Business Page – May 02, 2004

Tax law in abeyance

 Introduction

One of the several key outstanding matters not addressed in the budget speech by the Minister of Finance is the ruling by the court on an application by the country's lawyers against the Fiscal Enactments (Amendment)(No.2) Bill 2003, which this column on August 10, 2003, noted contains some of the most dramatic and perhaps controversial changes in our tax laws for decades. That legislation was one of the main recommendations of a World Bank team on tax reform accepted by the Government as the way to deal with obvious, blatant tax evasion by the self-employed class generally, and the professional class in particular. The act not only drastically increased the fee for a tax-practice certificate but also imposed a charge of 5% and 10% on the charges by professionals, including accountants, architects, doctors and lawyers. This tax would be borne by the client but collected and paid over by the professional to the Guyana Revenue Authority (GRA).

Those in authority felt that by adding up the sums remitted monthly, the GRA would be able to establish the total fees charged by the professionals and therefore the amount of their taxable income. Not only does it appear naive to think it would be so easy to resolve the endemic problem of tax evasion by a group referred to in the literature as a "hard to tax," but the Government clearly underestimated the capacity of the professionals in challenging what they feel is a bad piece of tax legislation. Not that Business Page thinks it knows what tax legislation the self-employed would consider good legislation other than the abolition of income tax!

No sympathy

Prior to its passage, Business Page had cautioned that the hitherto muted reaction to the bill might not persist, and noted that in view of its far-reaching implications, the bill should be subject to very rigorous review and further consultation. For a tax system to succeed, there must be some legitimacy and support which come through understanding and discussion, which was noticeably absent in this case. Either because the Government does not understand the value of consultation, or because it refuses to take advice, the country now faces the possibility of legal challenges to new tax laws and these being held up indefinitely in the court system.

One would have thought that given the national importance of the challenge by the professionals, ways would have been found to bring this case forward. Unfortunately, our courts, even at the highest levels, 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.

It is therefore of some significance, and perhaps irony, that the National Assembly this week amended the Income Tax Act, exempting from tax the official income of the Chancellor and the Chief Justice, raising eyebrows not only in legal circles but among many Guyanese. No doubt, these excellent public servants deserve better pay than they now receive, but that is also true of many Guyanese both in the private and public sectors. It is hard to understand why the salaries were not increased to a level that allows them to have the same net pay. What signal does this send to the judges and the magistrates, and are we not now creating two classes of public servants - those who are subject to the country's tax laws and those who are not? Is this how fairness and legitimacy are promoted in an increasingly divided society?

No change

After all the talk about tax reform, has the Government looked at the composition of the tax revenues of the country? The burden of taxes continues to be borne disproportionately by the employed persons, and to a lesser extent corporate entities, as the following table shows:

Contribution to Tax Revenues 1999-2003 (Percentages)

                               1999   2000   2001   2002   2003

Companies           19.16  20.42  19.47  21.35  18.32

Personal               14.52  17.71  18.62  21.85  19.89

Self Employed      1.31    1.44    1.73    1.89    1.85

Not only are the self-employed making only a very negligible contribution to the tax revenues of the country but income tax deducted from employees now exceeds the taxes paid by companies - the burden is now shifting from the companies to individuals.

All of this is happening while even Ministers of the Government lament the existence of "a new group of people who have no visible or lawful source of income, but whose lifestyle is lavish, marked by an abundance of jewellery, drive expensive vehicles, lead affluent lifestyles, build and live in mansions..." (Minister of Home Affairs quoted in Guyana Review, April 2004). The only question one has to ask the Minister - on this matter - is what has he done about it in his ministerial capacity, and whether he has raised the question of money-laundering and tax evasion with the subject Minister or the relevant authority?

Not see?

It seems quite reasonable to ask as well, whether the GRA follows the reports in the press which state how many millions of dollars victims of crime repo1rsons in to question the difference between what they report in their tax returns and what they tell the press? Does the GRA not see the same things that the Minister of Home Affairs and the rest of the country see, and do they use that information in the administration of the tax laws?

This country has invested quite heavily in the Guyana Revenue Authority, and it should now be looking for some returns on that investment. But here again we run into ministerial inertia and incompetence. The Minister of Finance has simply ignored his duty under the GRA act to table the annual reports of the GRA since its inception in January 2000. Not only is this a requirement of the law, but the availability of the report will allow the citizenry to assess the success rate of the GRA and indicate remedial measures as necessary.

The total expenditure for running the GRA has jumped from $334M in 1999 to $1,063M in 2002, the last year for which figures are available. This represents a hike of 218% in total, while in terms of wages and salaries the increase was 267 per cent. On the other hand, tax revenues are faring much less impressively, rising from $38.9B in 1999 to $47.8B in 2003, or 23 per cent. While evasion takes place among all groups of taxpayers, the GRA's major test is how it performs among the self-employed, particularly in relation to revenues raised from investigations. On this basis, even the GRA may feel less than satisfied with the results so far with the taxes it has collected from this group. As a percentage of tax revenues, the self-employed pay only 1.85% of total tax revenues collected, and in absolute terms this is less than $900M. These have increased by only 74% since 1999, despite what appears to be some rather ambitious targets. In all but one of the past five years the taxes paid by the self-employed have been well short of the budget - in the past two years by G$150M and $192M respectively, figures that should cause great concern which cannot be attributed to the law since it was only presented in Parliament in August 2003. For 2004, the Minister is budgeting to collect just under $1B, a figure that would demand the GRA to perform at a level well beyond what it has achieved in its short history.

Conclusion

This column has repeatedly called for meaningful tax reform with a view to lowering taxes and spreading the tax burden. All that has happened so far is that more taxes are being extracted from the same set of taxpayers. While the GRA is now a statutory body with some independence, the Ministry of Finance cannot relinquish its responsibility for tax policy.

With the level of lawlessness in this country, the task of the GRA is a difficult, thankless one. With a weak court system, an accounting profession that seems all too ready to bow to pressures from their clients and the influence of politics on tax administration, that job is almost impossible. Yet, the Government's boast lies in its capacity to spend large sums of money raised by way of debt relief, borrowing and taxing. The Ministry of Finance and the Guyana Revenue Authority need to do far more if our tax system is not to lapse further into dysfunction. The country depends on them.

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