ANY tax reform in Jamaica should be based on the following planks: reduction of tax evasion which is prevalent, encouragement of economic development, registration of all businesses above a certain level of income, bringing all individuals earning a salary in excess of a certain level of income into the tax net, simplicity and transparency in the system, a strong taxation agency, increasing the penalty for tax dodgers and strengthening the link between taxpayers and the tax authority.
There are too many businesses and people in the country who are not registered, and many in the tax net who are evading the tax by not fully reporting their income. Some middle-level businesses are issuing receipts without names and addresses, making it difficult for them to be traced by the tax authorities. Government is losing a lot of revenue because of this. Tax arrears in all categories now run into an estimated $10 billion and this is a conservative figure, based on official figures five years ago. This deprives the government coffers of money for recurrent expenditure and capital development, and forces the government to borrow. Property tax arrears are inordinately high. Neither the Ministry of Finance and Planning nor Taxation Jamaica could furnish any up-to-date information on total tax arrears. This is unacceptable.
All of the improvements that are necessary in the Jamaica tax system are contained in the White Paper on Tax Reform which was tabled in Parliament last month by the Minister of Finance and Planning, Dr Peter Phillips. The White Paper is for public discussion and will be followed by the enactment of the necessary legislation.
The introduction to the White Paper, "Rationale for Reform" states that tax reform has become a topical issue locally, especially in recent years. In reviewing the Jamaica tax system, it was determined that the inherent complexities made it pivotal for a tax reform to ensure a more efficient, suitable and simplified tax system.
The White Paper sets out under the section, "Guiding Principles", that it is accepted that one of the pivotal functions of any tax system is to garner resources to fund a government's recurrent expenses and expenditure to facilitate growth and development. The revenues are generated from direct taxes on income and indirect taxes on expenditure. However, to predicate the taxation system on this function solely would be remiss. The government of Jamaica, along with its international counterparts, accepts that the functions of any effective taxation system must be construed in the broader sense, whereby the system is predominantly guided by a policy of reducing inequalities and providing for acceptable taxation rates to engender local business development and attract direct foreign investment.
"The government of Jamaica is committed to the following principles of an effective taxation system. It should be as simple and transparent as possible to allow for ease of taxpayer compliance and effective of tax administration; fair and equitable in distributing the tax burden, thereby ensuring that people earning higher income pay a higher proportion of their incomes; have minimum non-standard tax rates as possible, thereby ensuring simplicity and that similar taxpayers and taxpaying activities are treated/taxed at the same rate; be sufficiently flexible within the context of a medium-term tax initiative, in order to ensure that tax policy and administrative changes will be made in a systematic manner; should remain consistent with meeting the revenue need of the budget; should facilitate savings, investments and the allocation of resources to build production, efficiency and enhance economic growth," the White Paper says.
The White Paper reviewed the ongoing tax reform within the concept of the Tax Reform Committee's report to Parliament earlier this year. Arising out of the report was the recommendation that basic food subsidy should be removed from the tax system and addressed through a social protection programme, but nonetheless, a small number of basic foods and other critical items should remain on the zero rated/exempt lists until the economy shows stronger growth, increased employment and a lower incidence of poverty. I do not think the basic food subsidy should be touched as this will bring hardship on a large number of people who might not be covered under the social protection programme.
Other critical recommendations in the report include:
The property tax regime - the proceeds of which are allocated to local government - has been underperforming, not only because of indifferent compliance, but also because of outdated property revaluation. The current law prohibiting indexing of property between valuations will be changed. Property value indices will be created on at least a biannual basis and used to adjust all property values between valuations. Government is committed to completing the current property valuation exercise before the end of the current financial year and to begin implementation using the resulting valuations from fiscal year 2013 to 2014. The current system of property tax encourages non-compliance because there are no serious consequences for non-payment. The parliamentary committee recommended that with respect to property tax, the government will simplify and streamline the process of selling property in order to execute a lien to recover outstanding property tax within the medium term.
I think we should all recognise that one of the factors responsible for the reluctance to pay property tax is that property owners realise that they are not getting a fair deal for the money, having regard to the appalling condition of parochial roads. These roads cause heavy damage to motor vehicles, requiring the purchasing of parts which have to be imported. The government should offer incentives to property owners who keep their accounts up to date.
The White Paper is correct when it states that reforming the tax system in order to achieve fiscal consolidation can be painful and politically unattractive, but unavoidable.