The Budget & You
Summary Revenue Measures
|REVENUE MEASURES AND ASSOCIATED POTENTIAL REVENUE EFFECTS||FISCAL COST OF REVENUE MEASURES (ANNUALIZED)|
|Reduction in the standard General Consumption Tax (GCT) rate from 16.5 percent to 15 percent||(J$13.968 Billion)|
|Reduce the Assets Tax rate from 0.250 per cent to 0.125 per cent||(J$3.020 Billion)|
|New Income Tax Credit for companies (regulated and unregulated) with annual sales/revenue less than or equal to $500 million||(J$1.010 Billion)|
The revenue measures proposed by finance minister, Dr. The Hon. Minister Nigel Clarke is historic to the degree that no modern-day finance minister has had the benefit of fiscal space to reduce taxes, rather than promote new revenue measures. This is a ‘dividend’ that is paid from Jamaica’s continued adherence to a strict economic turnaround program, and barring any structural shocks, we anticipate Jamaica’s economic transformation to continue. Very importantly, the government’s debt-to-GDP target would not be adversely affected by the proposed revenue measures.
Revenue Measure 1: Reduction in the Standard General Consumption Tax (GCT)
Commencing April 1st, 2020, the General Consumption Tax rate will be decreased from 16.5% to 15%, a 150bps decrease. This decrease will result in a potential revenue loss for the government of J$13.96 billion.
Barita’s Opinion: It’s important to contextualize this particular measure. For the period April to December 2019, tax revenues were up 2.7% over the GOJ’s budget and 6.7% over the corresponding financial year in 2018/2019. GCT performed above the GOJ’s expectation by 2.9%, and GCT inflows were higher than the corresponding FY2018/2019 period by 8.9%. It is increased compliance that contributed to the performance in GCT, and consequently the Government is banking on even more compliance given a lower rate. In the context of the COVID-19, which could lead to a short-term spike in local prices, the reduction in GCT could offset that impact, particularly on consumers.
While the GOJ is projecting that the loss in revenues will be within the range of J$13.96 billion, we think it is important to highlight that GCT (on local production and consumption and imports) accounted for 36.2% of total revenues, for the period April-December for FY18/19, and the lower GCT rate on imports could incentivize people to import more.
Revenue Measure 2: Reduction in the Asset Tax Rate
This measure was slated to commence in 2021, the effective year of assessment. The Asset Tax rate will be reduced from 0.250% to 0.125%. This decrease will result in a potential revenue loss for the Government of J$3.020 billion. However, in order to provide $3b for Jamaica’s COVID-19 response banks on March 17, 2020 have agreed to forgo the reduction in asset tax for a year.
Barita’s Opinion: We view this move positively. It continues the Government’s efforts to reduce the number of distortionary taxes or, really, ‘nuisance taxes’ that are inimical to economic growth. In fact, the imposition of this type of tax, particularly on financial institutions, is directly in conflict with other GOJ goals of financial inclusion. Consequently, with this reduction we anticipate that the financial sector will be able to make more financial products available to the public and to businesses on attractive terms.
Revenue Measure 3: New Income Tax Credit for Companies
This measure will provide “an income tax credit of $J375,000 for both regulated and unregulated companies with revenue/sales equal to or less than $J500 million”. This measure is expected to result in potential revenue loss of approximately $J1.010 billion. The measure is effective for the year of assessment 2020.
Barita’s Opinion: We also view this move positively. It is incentivizing further employment particularly among small and medium enterprises, for whom an income tax credit of $375,000 could be meaningful. It could also provide an incentive for people to move from the shadow economy to become incorporated enterprises. We note that this complements the Employment Tax Credit, which is available only to unregulated companies.
We are calling these revenue measures, the ‘fiscal-discipline-dividend’, that is, the benefit that is accruing to Jamaica from its years of economic reform under various IMF programs and across different political administrations. Covid-19 could pose a formidable challenge on the fiscal front if it escalates beyond what the GOJ is currently contemplating. The GOJ has already identified J$7billion to fight the virus and has indicated that additional resources are available if the virus becomes more pervasive.
The Barita BrainTrust
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