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Recommendations

Personal Income Tax (PIT)

The consultants have recommended that the non-taxable PIT threshold be raised in three phases starting next year and moving from the current $216,000 per annum to $240,000 per annum or $20,000 monthly. They recommended too that the 20% tax rate, the first band of the progressive rate of taxation on personal income, be applied on income between $240,000 to $396,000 and thereafter for a 35% rate be applied instead of the current 33.3%.

In the second phase, the consultants advised that the non-taxable threshold be taken to $264,000 per year or $22,000 monthly and for the 20% rate to apply on income up to $480,000 and the top rate of 35% thereafter.

The non-taxable threshold is to then move to $300,000 per year or $25,000 monthly in 2005 and the 20% rate to apply up to income of $552,000.

And to counter tax evasion by professionals, the mission proposed a minimum tax of 33.3% on professionals' income until the GRA could collect regular income tax from this group. It suggested that the base of the minimum tax be set at the level of the salary of the corresponding professionals in the public sector. For example, if the number of professionals in Guyana is 1,500 with an average civil service entry level salary of $65,000 per month, the base of the minimum tax would be $1.26 million and the estimated annual revenue would be $420 million.

The mission further proposed that the licence fee for professionals be increased from $10,000 to US$5,000 per annum as when the fee was first introduced, it was equivalent to this amount.

Further, the report recommended that to simplify tax administration, the GRA should not require employees with one source of income to file tax returns, rather, it should concentrate on tax collection from the self-employed.

The study pointed out that PIT was widely evaded by the self-employed, including professionals. The study found that 22,813 self-employed taxpayers and unincorporated businesses contributed $0.7 billion to the tax coffers in 2001, an average $30,000 per taxpayer compared with the average of $165,000 paid by employees that year. The rate of tax payment by self-employed persons was eight per cent, even though they number 33% of the total number of taxpayers filing returns.

The consultants noted in their study that the value of the threshold has been progressively eroded by inflation and said the government indicated that there was strong political pressure to raise the threshold to ease the burden on lower-paid workers. They said that they received similar messages in their discussions with private sector bodies.

The government's position is that it would cost much in revenue to raise the threshold because for every $12,000 increase, the revenue loss would be $130 million. However, the mission said that in many developing countries, the PIT threshold was three to five times the per capita income, while in Guyana it was only 1.2 times. And it underscored the inequity in the system as it was only the employed who largely paid their taxes. Evasion by the self-employed, the report said, has narrowed the base of the tax effectively.

The estimated effect of raising the PIT threshold would see 11,781 taxpayers removed from the income tax in the first phase, moving to 22,220 in the second and reaching 32,883 in the third. Income removed from the tax base starts at $225.4 million, moves to $440.4 million and reaches $691.7 million by phase three. The cumulative revenue loss would be $81.5 million in the first phase, $176 million in the second and $267.7 million in the third.

Consumption Tax

The mission recommended four options to reform consumption tax:

* a value-added tax (VAT) at the manufacturers' level;
* a wholesale level sales tax (WST);
* a retail sales tax (RST);
* a full-fledged VAT covering the wholesale and retail levels as well as services.

It suggested that the last one made more sense for Guyana.

Consumption tax is currently levied on sales by manufacturers and on imports at rates of 0%, 10%, 30%, 50% and 28%. It advantages are that it is simple to administer because it has about 205 manufacturers as its base and is applied to imports which are relatively easy to tax. It avoids cascading by exempting input purchases by registered taxpayers and eliminates the tax content on manufactured exports.

However, the mission noted that the tax was distortive and therefore anti-growth as it discriminated against consumption goods in favour of those of services. And by being applied at different rates on different goods it also distorted consumers' choice. The team said the inefficiency caused by the tax, undermined growth in the economy as well as Guyana's poverty reduction objectives.

The report said the consumption tax base was narrow because it did not tax services such as wholesale and retail services, transportation, construction, professional services, electricity and hotel (except for accommodation) and restaurant services. It highlighted that the exclusion of services from the tax base meant that the capacity of the tax to mobilize revenue at relatively low tax rates was limited, among other things. The result was that the tax rates for ordinary commodities such as fruits, nuts, sugar, and preparations for infant use, vegetables, paper and clothes were taxed at rates as high as 30%.

The mission said the system was forced to impose extremely high rates of taxes on commodities such as cars and it was understandable in the circumstances to have low rates of compliance and considerable tax evasion. The report also pointed out that another effect of the limited capacity of the tax to mobilize revenues at reasonable rates was that it made it difficult for the government to reform the inequitable PIT.

The study said the monitoring mechanism for the consumption tax was cumbersome, costly, open to abuse, and, in practice, ineffectual. It was cumbersome and costly, the report said, because each time a taxpayer made a tax-free input purchase, the list must be cleared by the Customs and Trade Administration (CTA). It was also costly because of monthly reports on production levels and stocks and the need to check that these were in line with requirements in the taxpayer's certificates. The monitoring system was not effective, the report said, because the CTA had not implemented a credible programme for monitoring abuse. The mission said it was told that the extent of abuse was substantial.

The mission said another disadvantage of this tax was that all exports could not receive the same treatment as only manufactures could register and get tax-free inputs, while all others had to pay consumption tax on their inputs and capital equipment. This, the mission said, was another anti-growth bias.

The study said a VAT at the manufacturers' level would have the same narrow tax base as the consumption tax but would be somewhat less distortive, because of the application of a single positive rate and zero rate for exports.

A wholesale tax would be similar to the consumption tax except that where goods were sold through wholesalers, the tax would be applied on the sale price of the wholesaler. The mission said that this tax had the advantages and disadvantages of the current consumption tax as well as the added concept of wholesaling being unclear.

With regard to the retail sales tax (RST), all manufacturers, importers, wholesalers and retailers of taxable goods would be included in the tax system. However, the report said that the RST had several disadvantages including the exclusion of services and for Guyana would not significantly widen the tax base or remove the economic distortion as a result of that exemption.

The mission saw it as most advantageous for Guyana to introduce VAT to the retail end and the report detailed how maximum benefits could be derived from such a tax. It suggested that if the government decided to go this route, it would introduce a broad-based invoice type tax with a single positive rate and zero rate for exports. It suggested a registration threshold of an annual turnover of $10,000 for registering taxpayers into the VAT and a presumptive tax on taxpayers with turnover below the threshold with voluntary registration permitted, subject to outlined conditions.

The consultants said government purchases must be subjected to the VAT and the tax on capital goods fully creditable. Further, they said, vehicles and entertainment expenses should be treated as final consumption and not allowed as input credit.

The recommendations include exempting all health services, educational services and financial services from VAT. The mission suggested that newly constructed residential housing be taxed, but residential rents be exempt and farmers with turnover above the threshold be given the option to register so they could be fully taxed or zero rated if they are exporters.

Excise Taxes

The mission recommended that these taxes be replaced by VAT using a uniform rate. It noted that because of the narrow tax base for the consumption tax, Guyana imposed other taxes on goods and selected services with the most important of these being the purchase tax on cars, hotel accommodation and travel voucher taxes.

The purchase tax on cars is imposed at various rates depending on the engine capacity starting from 10% and reaching 100%. The mission noted that the all-inclusive price of a medium-sized car in Guyana is approximately 2.6 times the Cost, Insurance & Freight (CIF) price because of the heavy taxation on cars.

The purchase tax, the mission said, was heavy, encouraged evasion and was unsustainable. The report said that the reason given for the heavy tax on cars was to address road congestion and pollution. But the consultants noted that the objective had not been achieved because of widespread evasion of the tax and the level of exemptions granted on cars.

Hotel accommodation tax is levied on hotel rooms but excludes services such as laundry and meals. Travel taxes are the ten per cent imposed on airline tickets and the departure tax which the mission said yielded little revenue. Over the last seven years entertainment tax has yielded between $30 million and $40 million annually.

The environmental tax introduced in 1995 grossed between $100 million to $112 million per annum. Premium tax on insurance premiums paid to foreign insurance companies yielded very small returns. The yields of the tax on telephone calls, fax messages and bets were also insignificant, the mission noted.

The mission said the taxes were ad hoc in nature, pointing out that while hotel accommodation, international calls, cinemas and live international performers were taxed, laundry and meal services of hotels, domestic telephone calls, cable TV or entertainment by domestic performers and sports were not taxed.

It said to meaningfully reform this system, the government should introduce VAT as discussed in the study and complement this with excise taxes on few commodities such as tobacco products at rates of 100% and alcoholic beverages, gasoline and cars at a rate of 30%.

The mission recommended that electricity, water, hotel and restaurant services, domestic and international telephone calls and fax messages be subjected to a selective sales tax of ten per cent. And professional services should be taxed US$7,500 per year. It said that professional firms currently not paying their taxes, should not be allowed to renew their licence.

The report recommended the imposition of a service tax on domestic production of non-returnable metal, plastic, glass or cardboard containers of any alcoholic or non-alcoholic beverage at a revised specific tax to take into account the effect of inflation.

Corporate Income Tax (CIT)

The report found the rate distinction between commercial and non-commercial companies of 45% and 35% to be arbitrary, distortive and unjustified on economic grounds, as well as difficult to monitor. It said that the tax rate for commercial companies was high by international standards and might be detrimental to that sector. Reducing this to 35% would result in a revenue loss equivalent to about 0.3% of GDP.

The mission recommended the reduction of the CIT over time to 40% and then to 35%. In the case of depreciation, the mission recommended that the rules be simplified by pooling. The report noted that the depreciation procedures were costly to use for taxpayers and to monitor for the administration.

In the case of interest on debt, the mission advised that the deductions of interest on debt be limited and for the withholding tax on interest to be raised from 15% to 20%. The report said that the tax discriminated against equity finance of investment as opposed to debt finance. It said that while the latter allowed for a deduction for interest paid, the former did not allow for a deduction for the opportunity cost of a firm investing its own funds. The mission said this would not have been a problem if the interest earned were taxed at the same rate as the corporation tax. However, interest earned in Guyana is subject to a withholding tax of 15% and the mission noted that it made better sense for a firm to deposit its equity in a bank and be taxed at 15% on its interest and borrow to carry out investment so that it gets a deduction for the interest paid against taxable profits. Hence, the mission said, the distortion could be reduced by raising the withholding tax on interest at least to the level of the first rate of tax on personal income tax of 20%. It also said that a restriction on the amount of deductible interest payments was desirable.

The mission said that the penalties for late payment of taxes were excessive and not symmetric as taxpayers did not receive interest from the government on refunds. It also noted that if a refund was due, the taxpayer had no right to demand it. The report recommended that penalties be reduced to a benchmark, such as prime interest rate at the bank and that the government pay interest on delayed tax refunds.

The report recommended that the capital gains tax rate on long-term gains should remain at 20%.

Withholding taxes

Apart from recommending that the 10% rate applicable to non-residents and the 15% tax for all other withholding taxes be raised to 20%, the mission also said that a withholding tax should be imposed at a rate of five per cent on payments to government contractors and providers of professional services. The mission expects the yield from the latter to be significant.

Property Tax

The mission said the government would need to enact legislative changes to require that the results of future evaluations to be made by municipalities, based on studies currently underway, be used as the base of calculating taxpayers' assets.

The report said the property tax form needed to be simplified to reduce compliance cost and the form should include the IRD file number of the creditors and process the information on deductions.

Further, the mission said that when the authorities were processing the tax compliance certificate, information on transfer of assets should be processed and made available to property tax audit.

The report said that taxpayers should be required to declare bank accounts individually and the balance in each at the end of the fiscal year. The mission said the authorities should obtain information of balances of bank accounts to ensure they were correctly declared.

The authorities also have to ensure that information on values of vehicles and their owners are available to property tax auditors. The mission cautioned against converting the current net wealth tax into an ordinary property tax.