Dr. Omar Davies, Minister of Finance and Planning, gestures during his Budget presentation last Thursday at Gordon House, Kingston. -Rudolph Brown
Based on the Financial Statements and Reve-nue Estimates tabled in Parliament on April 18, total Recurrent Revenue of the Ja-maica Government for 2001/02 was $97.2 billion, which is approximately 29 per cent of GDP.
Tax revenues were approximately 27 per cent of GDP. Without engaging in an extensive statistical analysis, this is one important indicator that there is some validity to the general sentiment that the country is too highly taxed, since tax burdens at this level are approaching those of more highly developed countries, where social services are much more available than is the case with countries such as Jamaica.
Combined with the fact that tax revenues fell short of the targets by approximately seven per cent last year (2001/02), a reversal of the trend in recent years; the fact that recent measures to increase or introduce new taxes have resulted in major civil unrest; and the phenomenon of the contribution by PAYE taxpayers to total tax revenues increasing relative to other sources of tax (such as corporate tax), it is no surprise that Government has, as promised, opted to present a budget that is devoid of any new or increased tax rates this year. The specific circumstances prevailing in an election year are simply not supportive of any move to impose any significant increases in taxes.
But there have been a few interesting initiatives to strengthen the revenue base. We discuss these in further detail below, but some examples are the decision to introduce a mechanism for collecting GCT on services supplied by foreign professionals and the new requirement for professionals to be tax compliant before they are allowed to obtain required licences. And yes, there will be some increases in user fees levied by the Customs Department.
Additionally, the Government perceives that there is major leakage in withholding taxes collected by financial institutions from interest payments, and proposes to undertake major audits of these institutions to prevent this. These initiatives are not earth-shattering, but they represent tinkering that should be effective in eliminating some loopholes that the technocrats have identified for a long time, but were unable to have fixed.
Government plans to spend some $210 billion this year, $125 billion in recurrent expenditure and $85 billion in capital. Included in these figures are $60 billion for interest payments and $75 billion for repayment of loans, making the overall provision for debt servicing 64 per cent of the total budget. This year's projected recurrent expenditure represents an effective reduction against expenditure for 2001/02 (of $212 billion), whereas the inflation rate for calendar year 2001 was 8.7 per cent, implying a real decrease of around 9 per cent.
The crucial success factor in maintaining the budget at this level must be the Government's success in reducing its borrowing costs to an average of 14.7 per cent, and this in an environment where recent issues of US$ denominated instruments have yielded in excess of 11 per cent, free of tax. The need of Government to borrow a full 40 per cent of its total revenue needs is not conducive to the maintenance of such an ambitious expenditure target, and we must wonder where the adjustments will come if these targets are not met.
The sources of revenue that have been identified to fund the projected expenditure of approximately $210 billion are as follows:
Figures are in J$ Billion
Tax Revenue 106.8
Non-Tax Revenue 5.9
Capital Revenue and Grants 9.8
Transfer from Capital Development Fund 2.6
Loans -
External 26.1
Domestic 58.8
TOTAL 210.0
Revenue-enhancing measures
General Consumption Tax: The Minister proposes to amend the GCT Act so that recipients of services from overseas service providers will become accountable for the related GCT.
This is intended to counteract a loophole in the legislation, which made it difficult for the revenue to pursue overseas service providers for GCT. Whilst the precise mechanism has not yet been made public, it would appear that the tax will effectively be deducted by way of withholding and remitted to the revenue.
This proposed amendment will be of significant concern to taxpayers carrying on exempt activities for GCT purposes, e.g., banks, insurance companies, building contractors. The GCT incurred by these taxpayers in respect of these services will become an additional cost.
However, local service providers should welcome the change, as it will remove the competitive advantage previously afforded to foreign service-providers.
Unfortunately, the amendment will also make services not otherwise available in Jamaica more expensive.
In addition, the Act will be amended to ensure that services provided by persons who are not licensed under the Betting, Gaming and Lotteries Act, to those persons who are registered under the said Act, are not exempt. Essentially, this translates to an overall increase in GCT cost incurred by licensed companies offering lotteries as they will now be required to pay GCT on services they utilise.
Linking of tax compliance with the granting of licences and certification: The Minister has proposed that valid tax compliance certificates be a prerequisite for obtaining various licences and professional certification. Previously, this was only required for persons tendering for contracts with the Govern-ment, and importers. This new development has implications for professionals, including registered public accountants, lawyers, architects, quantity surveyors, to name a few.
User fees at Jamaican Customs: Certain fees charged by customs will be increased to defray the costs of certain services, such as:
Processing of applications for licensing and facilitatory services.
Data entry services for brokers and importers who are not computerised.
Providing services for brokers who do not possess mail capabilities by transferring information on diskettes.
New annual fees proposed are:
$15,000 for companies,
$10,000 for conditional licences; and
$10,000 for individuals.
Other fees to be increased are:
A flat rate of $500 for entries with 10 or less items and $5.00 for each additional item.
A processing fee of $500 for each diskette received.
An annual licensing fee of $25,000 for the operation of a private bonded warehouse.
An annual licensing fee of $50,000 for a public bonded warehouse
Lottery games: The proposal is to increase the levy in respect of the 'Lucky 5' and 'Cash Pot' lottery games so that the payout (prize money) is reduced from 51 per cent to 50 per cent and 72 per cent to 70 per cent respectively.
Other initiatives: In furtherance of the Government's efforts to strengthen the efficiency and effectiveness of tax collection, along with compliance, there are plans afoot to become more stringent in granting waivers.
The Minister announced his intention to bring financial institutions under greater scrutiny, with regard to their dealings in tax-free instruments. He stated that the Taxpayer Audit and Assessment Department would be conducting intensive audit inspections of these institutions with a view to ensuring that the appropriate withholding tax is being remitted.
The traditional sources of increased tax revenues, i.e., on luxury goods such as tobacco and alcohol have been given a respite this year.
Penalties and waivers: The Minister acknowledged the complaint of some taxpayers who had been penalised for regularising their tax status after being delinquent. In consideration of this, he indicated that the Inland Revenue Department would be given the discretion to review requests for waiver on a case-by-case basis and grant partial reduction in penalties and interest to those taxpayers who demonstrate a willingness to settle their liabilities promptly. He did not indicate the exact nature of the relief that the Commissioner would be authorised to allow but implied that such relief will only be available up to July 2002.
General: There are proposed increases to be made in traffic fines and licensing fees. We must comment on the wealth of information and the clarity of the information contain in the several documents that have been made available and commend the various agencies that are involved in their production.
Our information is that whereas PAYE taxpayers contributed 1.9 times what businesses (companies and self-employed individuals) paid in 2000/01, this ratio increased to 2.76 in 2001/02.
This Pricewaterhouse-Coopers Tax Newsletter has been written to alert clients to the proposals of the 2002/2003 Budget. The proposals are reported and discussed in general terms and should not be acted upon without professional advice.
