The Estimates of Expenditure as approved by the Standing Finance Committee projects
spending of $261.3 billion. We have all accepted that the reduction and then the
elimination of the fiscal deficit are objectives which must be attained.
We therefore now need to look at projected revenue flows in order to assess what
additional action needs to be taken to meet that critical target – a deficit of 5-6%
of GDP.
On a passive scenario, we project tax revenues and grants totaling $132 billion of
which $122.5 billion will represent tax revenues. The projected growth in revenues is
consistent with the pattern over the last several years. If we add to this total of $132
billion, loan receipts of $116 billion we have a total of $248 billion. That leaves a
financing gap of $13 billion.
Obviously that gap cannot be closed by more borrowing, as that will exacerbate our
existing problem of a deficit which is too large. Hence, in order to attain the fiscal
deficit of 5-6% we need a revenue package of just over 3% of GDP or $13 billion, to close
the financing gap.
In seeking to generate this additional revenue totaling $13 billion we have had to
examine a menu of options.
The first major area of increased revenue is aimed at pulling into the tax net those
individuals/firms who, in one way or another, are avoiding payments which are due. Such
individuals/firms by their actions are creating unfair competition with those who
routinely pay their taxes.
A recent study has demonstrated that the informal economy is at least 40% of the formal
economy – that is those who pay their taxes. Put another way, of the real economy
only 70% of activities are included in the tax net.
All are agreed that we must seek to bring this additional 30% into the tax net. The
obvious question is how? We know that in several cases importers have no interface with
the tax authorities after goods leave the ports. A measure which will be implemented is a
prepayment of income tax due by all importers. A 4% cess will be charged at the ports on
all imports, including capital goods and raw materials. This cess will be treated as
credit against income tax when the importers have filed his/her income tax returns.
The exemption from this cess will be applicable when goods are being imported by
government, diplomats, international organizations and individual passengers up to the
allowance of US$500.
From the perspective of the importer who systematically files returns, this cess would
have minimal impact, only in so far at it affects his cash flow. The only persons who will
have a net loss, compared to their present situation, will be those who have not been
making income tax payments. If these wish to claim for that credit, then it may represent
their introduction to the tax system.
We estimate that there will be a net gain of approximately $3.4 billion from this
measure.
I now turn to two areas where special services for the population are being partly
funded from the Consolidated Fund and for which additional revenues are needed.
Members will recall that the revenue gained from property taxes is specifically
allocated to Solid Waste Management Bodies, for fire fighting services and streetlighting.
As I have indicated to this House earlier this year, the projected collection from
property taxes in fiscal year 2003/04 will only be able to fund approximately 50% of the
cost of providing these services.
In terms of Solid Waste Management, an area which is of growing concern is that of
disposing of plastic packaging material. 12% of the municipal waste generated in Jamaica
is comprised of such material with 50% of this figure attributed to PET containers.
One only has to drive through both urban and rural Jamaica to see the extent to which
such material litters the landscape. Such waste has serious environmental consequences,
not just in Jamaica but internationally. In fact, almost all other CARICOM countries have
imposed an environmental levy on such containers ranging from $8.40 per container in St.
Vincent to $2.50 in Guyana.
It is being proposed that the environmental levy of J$2.00 per kilogram be
placed on containers which are imported, manufactured and are distributed in Jamaica.
The proceeds from this levy will go towards off setting the cost of clearing up the
tonnes of waste created by these materials.
I have already spoken of the proposed coverage of the National Health Fund (NHF). A
programme which has been welcomed by everyone. Again, the Consolidated Fund is expected to
make a contribution to finance the Fund this year of approximately $450 million. In order
to bolster inflows into the Consolidated Fund there will be an increase in the SCT rates
on alcoholic beverages.
The environment levy will raise $190 million and the increase on the SCT on alcoholic
beverages just under $450 million.
Let me at this point indicate that we have received several submissions from the
tourist sector concerning the SCT levied on certain high priced foods and alcoholic
beverages. We have heard you. I have asked authorities to initiate immediate consultations
with the sector.
I will provide a definitive statement on the relief when I close this Debate on the 30th.
Adjustment on the Age Limits on the Importation of Motor Vehicles. I now turn to
duties related to motor vehicles and we intend to address this matter with an objective of
rationalizing the duty structure on specified vehicles.
As it may be known since March of this year as per the WTO agreement the valuation on
motor vehicles is based on the transaction valuation as opposed to the Blue Book reference
prices. This has implied a significant drop in custom duties. The decision has been taken
to lower the age limit on vehicles which are being imported. For returning residents the
new age limit will be 5 years and for the other individual dealers the maximum age will be
three years for cars and for vans, and trucks 4 years. This measure will reap
approximately $180 million.
The third area for increased revenue from motor vehicle importation relates to those
persons who benefit from special duty concession. At present specified public officers are
allowed to import vehicles on a concessionary rate of 20% if the vehicle has a maximum
value of US$30,000 FOB. We propose to reduce this limit for concessionary vehicle
importation to US$25,000 CIF. This is projected to yield $250 million.
The duty regime on motor vehicles has been in place for an extended period, penalizing
vehicles with a CC rating of over 3,000 CC but making special allowances for trucks,
pick-ups. However, over time vehicles which are ostensibly meant for the farm are now
being designed such that there is very little difference between them and luxury Sedans.
This duty regime is being restructured and will reduce the taxes on cars with CC ratings
in excess of 3,000 to 180%, and increase that on full size luxury pick-ups to the same
level. These changes would bring about increased revenues of $600 million.
I now turn to three areas which will have some direct impact on the business sector.
The first relates to the increase in the added stamp duty levied on goods imported by
in-bond merchants. It will be moved from 6% to 15%. It is expected to yield $85 million.
The second area relates to the assets tax levied on companies registered under the
Company Act, and societies registered under the Industrial and Provident Society Act. The
prescribed rates are being increased as indicated in the Ministry Paper and should yield
approximately $85 million.
The final area relates to the removal of credit bonus shares
issued.
Over the years the Administration has attempted to find ways to facilitate companies
faced with the high cost of loan financing. Two special steps worthy of note were taken.
One was the amendment of the Income Tax Act to allow the companies which issued bonus
shares from its accounting profit to receive a tax credit of up to 25% of its income tax
liability.
Many companies, both foreign and local have used this facility to reduce their tax
liability by the issuing of bonus shares. However, at the same time the tax on dividends
paid by public companies has been eliminated even whilst these companies enjoy the credit
for bonus shares issued. The loss of revenues from the tax on dividends has been
significant. In fiscal year 1999/00, this tax brought in $1.2 million, equivalent to 0.4%
of GDP.
The revenues cannot continue to afford both concessions and hence the credit for bonus
share issues will be eliminated. The removal of this credit is projected to yield $550
million.
I turn to the final area which is the GCT. There has been so much discussion about the
Administration’s plans to increase this area of taxation. In fact, there are many
persons who have advocated the abolition of income tax and the increase of the GCT even up
to a level of 25%.
This Administration has viewed with amazement such a proposal, as there is the failure
to recognize that those at the bottom of the income ladder consume virtually all their
income. Hence, an increase of that magnitude in the GCT impacts most of those who can
least afford it.
However, it is useful for us to reassess the present structure of GCT as well as the
items to which it applies.
Members of the House will recall that during the fiscal year 1995/96 the standard rate
for the GCT was increased from 12.5% to 15%. However, in an effort to reduce the burden on
the poor, certain items were placed on the zero-rated and exemption list. This action
served to narrow the base of the tax and has also made the system more complex. Over time,
through lobbying there has been an expansion of the list of zero rated and exempt items.
That has resulted in the system becoming very cumbersome, complex and difficult to manage.
To simplify the system and to broaden the base, some items previously zero-rated and
exempt will be included but with certain vital exceptions. These include raw materials,
capital goods, imports by the diplomatic service, importation by government, food items,
water, electricity and schoolbooks.
Let me repeat. The rate of GCT remains at 15% and although certain items are being
removed from the exempt and zero-rated list. Raw materials, capital goods, food items
which are presently exempt, schoolbooks, school bags, school uniforms will remain
exempted. However, the standard rate of 15% will remain.
This broadening of the base is projected to reap an additional $8.5 billion.
In total, the measures will increase revenue inflows by approximately $13.8 billion,
thus closing the financial gap and will put us in a position to achieve the target of a
deficit of 5-6% of GDP.
Equally, important this level of additional revenue inflows will provide a primary
surplus of 12.2% of GDP.
