The cess : How effective was it, and does it work?
published: Friday | October 3, 2003

By Lavern Clarke, Staff Reporter

The budget was announced six months ago with the Minister of Finance and Planning, Dr. Omar Davies, making it clear that he needed to collect more revenues and cut expenditure. To date he has been unable to raise sufficient funds on the international capital markets and earlier this week the Ministry of Finance released figures that show expenditures are up by 15 per cent. To compound matters further wages are up by 8 per cent with programme spending also up by 7 per cent. Only this week The Gleaner's Don Anderson Poll revealed that 65 per cent of Jamaicans believed that they are worse off since the 2003/2004 budget. This week the Financial Gleaner begins a new series examining the budget and whether it is proving successful or not.

THE NEW import tax when it was first mooted was a passionate issue for businesses, but five months later, companies seem to have accepted it as just another element of their cost structure, secondary even to the non-financial issue of crime.

At introduction on May 1, the tax was a 4 per cent cess which businesses could reclaim in tax credits, but it was reduced to a non-reclaimable 2 per cent user fee a month later on the insistence of the private sector who said it was a better deal for them.

Between April and August, Jamaica Customs collected $527.4 million from the cess/user fee, according to figures supplied by the agency ­ reflecting a monthly average of just under $132 million.

Finance Minister Dr. Omar Davies projected that the tax would yield $3.4 billion over the fiscal year. Ignoring seasonal fluctuations, that figure averages $283 million per month. The keeper of the treasury, it appears, is off target on the cess.

Meantime, none of the trade associations nor the research-based Jamaica Conference Board have yet got around to analysing the tax's specific impact on the cost of doing business. But in an interview Wednesday, Jamaica Chamber of Commerce president Michael Ammar, Jr. said feedback from his membership suggests that the impact on production costs was running marginally at an average two per cent.

However, the pass-through to shelf prices, he says, appears to be coming out at 2.5 to 3 per cent.

CRITICAL ISSUE

Mr. Ammar, having reiterated that the chamber was among the business associations in favour of the user fee ­ side-stepped to speak on another critical issue ­ that of crime.

"It's the biggest deterrent to business," he said, having named the issue Tuesday as one of five key matters to be prioritised in his second term as JCC president, following his re-election.

Instead of concentrating on making money, he said, companies are far too engaged in assessing tensions to determine how safe it might be for employees and the business to operate on particular days.

Having lobbied for years for action on the problem, the Chamber president said, there is now a shift in strategy.

"The Chamber's position now is not to confront, but to cooperate with the Government on security," said Mr. Ammar.

But back on the issue of taxes, Mr. Ammar's guestimate of the cost effect of the user fee, is in line with the 2 per cent pass-through that Finance Minister Dr. Omar Davies' technocrats had advised him would have resulted from the cess.

As originally configured, the import fee would have required a more disciplined approach to filing returns, which would be required on a quarterly basis.

The private sector said in May its analysis was showing a likely 8 per cent effect, but they were more concerned about the impact on cash flows and interest costs on overdrafts, and the opportunity cost associated with pre-paying income taxes. The user fee, which they offered as a compromise, would be a straight up expense and therefore easier to factor.

But as it emerged, the import tax turned out to be the least of several hits that companies would take in the April-May period, including a sharp drop in the value of the Jamaican dollar.

While subsequent figures out of the Finance Ministry would indicate that the Government was earning slightly more tax revenues than targeted in the first fiscal quarter ­ those gains have now been reversed according to the July and August fiscal figures which show tax revenues off by $2 billion ­ companies had significantly higher import bills arising largely from a rapid slide in the dollar.

Mr. Ammar says while some groups, such as haberdashers, have had to hold a check on price because of competition, on a wider scale, shelf prices have seen an average 20-25 per cent increase ­ 30 per cent in some areas ­ and is especially evident in the supermarket and food sectors. From $56.49 at the start of April, the Jamaican currency fell to a low of $67.21 to the US dollar in mid-May, reflecting a 19 per cent dip in value.

WHEAT PRICES

Companies like Continental Baking Company (CBC), a core operation of the National Continental Corporation group, sat up and took notice, especially as wheat prices were moving up on the world market, and the price of flour was expected to follow.

Bread which not so long ago was selling for $56, then $62, is now on the shelves at over $70.

CBC managing director, 'Butch' Hendrickson, says the cess/fee has added an estimated seven per cent to prices, but the movements have been fairly well contained, even restrained, he suggested.

"I have not seen the panic where people are changing prices minutely," he told the Financial Gleaner, comparing to former years. "Our suppliers have been more than responsible...in a business sense."

Mr. Ammar, meantime, says this new environment of price restraint indicates clearly that right now "it's a buyers market."

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