'NO NEW taxes,no tax package'. That's good news for a society in which there is consensus that "we are overtaxed" or that "we have reached our taxable limit".
With taxes as a percentage of GDP for 2004 likely to be no less than the 27 per cent that it was in 2003, it is perfectly understandable that this sentiment is so popular. In the Budget presented last Thursday, the Minister indicated that he expects taxation revenues to contribute $155.6 billion to the overall Budget of $328.2 billion. This level of taxation will, if achieved amount to an 18.7 per cent increase over the $131 billion collected in the 2003/04 Fiscal Year.
Last year, revenues and grants amounted to 54.3 per cent of total expenditure. This year's budget calls for revenues and grants financing 53.5 per cent of total expenditure, marginally less than was the case last year. Anticipated borrowing of $153 billion remains at 47 per cent of total expenditure. Based on this programme, we don't see a trend that will support the prospects for reducing reliance on borrowing. Without a reduction in borrowing, the stated intention of creating the environment for a continuation of the recent decline in interest rates will not be attained.
The sustainability of the "no new taxes" promise is also worthy of examination. The Budget presupposes an 18.7 per cent increase in taxes over 2003/04, which saw an actual increase of 27.3 per cent over collections in 2002/03. It must be remembered that the 2003/04 Budget announced measures that should have raised some $13.8 billion. Some of those measures have still not been implemented (such as the environmental levy) and some appear to have been abandoned altogether. Without new tax measures and with inflation targeted at nine per cent, (compared to fiscal year 2003's 16.5 per cent), it is tempting to conclude that this year's budgeted tax revenue is overly optimistic even taking into account the fact that some of the 2003/04 measures were implemented several months into the year.
BOUNCE
But perhaps we are reading more of a promise into the Minister's words than was really said. After all, he has indicated that he is placing heavy reliance on the work of the Tax Reform Committee in evaluating proposals for changes to the tax system with which he has been bombarded. It may well be that he expects some 'bounce' from the outcomes of the Committee's work. Furthermore he has indicated that he is relying on "improvements in administration as well as in terms of certain legislative amendments, to make the various tax collection machinery more efficient." Whilst no new taxes are being announced at this time, this promise is clearly being made in the context that this could very well change after presentation of the report of the Tax Policy Reform Committee, due in October 2004. We agree with the Minister's acknowledgement that there are certain machinery and administrative reforms that are necessary to make the system more effective. However, we lament the fact that although there are already a plethora of measures available to the Revenue Department to enforce the collection of tax legitimately due, some are scarcely utilised. For example we still find many entities, including Government agencies paying on account of construction contracts without withholding the requisite Contractors' Levy. Yet machinery to stem leakage of this nature already exists and was utilised to great effect in the past.
Having said the above, we caution that there has been a dramatic improvement in the system of levying interest and penalties on outstanding tax, with many taxpayers being surprised at the extent of their liability when they learn of it, invariably when they seek to obtain a Tax Compliance Certificate. It would help if the Revenue Department communicated these assessments to the affected taxpayers. The draconian level of these sanctions (50 per cent penalty plus 40 per cent interest) will, ironically have the effect of discouraging delinquent taxpayers from regularising their positions. There is an urgent need to review the interest and penalty regime to ensure that it presents more of an incentive than a disincentive to comply. This applies equally to the Income Tax and GCT regimes.
Based on what the Minister has said, the Government does not see much potential for any dramatic gains from focusing on the expenditure side of the Budget, given that only $100 billion of the total expenditure is discretionary. Whilst we do not concede to that argument, we will not present a full analysis of this in this memorandum, since we feel that our readers are primarily interested in the method of funding the Budget, as this will have a more direct effect on their businesses.
We outline details of how the Budget is to be financed.
The Minister announced two initiatives being provided through the EXIM Bank. A loan facility of $80 million will be made available to the information, communication and technology sector for software development, capital expenditure and working capital purposes among other things. Additionally, an amount of US$8.4 million will be accessible by exporters meeting certain criteria and who have been approved by the Jamaica Exporters Association for this purpose. Up to a maximum of US$300,000 per borrower, at an interest rate of 7 per cent will be made available.
These are good moves, but the administrative costs may not be worth the savings in interest. As he did in his 2003/04 presentation, he advised that there would be improvements in the tax collection machinery. He also spoke to legislative amendments, which would assist in making the system more efficient. We understand that, in order to achieve this, certain tax administration measures would be implemented including a graduated tax collection scheme, the training of officers in investigative techniques and more aggressive collection efforts.
MEASURES
Some of the measures to be implemented will include:
Enforcing seizure and sale of assets for payment of tax
The registration of a "lien" on the property of a delinquent taxpayer
Transferring/collection of tax due by a taxpayer from third party debtor
Re-examination of interest and penalty provisions contained in the various Tax Acts. Increased penalties have already been imposed under the Income Tax Act.
Prescribed persons to be required to provide details in the form of a Return showing names and addresses of persons to whom interest has been paid or credited.
The Minister announced that the imposition of this fee in the last fiscal year had proven to be extremely successful, realising revenues of just under $4 billion. He further indicated that the PSOJ/JMA had submitted representations for the existing, non-refundable two per cent fee to be replaced by a 2.5 per cent charge, which would be creditable against the income tax liabilities of persons suffering the fee.
He expressed some concerns that this change would not necessarily achieve the desired effect of discouraging persons from increasing prices but stated however that a decision on the proposal is being deferred pending consultations with the Tax Policy Review Committee set up by the Government in the prior year. In fact, he stated that all proposals for fundamental changes to the tax system would be referred to the Tax Policy Review Committee for consideration before implementation.
PROPERTY TAXES
The Minister also confirmed that there would be no further increases in property taxes for the year even though the anticipated collections from the tax were below the target of $3 billion needed to cover street lighting and solid waste management.
SOLAR WATER HEATERS
He advised that a review of the current policy of taxing this commodity suggested that it was not an incentive to energy conservation. Certain changes would therefore be made to the taxes being applied. Effective 1 June 2004, no GCT would be payable on these items whether produced by a CARICOM manufacturer or an extra-regional manufacture. Such items produced by an extra-regional manufacturer would, however, continue to attract import duties and the user fee. We are unable to determine at this point whether the GCT relief on solar water heaters will take the form of zero-rating or exemption. Zero-rating would be much more beneficial than exemption, but we will have to await the actual implementation to be sure as to which mechanism will be utilised.
HEALTH INSURANCE PREMIUMS
The imposition of GCT on health insurance premiums in the previous fiscal year was also addressed by the Minister, who acknowledged that the taxing of this item had created an additional financial burden for persons. He announced that with effect from 1 June 2004 the GCT on such premiums would be removed. This appears to be somewhat of a reward to the unions for their acknowledged co-operation in arriving at a Memorandum of Understanding on wage restraint, which the Government has acknowledged to be an invaluable aid to efforts to stabilise the economy.
In acceding to the removal of the tax however, the Minister called on health insurance companies and their service providers to develop greater efficiency in their businesses.
This PricewaterhouseCoopers Tax Newsletter has been written to alert clients to the proposals of the 2004/2005 Budget. The proposals are reported and discussed in general terms and should not be acted upon without professional advice.
