Wednesday 28th September, 2005

 
REFORM OF THE NON-ENERGY TAX REGIME
 
 
 
 
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Mr. Speaker, in the 2005 Budget Statement I indicated that a Tax Reform Steering Committee had been established in the Ministry of Finance to address the reform and simplification of the non-energy tax regime. The Committee, with technical assistance from the International Monetary Fund (IMF), has submitted a number of recommendations. The Government plans to implement some of these with effect from the coming year, others are being considered for implementation on a phased basis over the next several years.

The Committee noted that at the personal level the current direct tax regime was overly complex with too steep a tax rate structure at the lower income end, and contained too many special purpose allowances. The Committee also observed that at $25,000, or about 40 percent of per capita GDP, the personal allowance was low by international standards.

As for the corporate tax regime, the current structure was seen to be competitive both regionally and internationally. However, the Committee felt that a regime based on more generous depreciation and investment tax credits would be more attractive to current and potential investors and would bring greater benefits to the economy.

Mr. Speaker, the Committee found that while the indirect tax regime was in line with international best practice in most instances, the performance of indirect taxes lags behind that of other countries of similar economic position. This was due to a number of weaknesses in the design of the tax regime, particularly as these relate to the level of excise tax rates, the extent of the current zero-rated list of goods and services under the VAT system, and the level of VAT refunds.

The Committee also recommended that the Government look at ways to expand the tax base through:

(i) a comprehensive capital gains tax;

(ii) a complete overhaul of the present property tax system, following a comprehensive island-wide cadastral survey.

Mr. Speaker, tax reform is a continuous exercise and we have started the process. Given the importance of a modern, effective and efficient tax regime in achieving our economic and social objectives, the Government proposes to establish in the Ministry of Finance, a Tax Policy Unit, with a mandate that includes the continuous reform of the tax regime in Trinidad and Tobago.

The Cabinet has, however, decided to introduce a number of tax measures in the coming fiscal year. Several of the measures are geared to simplifying the current system. We have prepared an appendix with the whole list of measures for circulation to Members of Parliament. I would, however, like to announce the major ones in the package.

Personal Income Tax

Mr. Speaker, given the deficiencies in the Personal Income Tax System identified by the Steering Committee, I propose to increase the personal allowance from $25,000 per annum to $60,000 per annum with effect from income year 2006. Accordingly, the following allowances and deductions will be eliminated:

* The personal allowance of $40,000 per annum for individuals age 60 and over;

* The child allowance of $1,200 per child;

* The Mortgage Interest Deduction;

* The tax-free withdrawal from pension funds and deferred annuity plans for the purchase of a first house;

* The $10,000 deduction for credit unions and co-operatives; and

* The 25 percent investment deduction in respect of equity investments in hotels.

In addition, I propose to replace the current rates of Personal Income Tax of 25% and 30% with a single rate of 25 percent.

Mr. Speaker, these are significant measures indeed as they will put an estimated 300,000 taxpayers out of the income tax net altogether. In addition, everybody will pay a flat rate of 25 percent.

The change will result in an important simplification of the tax regime in that instead of the series of deductions which only benefit specific individuals, all wage earners will now get expanded relief. This means, Mr. Speaker, leaving much more of the workers' wages in their hands, so that they could improve their welfare and the welfare of their family.

Mr. Speaker, this Government has considered the matter in depth and we believe that it is one of the best ways of having the broad mass of the population share in the benefits derived from the high oil prices. This is the concept of the energy dividend. The revision has another important effect. By simplifying the tax, not only have we made it easier for the taxpayer but we have also made it easier for the staff of Inland Revenue Department, who can now devote more of their energies to ensure compliance.

At the same time, Mr. Speaker, the Government has sought to tidy up a number of issues relating to in-kind benefits and the taxation of annuities, pension contributions and benefits.

Corporation Tax

Mr. Speaker, in order to modernize and strengthen the effectiveness of the Corporation Tax structure, we propose to amend the Tax Regime as follows:

i. Reduce the corporate tax rate from 30 percent to 25 percent to keep it in line with the personal income tax rate.

ii. In the case of businesses registered under Section 16A of the Income Tax Act; i.e., an approved small business, an approved company carrying on business in a regional development area, and an approved activity company, we propose to reduce the existing rate to zero percent for a period of five years commencing the First of January 2006. Furthermore, these businesses will be exempted from the Business Levy for a period of five years also commencing from the First of January 2006. In effect Mr. Speaker, there will be four rates of Corporation Tax:

a. Zero percent for businesses registered under Section 16A of the Income Tax Act;

b. 25 percent for non-energy and non-petrochemicals companies;

c. 35 percent for petrochemicals companies; and

d. 50 percent for energy (oil and gas) companies.

Mr. Speaker, the package of measures also includes initial steps to transform the incentive regime. In essence, we plan to terminate several tax holidays for new investors (except for tourism projects under the Tourism Development Act) and to consolidate the remaining provisions relating to investment incentives and depreciation regimes.

One final word on taxation, Mr. Speaker, and it has to do with gambling. As you know, gambling is against the laws of Trinidad and Tobago and this Government is determined to uphold the law. There has unfortunately been a proliferation of gambling activity under the guise of private members clubs. Over the years we have sought to use financial mechanisms to contain the number of such clubs without much success.

The new approach we intend to take is to bring all private members clubs under a strict licensing arrangement to be administered by the Ministry of Finance. Under the proposed licensing regime, only genuine private Members Clubs will be permitted to operate and there will be restrictions on the types of activity in which they can legitimately engage.

Food Subsidy

Mr. Speaker, food prices have doubled over the past ten years. Even while overall inflation has been contained over the last five years or so, rising by an average of 4 percent per year, food prices over this same period increased by 12 percent a year. The main factors behind this rapid rate of increase include increasing non-oil commodity prices such as corn, wheat, soyabean; declining domestic agricultural production; annual floods combined with poor drainage; and high shipping costs due in part to rising energy costs.

In July of this year, the Government established a sub-Committee to examine initiatives to deal, once and for all, with the problem of rising food prices. Having studied the Committee's report, the Cabinet has agreed to implement the recommended strategy which includes (i) the provision of short term targeted and conditional cash transfers; (ii) the reduction or removal of duty on selected food imports; (iii) the use of a restructured NAMDEVCO strategic market intervention as needed, through the bulk buying of basic and agricultural foods.

The medium to longer term plan of action will be geared towards boosting domestic agricultural production. As discussed earlier, this longer term plan involves measures and infrastructural improvements for the agricultural sector; increasing the supply of micro-credit and grants to entrepreneurs involved in agriculture; expanding the role for NAMDEVCO to include the administration of guaranteed floor prices for target crops and the promotion of agricultural processing and the establishment of a mechanism for agricultural insurance.

Mr. Speaker, the proposed cash transfer through a Smart Card will target about 60,000 families. The Smart Card will allow for the purchase of food on a defined list of items of $300 for families of 3 or fewer persons; $400 for families of 4 to 5 persons; and $500 for families with 6 and more persons.

An integral requirement of the programme will involve participation in training. We are targeting implementation by March 31, 2006.

The Ministry of Consumer Affairs will engage a Consultant to detail both the criteria and systems in accordance with best practices for the administration of the programme. There will be proper interface through the Ministry of Community Development and the Ministry of Social Development. The SMART Card programme will replace the Food Hamper programme.

The Budget Estimates for Fiscal Year 2006

Mr. Speaker, as in the past few years, the 2006 Budget estimates provide for a small surplus of $9.8 million, after an allocation to the Revenue Stabilisation Fund.

Mr. Speaker, total revenue for fiscal year 2006 is forecast at $34,129 million while total expenditure for the year is Budgeted at $34,119 million, of which $2,625.3 million is appropriated for interest payments. The expenditure level also includes an amount of $1,862.8 million to be allocated to the Revenue Stabilisation Fund.

In line with international best practice, the revenue projections are predicated on the long term projected oil price, which for our mix of crude oil is about US$45 per barrel. With oil prices currently at about US$65 per barrel, the reason behind these obviously conservative oil price assumptions is to maintain a disciplined expenditure profile and to avoid the need for expenditure cuts in the (admittedly unlikely) event that oil prices fall below our forecast.

On the other hand, our expenditure programme is based on an oil price of US$35 per barrel. The difference between the revenue price and the expenditure price is estimated at $ 1,862.8 million is allocated to the Revenue Stabilisation Fund.

Oil revenue is projected at $18.1 billion, compared with $11.1 billion in the previous year while non-oil revenue is $16.1 billion compared with collections of $17.1 billion in fiscal year 2005.

Mr. Speaker, our forecast for oil revenue includes an amount of $1billion arising out of the introduction of the new oil tax regime. Of course, given the progressive structure for the new tax regime, if oil prices turn out to be higher, our tax collections will increases correspondingly.

The new gas tax regime will have an even larger impact on our tax collections. As I indicated earlier, previously our gas taxation was based on transfer prices which were considerably lower than the actual prices at which the gas was sold. With the new tax regime based on the concept of fair market value, the increase in revenue attributable to the new gas regime, is about $2 billion.

Mr. Speaker, the projected decline in non-energy tax collections is attributable to the significant tax relief that this Government has decided to give to the broad mass of taxpayers, but particularly to the middle-income taxpayer. The cost of the tax relief has been estimated at $1.7 billion, on a net basis.

Mr. Speaker, the expenditure profile for fiscal year 06 is fully in line with the strategy and priorities as outlined in this Budget. As I said earlier, Education and Training, National Security, Housing, Agriculture and Social Services are the areas of main focus. The specific allocations in these areas are:

* $5007.7 million to Education and Training (i.e. combining the Ministry of Education and the Ministry of Science and Technology)

* $2992.7 million on National Security

* $502.2 million on Housing

* $602.2 million on Agriculture

* $1718.5 million on Social Services

In terms of the Economic Classification, total expenditure is made up of:

Personnel Expenditure 6,176.7

Goods and Services 4,019.4

Minor Equipment Purchases 307.2

Current Transfers and Subsidies 14,761.8

Acquisition of Existing Buildings 21.2

Current Transfers to Stat. Brd 4,078.5

Debt Servicing 5,052.1

Total Recurrent Expenditure

(incl. Cap Repayments) 34,416.9

Less Capital Repayments and

Sinking Fund (2,291.8)

Recurrent Expenditure

Fiscal Operations 32,125.1

PSIP 1,500.0

Dollar for Dollar

Green Fund 150.0

Unemployment Fund 344.0

Total Expenditure 34,119.1

Mr. Speaker, included in the current transfers and subsidies is the sum of $2.3 billion for transfer to the Infrastructure Development Fund to meet capital expenditure in fiscal 2006.

CONCLUSION

Mr. Speaker, let me end this presentation in the same way I began, perhaps using different words but reinforcing the unwavering determination of this Government to achieve certain objectives.

Mr. Speaker, we are giving top priority to the security of the State which is Government's first responsibility to our people. We must be able to walk the street in safety and enjoy our homes in comfort. Despite the obstacles, with the cooperation of all it will be an objective we shall achieve. We cannot fail.

We will work to strengthen families as this is the surest way of strengthening our communities.

We will pursue with a passion our efforts to assuage the concerns and fears of the citizens. We must regain the respect and thrust of each other and, as the challenges arise - which they will, we must put on our tall boots, go into the communities and work with our people. We will make Trinidad and Tobago the paradise it can be. This is not only a task for the Government, it should be a determined resolve for all our citizens.

But to achieve this requires a change in attitude, a commitment and determination by each one of us to be our brother's keeper. I cannot overemphasise the importance of this. It requires that each day we must be better that the last day.

It requires:

* a return to the basics of wholesome family life;

* driving carefully on the roads;

* going to worship;

* respecting and caring for our elders;

* Teachers comporting themselves in an exemplary manner to earn respect

* Students obeying laws;

* Helpful police officers;

* Respect for authority;

* Offering of prayers and supplication;

* And going the extra mile.

No Budget and sums of money can replace these challenges. Let us remember Louisiana.

There must be a return to soul ..... to conscience.

This requires unity and not division and I close, Mr. Speaker, by reminding this Honourable House that this is our country - this is our Trinidad and Tobago.

To make it better should be our resolve, our commitment. And, we can achieve this through a return to basics. There is no other way.

I beg to move.

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