The new taxes for 2015

The Letter of Intent signed between the cash-strapped Keith Mitchell government in St. George’s and the International Monetary Fund (IMF) has given an insight into the new taxes the 17-month old administration intends to introduce next fiscal year.

The letter was critical for the Mitchell government to secure assistance from the Washington-based fund to give support to the Structural Adjustment Programme (SAP) aimed at addressing the fiscal crisis facing the island.

One of the revenue earning measure on the table is a 5 percent on gross sales of small business firms with sales between EC$30,000 and the VAT threshold (EC$120,000), while the other is the introduction of a 10 percent tax on wages and profits of financial institutions.

THE NEW TODAY understands that the IMF is currently looking for office space in the city for its officials to operate from in order to keep a close check on government’s performance on the austerity package unveiled for the island.

The Letter of Intent hinted that in 2016, the government would look at bringing on board a further increase in the property tax that was increased by 50% in the current fiscal year.

As a public service, this newspaper has decided to reproduce the commitment given by the Mitchell government to the IMF in the Letter of Intent with respect to its programme of Fiscal Responsibility:

Fiscal Consolidation

The first pillar of the Government’s fiscal programme is a strong fiscal consolidation effort aimed at putting debt on a downward path.

The Government has taken measures already in 2013 to stem the rapid deterioration of the fiscal position, limiting the primary deficit in that year to 3⅔ percent of GDP, notably below its budgeted target of 4.2 percent of GDP (outcomes consistent with the budget was a prior action).

Going forward, a fiscal adjustment effort of 7¾ percent of GDP will bring the primary balance into a surplus of 3½ percent of GDP by 2016, which will put debt on a declining path even under reasonable shocks.

The adjustment will be front-loaded, to help meet the higher financing requirements early in the programme, with 5.6 percentage points of GDP undertaken during the first two years.

To mitigate the impact of this adjustment on the nascent economic recovery and the most vulnerable, the Government will establish a floor on social spending for targeted programmes and will safeguard critical infrastructure programmes by allocating, fiscal space permitting, at least 7 percent of GDP to the public sector investment programme on average during the next three years.

For the medium term, our objective is to achieve the ECCU-wide target of 60 percent of debt-GDP ratio by 2020.

The fiscal consolidation will rely on measures that ensure a broader and a more equitable participation in the tax effort, as well as reductions in less productive spending.

These will include:

*A reduction in the personal income tax threshold−which is among the highest in the world and excludes most income earners from the tax net – from the current EC$60,000 to EC$36,000 in 2014. A lower rate of 15 percent will apply to income below EC$60,000, while the rate for income above EC$60,000 will remain unchanged at 30 percent.

* Boosting income and withholding tax collection by extending the income tax base to winnings from lotteries and games of chance, to come into effect in 2014.

*An increase in property tax collections through an increase in the property tax rate on buildings and land from 0.1-0.15 percent to double those amounts in 2014, and to an average of 0.5 percent in 2016, as well as through a revaluation of assessed property values to reflect market valuations.

Once the primary balance targeted under the programme (3½ percent) has been achieved, the Government intends to reduce the currently high property transfer taxes to encourage the development of a more vibrant real estate market.

*Streamlining tax exemptions to ensure equitable burden-sharing through:

(i) a 50 percent reduction in tax exemptions to GRENLEC, the largest beneficiary of exemptions, statutory bodies, St. George’s University and the returning nationals;

(ii) reducing the tax rebate to manufacturers by eliminating credits accumulated during 2010-13; allowing the use of the rebate against non-VAT liabilities only; capping the annual fiscal loss to EC$2.5 million; and discontinue the program fully after 2016; and

(iii) reforming the tax incentive regime to ensure the integrity of the tax base going forward. The first two measures will be effective from 2014 (excluding St. George’s University, which will be effective in 2016).

*The base of the VAT will be expanded by

(i) applying VAT to select exempt items (non-basic food, private accommodations); and

(ii) applying the full 15 percent rate to construction inputs (from 2014) and utilities provided to St. George’s University (from 2016).

*Broadening the base and yield of excises by:

(i) introducing a 5 percent excise on luxury goods and on vehicle parts, tires, batteries, and motor oil; and

(ii) increasing the excise tax on alcohol and tobacco products by at least 10 percent.

*Other revenue-enhancing measures will include:

(i) the introduction of a small business tax regime for firms with sales between EC$30,000 and the VAT threshold (EC$120,000), charging a flat rate of 5 percent on gross sales;

(ii) the introduction of a 10 percent tax on financial activities (wages and profits of financial institutions);

(iii) increased fees on motor vehicle, professional and gun licenses;

(iv) fees for new government guarantees on the debt of statutory bodies; and

(v) an increase in the customs service charge from 5 to 6 percent.

*The Government also intends to undertake a revenue-neutral simplification of the tax system by way of overcoming resource constraints and improving compliance. Technical assistance on this, and on the introduction of the small business tax regime, was requested from the IMF.

Increased efforts to collect taxes that are due will also be critical in supporting the fiscal consolidation.

The Parliament has recently passed a revised Integrity in Public Life law intended to strengthen governance and facilitate higher levels of integrity throughout the government, including in revenue collecting agencies.

Going forward, efforts will focus on fully implementing the reform agenda that has already been developed with support from CARTAC that includes:

(i) completing institutional reforms to focus on risk management and large tax payers;

(ii) eliminating the bonus for tax collectors on interest from tax arrears, with a view to correcting the disincentives to collect on the large stock of existing arrears (prior action);

(iii) introducing a strict sanction regime for late payment of taxes due (the relevant tax laws will be revised before end-November 2014)

(iv) connecting the customs and inland revenue information systems and ensuring exchange of information between the two departments;

(v) enacting the newly drafted Customs Bill that will modernize the existing legislation and introduce penalties for noncompliance, among other things (by end-June 2014);

(vi) establishing an Internal Audit Unit at Customs; and

(vii) improving controls and monitoring of customs bonding warehouse, by increasing audits and closing repeated non-compliant warehouses.

*A reduction in central government’s nominal wage bill to 9 percent of GDP by 2016, from a projected 10.3 percent in 2013 (excluding retroactive payments).

This will be achieved, at the minimum, by capping the nominal wage bill during 2014-16 (including allowances) at May-December 2013 levels (this will bring the wage bill to a projected 9½ percent of GDP by 2016).

A further reduction in the wage bill will be achieved through attrition, with only 3 out of 10 departing employees replaced; and through the streamlining in the public sector following the planned public service review.

To facilitate the achievement of the wage targets, we will:

(a) eliminate at least 100 vacancies a year during 2014-16 (previously used to grant higher salaries to existing staff); and

(b) not award performance increments for 2013-16 period, while improving the performance appraisal system.

These measures will also be supported by fiscal structural reforms that would restrain public wage growth on a more sustainable basis.

*A 20 percent reduction in spending on goods and services relative to 2012, focused especially on savings in the utilities bill, rental costs, and communication costs, through renegotiation of telephone contracts, switching to energy-saving LED lights and the consolidation of public offices.

Other spending on goods and services will be frozen at 2013 levels. Other spending will also be streamlined, including investments of lower social return and reforms of statutory bodies to reduce their drag on public finances.

Most measures required for the consolidation will be secured upfront in order to impart additional credibility to the adjustment effort.

*The Government will obtain parliamentary approval of all the fiscal adjustment measures listed in paragraph 18 that require legislative amendments as a prior action, although the implementation of the measures will be staggered in line with the agreed pace of consolidation.

The only four exceptions to the ex-ante legislation of measures will be:

(i) the new taxes to be introduced in 2015 (financial activities tax and small business tax) will be legislated during 2014 to allow adequate time for their proper design, technical assistance for which will be sought from the IMF;

(ii) the second round of property tax increases for 2016 will be legislated after we assess the implementation of the first round of increases;

(iii) the fees for the new government guarantees will be enacted soon after the post-restructuring technical assistance on public debt management, which we requested from our international partners; and

(iv) the measures associated with the St. George’s University will be enacted before mid-2015, after the conclusion of our ongoing renegotiations of the existing arrangements with the university.

Finally, the parliament approved the 2014 budget in line with the programmed primary deficit target of 2½ percent of GDP. To ensure that primary spending is consistent with the program if budgeted revenues do not materialize, the Government will take additional safeguards to secure execution in line with the program, including:
(i) issuing a Cabinet conclusion allowing spending commitments only up to the programmed, rather than budgeted, spending;

(ii) issuing spending authorizations in line with the programmed spending targets, and only one quarter ahead, to strengthen our ability to control spending commitments; and

(iii) revising the Public Finance Management Act, ahead of the planned overhaul of the public financial management legislation, to introduce personal financial penalties for responsible officers committing to spending above budgetary ceilings.

To ensure that our consolidation efforts remain on track in the face of unanticipated events, such as natural disasters, the Government will put in place a number of measures. In particular:

*It will seek donor assistance to purchase additional natural disaster insurance for the duration of the programme to ensure that Government policies are not derailed by natural disaster shocks.

The Government estimates that the cost of this supplementary insurance would be US$3-5 million per year (0.4-0.6 percent of GDP), providing a substantial level of coverage for Grenada and representing 20 to 30 percent of the estimated average annualized loss for the covered perils.

*The Government has also identified contingent measures for up to 0.7 percent of GDP in 2014 that will be implemented to ensure that the fiscal consolidation does not fall short of the target.

These include:

(i) reduced (only one-quarter-ahead) expenditure authorizations in the first three quarters of the year compared to the program, with the remaining allocations released once there is evidence that the fiscal programme is on track; and

(ii) a further widening of the income tax base to capital gains, dividends, and interest.

The Government plans to clear its existing domestic and external arrears during the programme period.

A clearance framework for the existing stock of Government debt arrears will be agreed on as part of the ongoing debt restructuring, and the Government will not incur additional debt arrears during the duration of the programme outside the restructuring process.

Existing supplier arrears will be repaid through a combination of Government paper and cash during the first two years of the program.

The Government will not incur additional arrears on membership fees to regional and international organizations from the start of the program, and will seek to regularise these delayed payments in the course of 2015.

In the context of public financial management reforms, the Government will also strengthen the monitoring of expenditure commitments to prevent future accumulation of arrears.

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