to motor cars;

D. Tax Waivers/Incentives:

Simplify/amalgamate the laws granting waivers into an Omnibus Tax Incentive Law, which would bring all pieces of legislation to do with the approval or granting of tax benefits under one umbrella.

And there is also the pending Charities Act.

PHASING OF THE CHANGES

The Government wants the changes to be phased in a "systematic structured approach to tax policy". It is therefore proposing that:

1. Changes to tax rates, including the GCT, would be structured in three-year intervals and renewed or amended subject to review;

2. Changes in income tax would be implementable on a calendar year basis, that is, effective January 1 at the beginning of the tax year, to allow for smooth transition;

3. A pre-implementation period, right after the budget debate ends, would be given to sensitise the public to the upcoming changes so that taxpayers can make the necessary adjustments; and

4. There will be active performance monitoring of the respective tax policy changes.

A special parliamentary committee chaired by Shaw will begin reviewing the reform proposals this month.

renee.shirley@yahoo.com