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Tax: Relief and pain

BY: Bernard Otabil
Tax

Two articles l wrote in this column, one more than two years ago and the other about 20 months ago, came to mind while monitoring the unfolding debate surrounding the introduction of a new tax regime this year.

The first article was on why tax shouldn’t be tasking generally, published here on November 23, 2013, basically looking at the core issues, as far as taxes are concerned, and explaining why they were crucial to a country’s revenue mobilisation efforts, and therefore its socio-economic development.

The second, titled: Sweet-bitter experiences of taxes, was more direct, looking at Act 870 on Value Added Tax, which in April 2014 had generated some controversy.

In Act 870 of the VAT Law, there are fees for non-core financial services provided by the banks, such as data processing, legal, accounting, actuarial, notary and consulting services to be subjected to tax — VAT.

What this meant was that at any point where “value” was created within the chai

 

It wasn’t any new tax but rather an existing regulation that had not been followed, and yet there was controversy.

Of course, not many are happy paying taxes and therefore the interest that my articles generated, from comments received from readers, did not come as a big surprise to me.

Plain truths were told, with some of the readers expressing support for revenue mobilisation efforts through taxes that would ultimately develop a country but bemoaned the situation whereby some in authority enrich themselves with the taxpayer’s sweat. In effect, as some said, taxes are only good when it ultimately fulfil the reason(s) why they were first collected.

Let me, quickly, add that the argument above was from just one school of thought.

There was also another group that was against the introduction of the fees or increasing VAT rate at any given time, and introducing other forms of taxes when the economic conditions were tough.

“Governments can tax you on anything; they have the power to do that. But in tax administration there is a limit to what a government can take from individuals and corporate entities.

“You can introduce taxes, but that could cripple industries to the extent that workers will have to be laid off. When such a thing happens, government could lose in many ways because income taxes, paid by those gainfully employed, would also be lost.

“So tax is a difficult thing to manage in a socio-economic context”, one ardent reader, who only identified himself as Stephen wrote to me.

Another added that “innovation is far more rewarding than taxes. Countries that have relied on taxes to grow their economies in the long run experience social unrest.

“For instance if you increase taxes on income, especially by lowering the tax-free threshold or by introducing new forms of taxes on savings and other investments, those who experience reduced disposable income would ask for more money.

“Besides, in putting the incidence of taxation on the final consumer, whether through indirect forms of taxes, like VAT or direct taxes like income tax, you must ensure that you also control the economic activities well. If you allow, within such a regime, uncontrolled inflation and currency depreciation culture, you more or less run down your country.

“It doesn’t work. You only introduce hardship. Governments must be far more innovative than what we are experiencing all around us. That is the only way that economies grow.”

Well, since tax is as certain as death, we must certainly be getting used to it shouldn’t we? Of course, but have we? Certainly not.

This week, we have had course to complain yet again about taxes, this time because a new income tax law has been introduced which would pinch a few coins out of our pockets again.

As I have always maintained in this column, explaining taxation and public spending can become problematic, especially because of the  disconnect that seems to exist; whereas citizens would, at all times expect the government to be catering for all their needs, governments have also always complained of lack of adequate resources to provide “everything”.

The review of the previous law, leading to the introduction of the new one means as an individual, all interest paid to you will attract a one per cent tax. By extension, money market instruments such as Treasury Bills, fixed income deposit, interest from banks among others, would fall within this bracket.

The implication here is that your “earnings” would reduce, and that, if the situation is deemed to be “over the top” by some, it could lead to a reduction in the uptake of such instruments.

That, however, is the theory though, as in practice, bargain-hunting investors would weigh up their options carefully, looking at the available trade-offs and the risk profile of every investment vehicle before making a decision.

A one per cent drop in income, in my view, even though could be drops that would yield a good fund for the government, should not significantly shift investor appetite from such instruments, at least in the short-term.

The long term effect would follow market adjustment to this new regime, especially how investment schemes perform generally.

Talking of investment schemes, interest or dividend paid to a member or holder of an approved unit trust or mutual fund (collective investment scheme) is taxed at one per cent also when held by an individual and eight per cent in “joint stock” or other forms of ownership.

Let us look at other areas where you could find yourself with taxes to pay. If you enjoy allowances or other fees as a director/manager of a company, a board member or trustee, you will have to pay 20 per cent tax. Also, commissions paid to insurance agents, salespersons, resident lotto receivers and agents will also attract 10 per cent tax.

Ah, yes, fees to lecturers, invigilators, examiners, part- time teachers, non-executive directors, board members and endorsement fees will attract 10 per cent tax and when you are lucky enough to win the lottery, you will pay 5 per cent tax on your prize.

So there we go…..pain and less reliefs, bitter-sweet and more tasking than it should be?

Well, let us wait and see the outcome through the development projects that we expect government to be providing.

 

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