Fix the C-tax on fuel
Business Editorial...
Stabroek News
May 28, 2004
Fuel accounts for a substantial part of Guyana's import bill and its costs feed directly into the economy. It affects the cost of transportation, goods and services, electricity and ultimately the purchasing power of citizens by feeding through into inflation. The higher the cost of fuel, the more uncompetitive industries become.
The consumption tax on fuel is 50% and has, on occasion, been lowered because of upward spikes in fuel prices as was recently done.
A developing economy such as Guyana, which finds it difficult to sustain growth and increase its foreign exchange earnings, needs to carefully think through its policy on an important input into the economy such as fuel. It is not simply the issue of fuel as this crosses into monetary policy and inflation. The lower the effect of fuel, the less impact it will have on inflation. So the two policies should move hand in hand.
However, this appears not to be the case as was borne out recently when the government allowed the fuel prices to soar above $618 per gallon at the pump. The government advised on the conservation of fuel and of the need to consult with stakeholders during a hue and cry by the citizenry for a reduction in the c-tax. It later acquiesced with a 10 percentage point reduction.
A 50% c-tax on fuel seems to be rather high for Guyana. It is a characteristic of the entire tax system - high taxes and a low tax base (too many people and businesses escape the tax net). This needs to be reviewed as part of the entire tax reform exercise. Lower taxes on a wider base will not only make the tax system more equitable, but will provide less of an incentive for evasion.
However, the more immediate issue which can be dealt with by the government to make the tax less of a burden in the face of the uncertainty in the world fuel market is to replace the c-tax percentage with a fixed nominal value.
That is, if the government budgeted the tax revenues to come in from fuel at G$30 per gallon , then it should make the necessary changes to the law for this fixed sum throughout the year, irrespective of the price of fuel. Hence, all that would be passed on to consumers in a price increase is the effective world market price.
The government has profited from the recent increases as the c-tax of 50% on a higher value fuel raked in higher revenues.
While on the one hand the government gets more revenues, it still spends money each year to mop up liquidity to keep a lid on inflation, the very inflation which higher fuel prices (and the effect of the 50% ad-valorem tax) would add to.
The government should seriously rethink its tax policy on fuel to ensure that the economic costs do not outweigh the short-term revenue gains.