In an attempt to garner more revenues into the cash-strapped national coffers, the Jamaican government has gone on a taxation assault which is destabilising the private sector.Liquor warsLocal consortium may buy Red StripeHigh import duties on motor vehiclesA more equitable tax system is neededMaking the tourism sector sufferSpur economic activity

Facing a J$35 billion imbalance in the 2011/2012 budget in addition to its failure to collect the budgeted J$33 billion for the April to October period, the government now finds itself having to tax the country at an exorbitant rate. Data from the Ministry of Finance reveals that the government missed its taxation of workers target by J$4.4 billion, making it tough as it goes into 2011 having to contend with rising poverty levels and increasing unemployment numbers. Already the much vaunted Jamaica Debt Exchange has sucked J$80 billion out of the system, compounding the country’s difficulties even further.

Last week saw a heated war of words involving the two largest alcoholic beverage companies, Red Stripe and J.Wray & Nephew, with the former threatening to pull out its export business Jamaica and the latter refusing to deliver liquor over the festive season. The protracted dispute centres on the government’s attempt to wring an additional J$772 million in taxes from the alcoholic drinks industry.

Last month, Minister of Finance Audley Shaw announced in Parliament that alcoholic beverages would be taxed J$960 per litre of pure alcohol with the SCT increase to become effective December 1, 2010. The government decided to raise taxes depending on the strength of alcohol content. However, J.Wray& Nephew maintained that the company was never consulted on the tax measures or for that matter allowed to propose alternative measures.

David Mc Connell, J.Wray & Nephew’s managing director of its Global Marketing Division, astutely summed it up and emphasised that the company had to accept the new tax measures without being consulted. He further alluded to the fact that excessive taxation of liquor would eventually prove detrimental to the government because of its decision to excessively tax an industry thus forcing it to cut both its operations and jobs.

“We were under the impression, based on the Minister of Finance’s announcement in his budget presentation in April 2010, that there would be no new tax regime on alcoholic beverages while Jamaica was under a borrowing arrangement with the IMF. Once we had a chance to review the new tax measures, we realised that it was very inequitable because it has significantly shifted the tax burden to lower-priced, locally produced spirits and locally produced wines while reducing the tax revenue for beer and stouts,” said Mc Connell.

Though one must guard against taking a protectionist stance, the government must do what it can to assist local producers and its employees. J Wray& Nephew employs hundreds of people and is an iconic standard-bearer of corporate Jamaica. With the Jamaican economy contracting and alcohol spend diminishing, the last thing the company needs is prohibitive taxes. Rather than rush to tax the industry in an induced panic, the measures should have been discussed and a consensual approach adopted. Instead the government went the arbitrary route, choosing to be obstinate about it.

“In an economic environment where the government is in search of additional tax revenue, it is curious that one segment of the industry will benefit from a tax reduction while another will have to bear additional taxes,”pointed out McConnell.

Red Stripe then held the view that the tax arrangement at that time was fair, but any new proposed measures may well force the company out of Jamaica. Its managing director Alan Barnes notes that there are proposals to add a further 35 per cent on imported spirits and this does not create a level playing field. He drew attention to the big difference in tax that would exists between an Appleton Special and a Zacapa Rum.

Talking about falling volumes of Red Stripe, Barnes said: “We have a 14-million case capacity at our plant on Spanish Town Road and we are now running at 9.2 million cases, so we are well below capacity. When you have a big operation like we do, you have many fixed costs. The cost per case has become a lot higher. The impact of yet another new tax on our business will be substantial and that is one of the problems we have now. Last year we had to let go just under 100 people and it would be a shame to lose more in the new year.”

However, Mc Connell countered that Red Stripe will gain from the current new tax measures, declaring that Red Stripe has effectively received a tax reduction of 17.4 per cent with tax on Red Stripe Light falling by 53.5 per cent. At the same time Appleton Special has been burdened with a tax hike of 106.5 per cent. The way Mc Connell saw it, his company will be saddled with J$1.2 billion in increased taxes while Red Stripe, with a strong parent company in Diageo will see its taxes fall by J$700 million. All this was the case last week. This week a new situation prevails and God only knows what is in store for next week.

What is most disturbing is that the Government in its haste to reap more taxes did not initially consult with both companies, choosing to rush through an ill-conceived tax measure which has caused an injurious dogfight between the two leading drinks companies over the carcass that is the lucrative alcohol drinks industry. Such is the desperation of the current administration to collect more taxes.

Commenting on this locking of horns, the chairman of this newspaper and Sandals Resorts International, Gordon ‘Butch’ Stewart said:” Red Stripe cannot be crying like a spoilt child when all of us in Jamaica have to put up with tax hikes. If it wants to pull out of Jamaica, particularly in light of the fact that they received a generous tax holiday which lasted for years, then we will form a local consortium with a view to acquiring Red Stripe. We have the local experience and expertise that will allow us to successfully run the company. They can pick up their ball and walk away if they should so choose, but a great Jamaican brand will continue to soldier on and survive.”

The impact of the government’s then edict on liquor would also have a negative impact on the tourism sector, costing it some J $650 million a year. Many share the sentiments of Wayne Cummings, President of the Jamaica Hotel and Tourist Association: ” It is a challenge to the hotel sector if at every turn there is a new tax for an industry which the government itself describes as an important industry. The hotel sector needs to be protected for it to become competitive and smarter in the way it does business so that it can actually collect that revenue.”

Commenting on Red Stripe’s decision to consider pulling out of Jamaica, Cummings said: ” I think any company that believes that when everybody is under pressure the only way they can deal with the matter is to run says a lot about them. When you are given the option to weigh the difference between a company that decides what is good for them as opposed to the rest of the country that has to bear the additional taxes, then I believe that the decision is not a hard one for me to make as a consumer.”

Facing severe criticism and the prospect of creating significant injury to a major industry, Finance Minister Audley Shaw earlier this week did a volte-face on tax on alcoholic beverages and has now decided to impose a revenue-neutral rate per litre of pure alcohol on beers and stouts. This now means that the tax on beer and stouts will move to J$1,134 per litre of pure alcohol instead of the J$960 an announced earlier this month. Red Stripe believes this latest move will cost it about J$400 million . It has also said that the business is becoming unviable and that it may well have to pull its export business out of Jamaica as well as raise prices of its products after the Christmas season.

Shaw also dealt a blow to the energy drinks market, slapping a 15 per cent tax on high caffeine non-alcoholic drinks like Red Bull, Boom, Monster and Taboo. The managing director of Wisynco Group William Mahfood, who is a major distributor of energy drinks described this decision as uninformed and hasty.

Mahfood said: “They put these things in without much thought and in this case there was almost little or no thought applied. The Government in its haste to try and identify new revenue sources has not identified the level of revenue from this category.”

He went on to say that by the government’s definition drinks like Coca-Cola, Lucozade and Milo may well attract a 15 per cent tax.

“The combined revenue already to the country from energy drinks is way in excess of $400 million per year between GCT and import duties. By putting on this tax they feel they are getting extra revenue. What the Government fails to recognise is already we are seeing a contraction in the economy, consumers are overtaxed and to impose new taxes on products like Red Bull or Boom, all that is going to happen is they are going to consume less, so the net effective revenue is going to be less to the country,”Mahfood said.

Last Christmas saw the government introducing punitive tax measures, coerced by the IMF who at the time promised a helping hand of US$1.3 billion under certain conditions. The country balked at it and the national revulsion was too hard to ignore from an embattled Prime Minister. Those tax measures were revised and were somewhat less draconian.

Imposing additional taxes, the Government has inplied, is part of the deal with the IMF, but the Government must be prudent enough not to instigate a decimated private sector and incite civil insurrection, particularly one year before a general election, all in an effort to appease the IMF. To continue to impose exorbitant taxes on a country with an income per capita of around US$4,500 per year makes little sense. All it serves to do is make life in Jamaica more arduous and blight the prospects of re-election for a sitting administration.

We are now at the point where the comforts and joys of life are taxed heavily, bearing in mind that we live in a country that produces very little and relies almost entirely on imports. The government’s policy on the importation of cars sees Jamaicans paying twice as much as the Manufacturer’s Suggest Retail Price (MSRP) price for a vehicle. This makes buying a car in Jamaica prohibitive. For many local managers and the middle class in general, buying a car is as much as their entire salary for the year. A BMW X5 costs around US$50,000 in the US. In Jamaica that same vehicle will cost you around J$10 million, virtually the cost of a small house. In fact the Jamaican government extracts more revenue from an imported car than the country in which the vehicle was made! Cathy Leckler of Stewart Motors and the used-car dealers have made it clear that high import duties are hampering sales, but their exhortations to the government seem to have fallen on deaf ears.

The government is indeed constrained firstly by a shortfall in revenues exacerbated by a global recession and also by the diktats of the IMF. Nevertheless it must be mindful not to saddle the economy with onerous taxation that becomes self-defeating and leads to an incitement of civil insurrection. Consumer spending will facilitate greater productivity and so a more prosperous economy. The IMF agreement may well have to be extended and the terms re-examined because as it currently stands , it is proving detrimental to the economy. It now appears that every week, some economic sector is taking exception to the imposition of some new additional taxation as the government continues to struggle to balance the budget. The Special Advisor in the Office of the Prime Minister Christopher Zacca has long advocated a 10, 10, 10 tax policy that sees income tax at 10 per cent, 10 per cent customs duty and 10 per cent GCT. This would go some way to attract investment into the country. A sure way to turn away investment is to have a high tax, high interest rate regime where a government is looking to squeeze every cent out of you.

” Right now, Jamaica is a place where the government taxes heavily all the sweetness of life, a nice car, boats, cigars , everything. As far as they are concerned you have to make do with a Chery QQ Cu and sardines and water crackers, and yet they keep talking nonsense about being first-world by 2030. The economy is contracting and most businesses have to contend with shrinking revenues and rising operating costs. To have more taxes heaped upon businesses is a sure way to bankrupt the country,” said one leading businessman.

In 2006, Carreras sold around 900,000 cigarette sticks. Today that is down to 650,000. A leading nightclub impresario tells of his average spend on drinks shrinking from J$1000 to just J$400 during the weekend and the number of patrons dropping by half as a result of the lack of disposable income. And similar tales can be heard throughout the country.

The government may be fearful of defying the IMF on taxes, but other countries have seen the good sense in not overburdening their country with taxes. Earlier this month Grenada defied the advice of the IMF to introduce a tax amnesty and reduce the value-added tax on key sectors in an effort to stimulate economic growth.

Speaking on the matter, Grenada’s Finance Minister Nazim Burke said: ” This was a very bold and courageous move against the advice of the IMF. We had a big disagreement on this because, as far as where they were sitting, we should not grant any amnesties and I said no, we are granting the amnesty. I am convinced about the correctness of this measure because by granting the amnesty we gave a break to businesses, allowing them to continue to function so that they will not lay off workers,” said Burke.

A 15 per cent VAT on goods and services was introduced in Grenada, earlier this year; however , several sectors of the economy such as yachting, manufacturing and the hotel industry were allowed to pay 10 per cent.

“They were all measures taken to ensure that you do not suppress economic activity; that you allow some room for these businesses to operate,” said Burke.

Jamaica needs to take a leaf from Grenada’s book. Already Jamaicans have to make do with stagnant wages and salaries with even more taxes. This does not spur economic activity, it does not create a path to growth. It cannot be the case that the IMF says “Jump, and the government says “How high. The government is best placed to assess and know just how much its citizens can take — not the IMF.

Tourism continues to be a major pillar of the economy and the objective should be to attract more visitors to Jamaican shores year on year. Already faced with heavy discounting, hoteliers should not have to face additional taxes that only serve to hinder their operations. Cruise ships cannot keep getting a free ride at the expense of land- based hotels. Super Clubs boss John Issa’s astute observations on the matter are worthy of further consideration. Earlier this week he wrote: ” We have been piling tax upon tax on our visitors for giving them the privilege of spending their hard-earned money in Jamaica. In addition to increasing the GCT on their hotel stays to 10 per cent, every tourist has to pay a J$1,800 departure tax and US$10 to the Tourism Enhancement Fund (TEF) on arrival. And now the board of the TEF wants to raise this head tax to US$20 per person. That would mean that the visitor who arrives by air would pay over US$40 for the privilege of arriving and departing.

“While the TEF wants to double the head tax for the landed tourist, they have failed to collect the US$2 head tax due from cruise passengers since the inception of the tax in May 2005. Up to the end of 2008, US$8.5 million was due on this tax from cruise passengers, and my estimate to the end of 2010 is an additional US$4 million will be due; bringing the total to over US$12 million. Not one cent has been collected.”

Faced with having to discount heavily to entice visitors, the sector has faced rising electricity, water, security and liquor costs all this year. It has been stretched to breaking point. Earlier this year the Government protested most vigorously when the UK government imposed an Air Passenger Duty (APD) to be paid by all travellers on leaving Britain, with the world split into four bands with the Caribbean placed in Band C. Here the duty will go up from 50 pounds to 75 pounds per person. This means a family of four flying to the Caribbean will have to pay 300 pounds in duty compared with 160 pounds last year.

Commenting on this move, British Airways Chief Executive Willie Walsh said: Excessive taxation puts aviation’s social and economic benefits at risk. It’s hitting at business and it’s hitting at people who want to do business in the UK., I believe, and I think there’s plenty of evidence now to support it, that this is damaging to the UK.”

The Jamaican government and TEF do not share those sentiments and are now speaking out of the other sides of their mouths.

The chairman of TEF Godfrey Dyer is reported as saying, ” Over the last two years, because of the economic constraints the Government has found itself in, we have to be taking up a significant portion of tourism through the Jamaica Tourist Board. And when we examine the things we have to do including the marketing, we decided that we definitely needed an increase, so it was felt that J$10,000 (US$117) would not be a burden because tourists were used to paying US$30 before that and that’s how the US$20 came in.”

The Jamaican government should not rush to impose punitive taxes in a panic and then with egg on its face as a result of public revulsion, recant and then roll them back. It should involve all concerned parties, bring them to the table and determine what impact additional taxes will have on respective industries. Jamaicans are already up against it. Low wages, exorbitant utilities costs, excessive crime, poor infrastructure, businesses stifled by too much red tape, high interest rates, and the list goes on .To burden the population with even more taxes is short-sighted and cruel and may well incite mass civil insurrection .The government argues that it needs to raise taxes, yet it has done little or nothing to rein in spending, waste and fraud in its own ranks. Falling tax revenues are caused by businesses failing, not because taxes are not being collected. Restore businesses and the economy, spur growth and these tax receipts will reappear.