PROPOSED changes to the general consumption tax (GCT) will be offset by cuts to import taxes, resulting in price rises on basic foods of “just” six to nine per cent.

The Private Sector Working Group on Tax Reform has proposed that the government lower the GCT rate from 17.5 per cent to 12.5 per cent, while applying the levy to items currently not taxed, such as flour, rice and meats.

Those measures are expected to result in an addtional $7.6 billion in revenue for the Government, but it also means that low-income households will see higher costs for goods that make up a significant part of their consumption basket.

The chairman of the working group, Joseph Matalon, argues that the removal of the custom user fees and environment levy, which account for 2.8 per cent of the value of imported products, would offset the impact of the application of GCT on items now exempt from the tax.

“Most of basic foods are imported,” he said at the Jamaica Observer Monday Exchange this week. “If you take that through the chain of distribution — wholesale, distributor and retail — that is likely to have a downward impact on GCT inclusive prices of about four to 4.5 per cent.”

The net impact of the price of basic goods after applying the GCT is expected to range from six to nine per cent.

To counter the impact on the poorest in the society, who were supposed to benefit the most from exemptions, the working group proposed an additional $2 billion in funding be placed in social welfare mechanisms, such as the existing Programme for Advancement Through Health and Education (PATH). Those funds would specifically target the poorest 40 per cent of households.

Even then, another half of households may find the increase a tough measure to bear.

Income in Jamaica is heavily skewed towards a small group of very rich people. The top 10 per cent income bracket includes, along with a small number of extremely wealthy households, people of much more modest means.

“I wouldn’t imagine that the top decile (10 per cent of households) begins anywhere beyond $2-3 million,” he said. He blamed that on low growth over the last 50 years.

Measures are also in place to reduce income tax on pay-as-you-earn (PAYE) workers. But its doesn’t go as far as to increase take-home pay by as much as six per cent.

The flip side to a higher tax burden on the majority of Jamaicans, is the reduction in evasion by unscrupulous importers who currently find ways of misclassifying taxable goods as zero-exempt items.

“There is a compliance dividend that might come from this uniform basis of applying GCT,” said Matalon. “It is difficult to estimate what the additional income might be.”

In response to the notion that lower GCT rates would not be passed on to consumers, Matalon said that the highly competitive market for basic food commodities — for which there are over 30 major distributors — augurs well for the consumer to benefit.

Bank of Nova Scotia vice president for Government relations Dr Wayne Henry added that moral suasion has also helped keep prices down in recent times.

“Price distortion tends to persist where you have incomplete information,” he said. “We have seen in recent times where the government have published price listings. We have seen the response, that distortions in various places have been removed.”

Overall, the give-and-take measures being proposed by the working group are expected to add 1.6 percentage points to inflation, should all 145 recommendations are taken as a package.