Government is currently losing out on substantial revenue as a result of over two billion dollars in personal income tax allowances and deductions alone.
And the International Monetary Fund (IMF) has strongly advised that it takes a hard and serious look at its domestic tax policy, with a view to widening the tax base and eliminating a number of these exemptions.
If accepted, officials say the advice could also redound to the benefit of the average Barbadian taxpayer, since an expansion of the base for the Value Added Tax (VAT) for instance, which raked in $704 million in fiscal year 2009/2010 compared to $814 milion the last year, could more easily lead to a lowering of the current rate of 17.5 per cent.
“Generous zero rating provisions are the main factor behind the VAT’s low revenue performance on the basis of its current high standard rate of 17.5 per cent,” the IMF says in the report dated June 2014, in which it explicitly states that the VAT, which is exempted from gambling and lotteries and insurance policies, “should be producing substantially more revenue than it currently does”.
The team of experts from the Washington-based institution, who compiled the report after conducting a Government-requested review of Barbados’ tax system, also warns that “broad zero rating provisions are poorly targeted instruments to deliver relief to low income households”, explaining that “middle and high income households consume more than lower income ones and therefore generate a larger absolute benefit than the lower ones”.
In its detailed breakdown of the current exemptions provided for by the Government, the IMF team further reveals that of the $3.7 billion raised in Total Assessable Personal Income for Income Year 2013, a whopping $2.4 billion went the way of allowances and special deductions. This means that the Government was left with a mere $1.3 billion from which to collect its taxes.
The personal allowances and deductions figure is further broken down in the IMF report as follows:
Spousal – $9 million
Child Allowances – $ 32 million
Personal Allowance – $2.2 billion
The report also details other deductions including:
Home improvements – $166 million (of which mortgage interest is $118 million)
Rent – $16 million
Energy related – $4 million
Other – $10 million of which medical (max $750 per individual) is $3 million and trade union subscriptions $5 million
In terms of corporate tax payments, the IMF seemed satisfied that the current rate was generally “competitive”, when compared to the region and the world.
In response to the findings, Prime Minister Freundel Stuart has already indicated that the report has highlighted “our un-wisdom in playing taxation – in saying that we are imposing a tax because the whole purpose of imposing the tax is to get revenue and then undermining our capacity to get the revenue by giving a whole set of allowances”.
Stuart, who made more than a passing reference to the IMF report last month but stopped short of providing all the details before it could be put to his Cabinet, had pointed out that after the 1991 economic challenges facing Barbados, then prime minister Erskine Sandiford [now Sir Lloyd] had stripped the tax system of the raft of allowances that made the tax effort “a waste of time”.
However, the Prime Minister said, bad practices had crept back in and some of the same problems solved over 20 years ago now have to be solved again.
“ . . . a very cursory reading of the report shows that there are quite a few things that we have to do with our tax system at the moment to make it more efficient,” he said.
However, Government is yet to take a final decision on the current level of exemptions. It is understood that the document is currently commanding the attention of a special committee set up by Minister of Finance Chris Sinckler and headed by retired permanent secretary William Layne.
That committee is due to report to the Minister “in another few weeks”, Government sources say.
They also indicate that the committee’s findings will inform Sinckler’s next budget presentation, a date for which is yet to be set.