By Pricewaterhouse Coopers Ltd, Trinidad & Tobago
Minister of Finance Winston Jordan, presented the second budget for the coalition government under the theme ‘Stimulating Growth, Restoring Confidence: The Good Life Beckons.’
The budget, according to the minister, is anchored on the following five pillars: National Unity, National Infrastructure, National Institutions, National Security and Public Services. These pillars are the main drivers in the shaping of government’s policies and programmes as it embarks on a journey to transform the economy through prudent management.
The Guyana economy, though showing signs of growth in the last 2 to 3 years, has been plagued with numerous challenges, including the decline in gold prices, a struggling bauxite industry and a dying sugar industry, to name a few. In presenting the $230 billion budget, the minister acknowledged that it is against the backdrop of a challenging global economy that Guyana’s economy will have to navigate the storm and subsist.
The fiscal measures announced by the government in the budget are at best cursory. In the main, the measures seek to promote a green economy by proposing certain changes to the excise regime as well as raising revenue via the increase of certain licence fees. Given that this budget (unlike the 2015 budget) is a full-year projection of the government’s plans and policies, it is surprising that certain key fiscal measures were not tackled, including reduction in the VAT rate and improving tax administration. Nevertheless, the minister did allude to the commissioning of the tax reform committee tasked with the review of the tax infrastructure and the responsibility of presenting recommendations on a comprehensive reform of the tax system. This is a work in progress which may explain the absence of substantial measures in the current budget.
The main fiscal measures announced by the minister in his budget are:-
- Measures in support of a green economy
(a) Removal of excise tax on motor vehicles under four years old under 1500cc
(b) Reduction of excise tax from 50% to 10% on motor vehicles under four years old between 1500cc and under 2000cc
(c) Restriction on the importation of used and/or reconditioned vehicles under 8 years old from date of manufacture to date of importation
(d) Ban on importation of used tyres and reduction of taxes on new tyres
(e) Ban on Styrofoam used in packaging of beverages, food and food products except Styrofoam containers of a type used for packaging frozen fish and seafood
(f) Exemption from custom duties on all bio-degradable containers used in the packaging of food and beverages
(g) Proposed reintroduction of a broad based environmental tax
Commentary
The United Nations Environmental Programme (UNEP) (2015) in its Inquiry Report “Aligning the Financial System with Sustainable Development” expounded that concepts such as “natural wealth and the circular, green economy have moved from the margins to become the substance of economic strategies and policies for businesses and nations”.
There is therefore a clear nexus between a government’s financial policies and the protection and preservation of the environment. The “green” measures announced by the Guyana government are geared towards reducing the impact of certain perilous practices that pollute and destroy the environment. These issues can negatively impact public finance and ultimately the economy if not addressed in a sustainable and comprehensive way.
An increasing trend globally is to impose environmental tax. Economic theory suggests that taxes on polluting emissions will reduce environmental harm in the least costly manner, by encouraging changes in behaviour by those firms and households that can reduce their pollution, One such tax that has recently gained favour is a carbon tax. It generally takes the form of an excise levy on the carbon-based content of fossil fuels as a means of reducing greenhouse gas emissions that contribute to global warming.
The only information provided so far on the proposed tax is that it will be a broad-based tax, which suggests that it will impact a large section of the population. This is likely to be met with strong resistance since tax is often perceived as an economic burden on those affected by it. We will await further details, but in concept an environmental tax is necessary if we are to protect our future and requires the support of the populace.
Government should therefore ensure that the measures to address the green economy are not instituted in an ad hoc manner or in vacuum but rather a comprehensive review should be undertaken to ensure that the measures are sustainable and effective.
- Measures to bring equity to the imposition of excise tax on alcoholic beverages
The minister announced the government’s intention to change the basis for the imposition of excise tax on alcohol on consumption to introduce a graduated specific rate system for the collection of the tax based on the alcoholic strength.
Commentary
The minister indicated that this measure is geared towards preventing manipulation of the system by importers and local manufacturers as well as to facilitate easy administration by the tax authority. The minister’s assertion may be sound in theory, but experience has demonstrated that in the absence of a proper enforcement system the most robust policy can be undermined. For the measure to reap the desired objective, it is critical that proposed change be accompanied by the appropriate regulations and enforcement.
- Measures to remove arbitrary, discretionary or undefined remissions
The following measures were proposed:
(a) Exemption of excise taxes, customs duty and VAT on motor vehicles imported by foreign service officers upon completion of official duties overseas;
(b) Exemption of import duty on motor vehicles imported by eligible public officers, qualifying re-migrants and settlers
(c) Exemption from customs duty on baggage and household effects imported within 6 months upon arrival by a qualifying re-migrant.
(d) Exemption of diplomatic, consular, international, charitable and non-profit organisations, semi-autonomous agencies, government departments and public corporations from payment of want-of-entry charges, stamp duty and environmental tax;
(e) Exemption of computer printer ink and toner cartridges for non-commercial printers;
(f) VAT exemptions on parboiled rice, packaging materials, malt extracts other than Ovaltine, personal effects including motor vehicles for re-migrants and settlers who qualify for exemptions from customs duties under section 23 of the Customs Act;
(g) Exemption from income tax of income earned by artistes during festivities certified by the minister responsible for tourism;
(h) Empower Commissioner General to apply refund to outstanding taxes, levy, interest or penalties payable
Commentary
These measures are to address the wide-scale abuse in the exemption from tax enjoyed by certain group of persons. We are uncertain as to how in practice these measures will reduce abuse. Nevertheless, further clarification is needed on the implementation as well as enforcement of these measures.
With respect to the exemption of certain items from VAT, it is assumed that the intention by the government is to zero rate these items which has a different impact under the VAT regime. Most commentators and experts argue that VAT exemptions are damaging to the neutrality and efficiency of VAT. The premise of this argument is based on the fact that exempt supplies refer to supplies that do not bear output tax – the supplier need not collect or remit any tax in respect of the supply and the recipient is not entitled to any input tax credits. As there is no recovery of input tax embedded in the price of exempt supplies, the cost of the price included in the price must be borne by the business/person that acquires the exempt supply and can only be recovered if the tax is passed on to consumer. It is in recognising this distortion in the system that most modern VAT systems maintain a small exemption list.
- Measures in support of the elderly
(a) Increase pension payable to former Guyana Telecommunications Corporation employees
(b) Increase old age pension from $17000 to 18,200
(c) Increase public assistance from $6,500 to $7,300
(d) Exemption of travel tax and fees for driver’s license for persons 65 years and over
Commentary
These are welcome measures but need to be effectively implemented and managed to avoid abuse.
- Measures to Improve tax administration
(a) Settlement of taxes and filing of returns as a prerequisite for the granting of all licences for public use;
(b) No granting of exemption until all returns are filed and taxes settled
Commentary
These measures may be perceived as draconian but it is important that the government find cost effective ways to improve tax compliance. Low compliance and tax evasion are just two of the many pitfalls undermining the efficiency of the tax system in Guyana. The minister was candid in his disclosure that while tax remains a viable source of government revenue “the numbers suggest that there is a large population of delinquent taxpayers.” The above measures are therefore appropriate to attempt to address the significant leakages in the tax system.
The Inter-American Development Bank while acknowledging that fiscal revenues have increased substantially in Latin America and the Caribbean in the last few years noted that tax evasion is extremely high and, consequently, has limited governments’ ability to offer basic services: roads, electricity, airports, health systems, and schools. It further pointed out that the gap between how much taxpayers are supposed to pay and how much they actually pay is, in part, explained by difficulties in complying with the law and by low levels of enforcement. This supports the minister’s assertion and underscores the need for a total reform of the tax system with greater emphasis on clarity, simplicity, consistency as well as enhanced administration and enforcement.
These measures are therefore a step in the right direction but will be meaningless unless accompanied by proper tax reform.
- Measures to enhance revenue
The minister proposes to amend various pieces of legislation to increase the fees paid to obtain various licences as well as to increase the annual firearm licence fees.
Commentary
The true effect of this measure will only be realized where proper administration and enforcement systems are in place to avoid abuse and corruption.
- Other measures
(a) Increase the rebate granted by Guyana Power and Light Company from 10 to 15%
(b) Reduce fuel prices on product sold by the Guyana Oil company
Commentary
These measures will be welcomed by most citizens since high fuel prices have always been a concern. However, given that the reduction is not significant it is left to be seen whether it will impact the cost of transportation and the supply of goods and services.
- Increase Income Tax Threshold from $600,000 to 660,000
Commentary
From 2008 to current the income tax threshold has increased by over 96%. This latest increase means that persons earning less than $660,000 per year ($55,000 per month) will not be subject to tax while others will enjoy additional disposable income of $1,500 per month. This measure is likely to boost consumption and contribute to economic growth.
Conclusion – A case for tax reform
While the government is cognizant of the urgent need for tax reform, the budget has not addressed this holistically. There is undoubtedly a dire need to reform the tax system in Guyana. It has been plagued with many ills including high tax rates, low compliance and tax evasion. In a global economy where foreign investment plays a crucial part, a robust tax system is a necessity to ensure that a conducive climate exists for investors and at the same time to ensure that the country benefits equitably from these investments.
The proposed reform of the tax system should therefore entail consideration of all aspects of the system from the tax base to the administration, to ensure clarity and certainty of the tax regime, a reasonable rate of tax that does not encourage evasion and proper enforcement and administration. In particular, clarity is required on the issue of when and how foreign investors fall within the tax net and meet their obligations. We therefore eagerly await further information on the government tax reform agenda.
Caveat
This article has been formulated as part of our general awareness programme and is not intended to form the basis for any investment or other similar business transactions. PricewaterhouseCoopers therefore does not hold itself liable for any loss which may occur as a result of the use of the information in this article for purposes other than general information. Please feel free however to contact us should you need specific taxation advice on any of the issues raised. (PwC Tax Team)
