The fear of tax reform

Apr 02, 2017 News

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By Kiana Wilburg
Tax reform—it’s a term that possesses the quality of being very progressive yet equally daunting. And when any administration seeks to set such a trend in motion, they face two hard challenges.

In my opinion, these challenges can be summed up to be; ensuring that tax reform is broad based, simple and fair, while bringing in enough money to support some of the national plans of the government of the day. It sounds easy, but the process is a complicated one.
The reform is further complicated by an emotion that is well known to us all…fear.
The ordinary class is fearful that a tax reform process will mean less money in their pockets.
The Government on the other hand, is worried that if its proposed tax measures aren’t all they were promised to be, then they would be penalised by the citizenry at the next elections.
In Guyana’s situation, the Government has boldly embarked on a tax reform process. It has attracted favourable opinions and harsh criticisms from various circles. There are some who believe that Government’s timing for tax reform is wrong; that given the economic state of affairs, implementing more taxes could be considered cruel if not criminal.
On the other hand, there are those who believe that tax reform has been delayed for too long. They argue that a reformed tax system would create a more efficient economy and deliver a fairer system.
There are others, however, who contend that if the Government’s tax reform is not carefully managed, there is the prospect that it will fall short of its ambitious objectives.
It is too early to determine which perspective is completely correct. In the meantime, the comprehensive tax reform report that was prepared by some of the nation’s tax advisors provides some useful insight into where Guyana’s tax system is and where it needs to be.
The Tax Reform Commission included the likes of Chartered Accountant Christopher Ram, Commissioner-General of the Guyana Revenue Authority (GRA), Godfrey Statia, NICIL’s Chairman, Dr. Maurice Odle and Economist, Dr. Thomas Singh.
The Commission noted in its report that revenue enhancement at this time is an important objective of the Government and tax reform is accordingly opportune. At the same time, it said that the possibility of Guyana becoming a petroleum producing country looms invitingly on the horizon, with tax revenue for infrastructure and other socio-economic purposes becoming a less constraining factor.
But even with such more fortunate prospects, the Commission articulated that tax reform now is appropriate, since there may be less willingness to effect fundamental reform when the economy turns around.

WEAKNESSES
According to the Commission, the main weaknesses in the Guyana tax system include an excessive number of exemptions; significant evasion and avoidance; low administrative capacity; a relatively narrow tax base; high effective tax rates in certain sectors, and a failure to achieve the desired amount of equity.
The body asserted that there are an inordinate number of exemptions granted to businesses, companies and individuals.
It said that the corporate exemptions (worth over $43 billion in 2014) relate mainly to customs duties, VAT and excise taxes, and are very significant when measured as a percentage of Government tax take, GDP or private sector investment. In addition, it said that there are tax holidays, miscellaneous waivers and other concessions, and accelerated depreciation and other types of investment allowances.
The Members of the Commission stated that this generous situation has arisen both as an attempt to offset the high rate of corporate taxation (“doctoring”) and as a result of excessive exercise of ministerial discretion, the randomness of which could lead to economic distortion and misallocation of resources.
The tax advisors stated that the instinctive and on-the-spot exemptions to interest groups have been used by politicians sometimes genuinely to address hardships, but not infrequently to curry favours with segments of the electorate. Such a practice, they said, can contribute to a tax system in which there is discrimination of one group over another based on political appeal and lobbying muscle.
With respect to tax waivers granted to certain individuals, such as the President, Attorney General, Chancellor, Chief Justice and Auditor General, the Commission members said that a rationale or justification is hard to find, especially since it sends the wrong signals to those persons whom the Government is hoping to rope into the tax net.
Furthermore, the tax advisors observed that various forms of tax exemptions have also been used to favour Members of Parliament and to provide non-tax benefits to public servants to compensate for what is perceived to be inadequate salaries. However, the advisors said that they constitute unfair discrimination, which causes dissatisfaction within the private sector.
Noting other weaknesses of Guyana’s tax system, the advisors said that the high incidence of evasion relates to those companies and individuals who use various devices to evade the several taxes imposed on them by law.
They also said that there is a very large underground economy, made up of both unincorporated firms, employing various evasion and avoidance practices, and self-employed persons of various skills and occupations. In addition, the Commission members documented the fact that smuggling is rampant because of the thousands of miles of unpatrolled borders.
The tax advisors said, “The failure to capture more operatives into the tax net is partly related to the relatively low capacity of the Guyana Revenue Authority in terms of trained and skilled personnel; the absence of the availability of adequate and appropriate information technology and the failure to use the available technology to capture common and relevant information regarding taxpayers and a common and adequate database; as well as a level of professionalism that is not sufficiently high to resist various forms of bribery. In addition, in the past administration, there has been political intervention/interference as to prevent the officers from conducting their duties in a fair and non-partisan manner.”
The advisors said the abovementioned weaknesses have all contrived to burden Guyana economy’s with a very narrow tax base, in terms of both the relatively small number of firms and individuals that do pay tax (in addition to the high revenue concentration among those who actually pay).
This derived weakness is also structural, given the significant share of the agricultural sector in the country’s GDP and the large number of small farmers. Also, the large services sector, with its considerable number of small operatives, with various levels of skill, income and net worth, do not lend itself to easy taxation.
Finally, the Commission said that the constellation of weaknesses, and the peculiar nature of their inter-play, has conspired to negate, to a considerable extent, the tax equity objective of the Government.
The members of the tax reform committee noted that at the vertical level, indirect taxation, which impacts irretrievably and indiscriminately on the poor, is high in yield relative to direct taxation. At the horizontal level, they said that some pay corporate and individual income tax, while others do not; and the individual income tax burden falls disproportionately on fixed income earners.
Over time, the tax advisors said they are convinced that the tax structure has not evinced fundamental change.
(To be continued)

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