IN trying to make the move towards a more efficient general consumption tax (GCT) system less painful, the Government may have created a tougher environment for businesses.

Instead of applying the sales tax to all goods and services and drastically lowering the rate in one sweeping move, Finance Minister Peter Phillips shaved the rate by one percentage point, applied the new rate to electricity and tweaked taxes on hotel rooms that may squeeze the tourism sector.

“The feedback from the industry is that they are extremely alarmed at the structure and level of tax rates,” said Jamaica Hotel and Tourist Association President Evelyn Smith. “They are expecting tourism to contribute a lot.”

She expressed concern over the potential impact that the room tax of US$2 to US$12 per night (depending on the size of the hotel) will have on the viability of the sector, while questioning whether the tax would be applicable to complimentary rooms. Those are needed to promote the products to agents and tour operators who in turn help sell the rooms.

Even though GCT-registered operators can recover the tax paid for input items from the tax they collect from sales, it may not hold true all the time for a sector that goes through major cycles.

“It is a cash flow issue,” said Smith. “In the down months, GCT on electricity may not be recoverable through sales.”

Phillips raised the tax-free threshold from 200 kilowatt hours to 300 kWh for residential customers, but at the same time increased the rate applied to taxable electricity from 10 per cent to 16.5 per cent.

Brian Denning, a tax expert and member of the Private Sector Working Group on tax reform, said he believes that the measures are a step in the right direction. It would have been difficult to implement a more comprehensive tax reform package at this time, given the need to finance a six per cent primary surplus.

But he pointed out that the Government could have acquired more fiscal space by simply avoiding the cost of passing on savings to highincome earners when the income threshold is increased. An income exemption limit would remove the burden of PAYE on low-income earners but would not give the tax-free benefit to high earners.

He suggested that producers of GCT-exempt items might have to absorb more taxes on their inputs as a result of a limited widening of the net.

In other words, adding some items to the tax list that would be purchased by such a producer could not be recoverable because the goods he produces are still not on the list. Similarly, the higher GCT on electricity would have to be absorbed.

“We are going to look at it more closely,” said Denning, “particularly as it relates to items that remain exempt”.

The minimum income tax on businesses is a concern for MSME Alliance head Professor Rosalea Hamilton.

“It is not clear if businesses which earn below the tax threshold or ones that are losing money will have to pay,” she said.

Aside from tax measures, Phillips spoke to ways to help the sector, such as a $1-billion loan facility to MSMEs through the Development Bank of Jamaica.

“The disappointment comes from not seeing anything more than the usual,” said Hamilton.

She argued that the focus of the announcements yesterday, as in the past, was on growing the size of businesses rather than growth of entrepreneurship and competitiveness.

“There was no mention of the MSME and Entrepreneurship Policy, after a year of discussion,” she said.