A Time to Tax
There are at least two reasons why Business Page should
address the ever -present question of taxation today. The first one is that
tomorrow is April 30, the final date for submitting income, corporation,
property and capital gains tax returns and the date for paying any balance
of taxes. The post-elections activities have created havoc with the
preparation and audit of financial statements and the preparation of tax
returns. Understandably, the Revenue Authority will be keen to catch up on
lost revenue but hopefully it will take the dislocating activities into
account in dealing with late filers.
The second one is that the Finance Ministry is now
consulting with stakeholders in the run-up to Budget 2001. President Jagdeo
has already pre-empted the process by announcing that there will be no new
taxes in the Budget. In the absence of any explanation one is not quite sure
whether the President means that no tax measures will be proposed or whether
his statement should be taken to mean that on balance he is satisfied with
the current structure and rates of taxes.
For years now successive Budget speeches have been
littered with pronouncements on plans to reform the tax system to make it
fairer, more efficient and less prone to evasion. Except in the very early
years of the Economic Recovery Programme, those plans have remained just
that and indeed some early steps have since been reversed. By the measure of
tax/GDP ratio, Guyana continues to be one of the most heavily taxed
countries in the world. The ratio has been falling but pressure on the
government to increase and improve the quality of public goods demands
increasing revenues. On the other hand businesses in their struggle to
survive need to retain as much cash through lower taxes and other relief to
help them afloat. The Finance Minister is facing a real dilemma.
The FTAA and taxes
Guyanese can be forgiven for their recent pre-occupation
with domestic matters and for not realising the implications of the decision
to establish the Free Trade Area of the Americas within the next five years.
The Guyana Government seems irrevocably committed to membership although
most people in the private sector seem unaware let alone prepared for this
giant step. With so little world-class product to offer the gains accruing
to Guyana from membership will not materialise for a considerable time.
Unless there are some dramatic and revolutionary changes in the structure of
the economy, we will have little to export other than the commodities that
have served us in some cases for centuries.
What we can be certain about is that the rules of the
club will require us to lower taxes and tariffs on imports from FTAA member
countries. The country will have to compensate for the loss of revenue from
those imports by raising the revenue from domestic sources. Already tax
rates are far too high and there is no question that we will simply have to
widen the tax base by bringing into the tax net income, assets and goods and
services that do not now contribute anything to the Treasury.
Any tax system is a mixture of historical, revenue,
social, political and economic considerations. One of the foremost
publications on taxation in developing countries noted that “the best
approach to developing taxes in a developing country - indeed in any country
- is one that takes into account taxation theory, empirical evidence, and
political and administrative realities and blends them with a good dose of
local knowledge and sound appraisal of the current macroeconomic and
international situation to produce a feasible set of proposals sufficiently
attractive to be implemented and sufficiently robust to withstand changing
times, within reason, and still produce beneficial results”.
If we could re-create the tax system, the recipe
identified above would no doubt make the ideal system. The current system
reflects the extent to which political considerations affect tax decisions
and have distorted economic decisions. Let’s take a few examples: Changes
to the Income Tax (in Aid of Industry) Act to include fridges and stoves,
ceramics and sanitary napkins were made to aid businesses operated by
persons sympathetic to the then administration while perhaps the most
outstanding example of politics influencing a tax decision is with relation
to the Beal Deal.
The political challenge
Success in obtaining concessions and reliefs depend on
the lobbying influence of those who seek them and such relief is usually an
acknowledgement of the weak viability of the particular project. It should
therefore have come as no surprise that despite such attractive fiscal and
other concessions, many of those businesses failed.
In 1994, the government made the very sensible decision
to abolish tax holidays but re-introduced them four years later. Tax
holidays should be granted very sparingly since all incentives including tax
holidays and remissions and exemptions only serve to narrow the tax base
from which all revenues are derived, distort the allocation of resources,
lack transparency, necessitate high rates, make evasion a risk worth taking,
and lead to further calls for relief. Tax reform will inevitably result in
winners and losers but the litmus test is whether the economy becomes
stronger. It is understandable that no one will willingly give up existing
concessions or agree to new taxes being imposed on them. The political
challenge lies in persuading those who perceive themselves as losers to
accept changes in the interest of the wider economy.
As we noted above, even prior to 1992, the tax system has
been used not only for revenue collection purposes but also to help
individual entities and to facilitate government intervention in the
economy. This is a dangerous practice and the laws that allow such
intervention should be amended. Taxes should be a matter for Parliament, not
The political compromise of our tax system has led to a
situation where major international companies in the extractive industries
pay no taxes whatsoever. This means that the sitting ducks - employees,
large companies and increasingly consumers - have to pay for the lucky ones.
Integrated approach to management
But there are other dimensions as well. Taxation is more
than just the raising of revenues. It is an important tool of economic
management. This means however that our economic analysts require a proper
understanding of tax bases and structures. Annual tinkering with the tax
system creates uncertainty for the taxpayers and headaches for the planners.
Economic management requires an integrated approach but
often our planners place trade, industrial and revenue policies in separate
compartments. Trade and investment policies are often guided by an
overriding desire to see factories facilitated by concessions that the
economy finds difficult to sustain in the medium term. Later entrants insist
on similar treatment so that while business activities increase, the tax
base narrows. No study has ever been done to evaluate the cost/benefit of
these incentives although despite the clear need for one.
Policy makers must realise that tax policy suffers from
the same conflicts as the economic policies of which it forms a part and
consequently they are both affected by the ideology of the government of the
day. Governments must understand that this lack of consistency has serious
implications for the private sector which becomes hesitant in making
investment decisions for fear that an otherwise viable investment could be
rendered unprofitable due to changes in tax policy or rate.
As stakeholders make their reverential trek to the
Minister’s door they will be at a severe disadvantage. They have no idea
of the government’s spending plans, its policies or commitments. They will
make submissions similar to the ones they made last year and the years
before only to be told that their submission cannot be entertained because
they did not indicate how any lost revenue would be made up or that their
submission is made too late for inclusion in the Budget. The Minister has an
excellent opportunity to demonstrate that the consultations are more than a
meaningless ritual and that he really takes them seriously.
As part of the budget preparation the Minister should
have his team review the Budget Speeches for the last twelve (12) years to
identify all unfinished business and unkept promises. Not only will this
exercise alert him to the sterility of idle promises but they may also make
him far more cautious in making new ones. The events of the past few weeks
have obviously narrowed the room for maneuver and flexibility. But at the
very least the Minister should announce the establishment of a National
Commission on Tax Reform to report back to Parliament within nine months so
that its recommendations can be fully implemented in the 2002 Budget.
Business Page humbly recommends that this item be put on the agenda of the
dialogue taking place between the President and the Leader of the
Opposition. There should be no disagreement since both the PPP/C and the
PNC/R have repeatedly expressed commitment to tax reform.