Budget proposals

By Stabroek News On In Letters to the Editor |

Dear Editor,

I submitted a number of proposals for incorporation into the 2016 Budget. I do not see them in the Budget that was presented to Parliament. The Minister of Finance did indicate to me that they may have been submitted too late for incorporation but that they will be considered for the future.

I am reproducing the document submitted to the Minister to give the reader an opportunity to see the relevance to the development of Guyana.

Value Added Tax (VAT)

I would not recommend reducing the current rate at which VAT is applied. Reducing the rate would spell disaster, given the ineffective and inefficient income and corporate income tax assessment and collection mechanism and processes that are in place today. The government should let the people know that it will postpone any VAT reduction until it is able to assess and overhaul its fiscal policy with respect to the assessment and collection of revenues through the taxation system.

The government needs to explain to the population that VAT is a worldwide phenomenon, with only 11 exempt countries, mainly the Gulf States, that do not charge VAT. VAT accounts for the largest source of revenue for most countries; 56% for Bangladesh and 50% for France with 15% and 20% VAT rates respectively.

Given that VAT is here to stay and the rate is necessary, how do we make it beneficial to the economy and the people? We start out with the premise that VAT is a consumption tax that is borne ultimately by the end consumer/user. Therefore, it will be treated as regressive where it causes undue hardship for the less fortunate to afford basic consumables. Here are my suggestions to ameliorate/reform the VAT system:

  1. Establish a VAT rebate system for eligible individuals/families with annual incomes below a certain threshold. This will serve the purpose of transferring income to the lower income groups that are the most vulnerable consumers. To be eligible individuals have to file annual income tax returns. This will encourage the society to be tax compliant and allow young people (from 18 years old) to report their annual income and get into the habit of accounting for their financial circumstances.
  2. Review the list of exempt and zero rated items and expand the categories for prescriptions, groceries, transportation, children’s clothing, prepared foods below certain dollar values, etc.
  3. Review the various sectors of the economy and use the VAT system by way of rebates to stimulate growth in these industries, including infra-structure and other construction.
  4. VAT fraud: This is a major problem around the world. I would suggest a two-pronged approach:
  5. Hold major shareholders/executive and active directors/sole proprietors and partners personally liable for undeclared and unremitted VAT. After all, this is a trust fund and they have a fiduciary duty towards the government for these funds. Legislation can be put in place to authorize Guyana Revenue Authority (GRA) to issue Requirement To Pay (liens) without resort to the courts. There are billions of dollars of undeclared and uncollected VAT.
  6. Set up an efficient and effective VAT assessment and collection system, aided by automation and simplification. Small and cash businesses should be encouraged to use the sales method,whereby VAT will be reported on the gross sales of the business. Businesses and individuals should be encouraged to use the bank direct deposit and electronic reporting of VAT and income/property taxes.
  7. Set up the necessary linkages between income and expenses, assets/property and VAT declarations so as to corroborate the relationships and automatically produce exception reports. Where these exceptions are significant and/or recurring, they should be investigated with a view to recovering any under-declared taxes. There are excellent readily available computer programmes at affordable prices to do this exercise in testing the validity of declarations in all areas – duties, VAT, personal and business income taxes.

 

Business stimulus tax package

Introduce tax relief for businesses:

  1. Allow a small business deduction rate for active businesses income (ABI) for Guyanese-controlled private companies with revenues and taxable capital below a certain dollar threshold. ABI will exclude income from property, dividend, royalties, interest and rent (after all these are passive income sources and need to be forced into active business). It will apply to businesses with a certain minimum number of employees with a view to encouraging employment.
  2. Encourage the manufacturing and processing sector by allowing a tax credit for companies that engage in manufacturing and processing activities. The economy has a woefully deficient

manufacturing and technology base. Tax incentives will help to kick-start this area.

  1. Provide tax relief for new manufacturing and processing machinery and equipment that are used in permanent establishments.
  2. Encourage scientific research and educational development through government grants to assist with certain costs.
  3. Allow tax credits for certain identified sector/industries such as fishing, tourism, logging, mining and farming.
  4. Explore the opportunity to set up tax-free zones to encourage large foreign businesses to set up operations in Guyana. This avenue is working well in many countries. Guyana will benefit from job creation and skills plus foreign currency and all local costs, such as PAYE taxes, utilities and transportation, etc, incurred by the tax-free zone operators. Please bear in mind that both foreign and local companies will have the opportunity to operate in the free-zone. One of our senior associates is stationed in the Dominican Republic as the Chief Financial Officer, dealing with tax-free zone matters. He has indicated his willingness to spearhead the introduction of this concept in Guyana.

Personal income tax

  1. Guyana’s flat rate system is simple but retrogressive, especially with the high rate it is set at. I would strongly recommend that we look at a progressive tax system that has different tax rates for graduated levels of income. The system as it stands is punitive to those who can least afford to pay taxes and allow those who can afford to pay taxes to escape paying their fair share of taxes. We can still keep it relatively simple by having, say, no more than three bands of tax rates.
  2. The PAYE system clobbers the lower and middle income individuals, while the business folks, professionals, personal service providers and unidentified individuals, such as drug lords and filthy rich seniors are actively accumulating wealth and stashing it abroad. Introduce a tax credit system to take into consideration certain sections of the population with special circumstances, such as disabilities, size of families, living in remote areas, higher education, apprenticeships, child care expenses, etc.
  3. Guyana has a porous tax system, mainly derived from business people and others with ‘connections’ who vastly under-declare their incomes. A couple of measures should be put in place to arrest the seepages. Carry out lifestyle tax audits for individuals who are clearly assets- rich way above the incomes they declare over the years. This is perhaps the only real effective tool to catch those who are understating their incomes. This process will entail compiling their assets and liabilities at cost (in Guyana and abroad) and factoring in their fixed and variable living expenses. This tool will also facilitate the effective operation of the anti-money laundering legislation and tracing of assets. My office has a wealth of experience in conducting lifestyle tax audits in Canada and cross-border taxation matters.
  4. There are many wealthy persons receiving pensions from Guyana and abroad. They are conducting active and investment businesses. A significant percentage of them do not file any income tax return under the guise that ‘pensions are not taxable’. But, invariably, pensions are the tip of their incomes. In my view, pensions that do not fall under the welfare category should be taxable. I would recommend that all incomes be included in the income tax returns to arrive at total income. Then certain deductions, including welfare pension (not working pension) be deducted to arrive at taxable income.

The singular overall theme with the above measures is to encourage and enforce more reporting of income and property. Too many wealthy individuals and businesses are escaping their statutory duty with impunity.

Yours faithfully,
Tameshwar N Lilmohan