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Last Thursday, Finance Minister Audley Shaw, in a well delivered presentation, finally revealed how the proposed rise in the tax threshold to $1.5 million would be financed. From a tax policy perspective, the new proposal is actually much more attractive than the new Government’s original election promise.

Firstly, the increase in the threshold now applies to everyone. As a consequence, it will benefit 251,000 taxpayers, or more than twice as many taxpayers as the 118,000 originally calculated by the Jamaica Labour Party during the election campaign.

This combines the important aspect of keeping the promise to raise the threshold, without, for the most part (which we will discuss further below), sacrificing the simplicity of the current 25 per cent flat tax, as would have been the case with the previous election campaign proposal.

Moreover, it spreads the burden of paying for the tax relief for the PAYE, who are effectively double taxed as they pay both PAYE and all the other consumption taxes — in a more “fiscally just” fashion across the entire economy.

Another benefit of the revised tax plan is prudent phasing. Minister Shaw stated that he had “listened” to the calls from private sector and the union movement to “phase it in”. The across-the-board increase in the PAYE income tax threshold to $1,000,272 would be effective from July 1, 2016, while the promise to raise the tax threshold to $1.5 million would now be kept on April 1, 2017.
The first phase, for the remaining nine months of the fiscal year, would cost $12.5 billion. However, Minister Shaw also announced new revenue measures designed to raise $13.7 billion, which more than pay for the tax change, for an additional net contribution to the budget of about $1.3 billion.

Most prominently, these include an increase in special consumption tax (SCT) on petrol of $7 per litre from May 13, 2016, which has an expected revenue yield of $6.5 billion.

The tax policy paper also includes the introduction of special consumption tax on LNG (when it comes) and change in the taxation of heavy fuel oil regime, from GCT (for which the power company can claim a set off) to SCT (on which it can’t) on May 13, 2016, with an expected revenue yield of $1.4 billion. The final position on this is not, however, entirely clear, as it now seems the Government doesn’t want a rise in electricity prices, and therefore may reverse the latter change.

Nevertheless, the emphasis on energy taxation, meaning the SCT on gasoline, liquefied natural gas, and heavy fuel oil is encouraging, as it essentially replicates a “carbon tax”. It not only captures the widest possible number of potential taxpayers — close to 100 per cent — but is also in line with the global thrust to a “green” economy, as well as taking into account the windfall effect of the recent drop in oil prices.

Another measure is the increase in SCT on cigarettes from $12 per stick to $14 per stick, from May 13, 2016, with an expected revenue yield of $600 million. However, at his Friday press conference, Minister Shaw revealed that half of the cigarettes sold in Jamaica are untaxed, so although the SCT on cigarettes is clearly good from a health perspective, it is hopefully not such a large increase as to further increase formality.

An increase in departure tax from just over the equivalent US$14 to US$35, from June 1, 2016, is however less welcome. This tax, which will now be denoted in US dollars, has an expected revenue yield of $5.3 billion. The rise in departure tax may impact tourism competitiveness, as it is nearly double the US$20 rate originally imposed, and well over double the current rate of departure tax.

As former Finance Minister Dr Peter Phillips noted in his presentation yesterday, this is a lot for low cost airlines and doesn’t take account the imminent threat to Jamaica’s tourism from the normalisation in relations between Cuba and the United States.

Finally, as Phillips also noted, the move to higher personal income tax on salaries over $6 million per year, from 25 per cent to 30 per cent also from July 1, 2016, is reminiscent of a similar rise during the financial crisis, which quickly became ineffective.

As Pricewaterhouse notes, “It seems most inequitable to target a subset of perhaps less than 12,000 persons to pay a further five per cent income tax on top of the multiple statutory contributions imposed on top of the current 25 per cent income tax rate.” It must therefore be hoped that the five per cent increase in the income tax rate for those earning over $6 million is meant as a temporary “solidarity tax”, as occurred during the global financial crisis, as it is likely to be ineffective over time, encouraging income shifting.

Nevertheless, and very encouragingly, the tax plan appears to have been developed in close cooperation with the International Monetary Fund, with the benefit of extensive joint modelling, and its revenue estimates are for the most part collectible and therefore credible, particularly as they have a little extra built in.

The Economic Programme Oversight Committee (EPOC) yesterday suggested that the IMF ‘s 11th and 12th reviews, ending in March, will be passed.

The July 1 start date for the new threshold of $1,000,272 should also ensure that the June IMF test is also passed without difficulty, maintaining the current macro-economic stability, a very bullish sign for the next few months at least, after the recent post -election uncertainty.

In future articles, we will look more at the overall credibility of the revenue numbers, at the prospects for financing further tax relief in the next fiscal year of 2017/2018, and what comprehensive tax reform, emphasised multiple times in Minister Shaw’s speech, should look like.

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