Business Page – August 10th, 2003

Sweeping tax changes proposed

Introduction  

Stabroek News of August 5 described the sitting of the National Assembly on Monday, August 4 as a “lightning” sitting.

Whether intended or not it was one of the best puns that could have been applied to at least one of the bills that were tabled that day - the Fiscal Enactments (Amendment) (No.2) Bill 2003.
That Bill contains some of the most dramatic and perhaps controversial changes in our tax laws for decades. Business Page has advocated tax reform to ensure a more equitable and efficient system leading to a better society.

In that context, it supports the objectives of the Bill, but it is concerned that the manner in which it has been introduced, some of its more innovative changes and the fact that forces are likely to mobilize against it, will affect both its passage and its effect.

Business Page among others has always called for national consultations to ensure that the populace buy into any tax reform rather than see it as an imposition to be evaded at all costs. Unfortunately those calls have never been heeded which will pose a challenge to those seeking to win support for the Bill in the National Assembly and those in the Guyana Revenue Authority who will have to administer it.
One fear of this column is that if these proposals go through they are likely to result in increased not reduced tax evasion given all the other factors at work in our society.
The decade of the 1980s saw major tax reforms around the world including here in the Caribbean where Trinidad& Tobago, Barbados and Jamaica re-engineered their tax systems making way for the expenditure tax known as VAT.

It was not until the late eighties, however, that the Hoyte administration made significant changes to our tax system including substantial reduction in the rates of both direct and indirect taxes, the abolition of personal allowances, the unification of the rates of corporation tax and the introduction of minimum corporation tax. The PPP/C has tinkered and reversed, then reintroduced some of these provisions which reinforced suspicions that the administration was extremely uncertain how to proceed with this highly complex matter.

Tax evasion

As a society we have been tolerant of tax evasion which is reinforced by our political culture, and as a result we avoided some of the action which we should have taken ages ago to combat tax evasion.
We have left it far too late and many of the proposals have an IMF/World Bank flavor and at best will place enormous strain on the resources of the GRA.
It is interesting to speculate whether, left on its own and given the composition of its parliamentary representation including doctors and lawyers and other self-employed persons, the government would have introduced such legislation on its own initiative.

We believe that some of the proposals are likely to prove unmanageable, inappropriate, counterproductive and not sufficiently thought out. In particular, some of these proposals are likely to be inflationary at a time when the economy is struggling, and it is important that we do not exacerbate an already bad situation.

The Bill

While some of the proposals are welcome and have the full support of this column, the debate is likely to be overshadowed by the adverse provisions. We now summarise the major provisions of the Bill:

1. An amendment to the Financial Administration and Audit Act is designed to make transparent the existing practice of remissions of tax when required by international agencies that provide loans and grants for public work projects.

2. Another amendment to the same Act which provides for a standard rate of interest to be charged on late tax payments. The interest charge is imposed at the prime-lending rate published by the Bank of Guyana plus 500 basis points, so as to recoup the time value of money lost when a taxpayer is late in paying tax. This is a welcome development since the existing rates of 45% and 50% are punitive, as a result of which calls for remissions take up a great deal of the Revenue’s time. The provision does not seem to apply to the immediate 10% for late payment or indicate any consideration for earlier periods.

3. The Bill provides for the extension of the service tax now paid only on hotel accommodation and telephones to other services offered by hotels as well as the services provided by a range of professionals including accountants, architects, auditors, dentists, engineers, legal practitioners, medical practitioners, optometrists, pharmacists, physiotherapists, surveyors and vets as well as real estate agents.

4. The fee payable for professional practice certificates for the classes of persons specified in 3 above is according to the Explanatory Memorandum being increased by 2400% to $250,000 per annum “to account for the effect of inflation.” This fee was last increased in 1993 and it is hard to see how the 2400% was arrived at. As if to cushion the blow the increase is being phased over a three year period.

5. A new provision is being introduced by way of regulations made by the Minister for the application of presumptive methods to determine the income of self-employed individuals with income of less than $10M. For those persons whose turnover exceeds $10M. the Bill proposes to apply minimum income tax of 2% of turnover. Here again we see the government making a U-turn while the non-commercial corporate entities are left as the only group of businesses to which there will be no presumptive/minimum tax.

6. The penalties imposed by existing law for failure to file, now in section 70(5), and by section 99(1) are combined in a revised section 99. Limitations have been imposed in the discretion in the waiver of penalties under section 108 of the Income Tax Act by specifying circumstances constituting “good cause.”

7. The tax holiday provision as provided for under section 2 of the Income Tax (In Aid of Industry) Act is modified to limit the exemption from corporate tax to new firms that create new employment in the specified depressed regions, and to firms that conduct new economic activity in the specified fields. The revisions to existing law are intended to aim the benefits of a tax holiday more specifically at areas of economic activity the government has determined as a matter of policy should be encouraged.

Comment

Presumptive taxation is considered an appropriate method of tax administration for specific groups of taxpayers and income is no longer assessed from accounting records but from indicators such as the value of a farmer’s land, gross turnover of the enterprise or signs of individual wealth.
One can see with some justification the accountants, lawyers, doctors, farmers, gas station operators, etc, being targeted, but since many in the professional categories practice quite blatantly without the requisite license, it is difficult to see how imposing other requirements will be more successful.
It certainly seems unjust that those few who now comply will be penalized along with the dodgers.
What is of grave concern is whether the administration of the tax system is capable of coping with these proposals which deal largely with hard-to-tax groups not only in Guyana but universally.
The courts, even at the level of the Chancellor and the Chief Justice, have shown a lack of sympathy for the tax administrator, with the Chancellor and Chief Justice both saying that the widespread failure by attorneys to take up practice certificates is a problem for the Commissioner.
If Guyana is to get serious about tax evasion the courts must be prepared to impose jail terms for persistent and blatant tax evaders.
In 1994, then Finance Minister Asgar Ally announced the intention to set up a Tax Court which would have been very instructive and helpful. This needs to be revisited particularly since the government has now signaled its agreement with specialized courts.

Conclusion

Minister Kowlessar in his 2003 Budget Speech had committed to a number of measures to improve tax administration including the introduction of Value Added Tax by 2006. There is some relationship between VAT and the proposed services tax which one presumes will be reviewed when VAT is introduced but even then it is difficult to see how this will bring about higher levels of compliance.
Accustomed as Guyanese are to unkept promises, observers may have misjudged the Minister’s intentions and underestimated the scope of his proposed action. Let us hope that he does not underestimate the reaction of those powerful and influential forces including the professionals and rice farmers who have so far operated outside of the tax laws, and who are therefore likely to rally to oppose moves to get them to pay taxes.
The Bill comes up for debate in the National Assembly during this week and the so-far muted response may not persist.
The Bill has far-reaching implications and hopefully it will be subject to very rigorous review and further consultation.
A tax system without legitimacy cannot succeed, and it is doubtful that some of the radical proposals will earn that level of support without considerably more discussion.
Whether or not professional bodies or business groups and other stakeholders are formally consulted, they should immediately meet as groups to offer their views, comments and recommendations to bring about the desired objectives with the least possible negative consequences.
We should not forget the names of Kaldor or Kelshall and that it is we as Guyanese who need to work out the most appropriate tax system for our country.   (Back to top)