Date: February 11, 2010, 4:48 pm


NEW REVENUE MEASURES COULD LEAD TO INFLATION – ISODEC


The Integrated Social Development Centre (ISODEC) appreciates the government’s need to improve upon domestic revenue mobilization, but wishes to caution that the cumulative effect of measures so far announced by government and its agencies will be inflationary and possibly lead to destabilization of the micro-economic environment. ISODEC is therefore calling on the government to review downwards the percentage increases especially in road tolls, company registration, and abolish the 20% excise duty on packaged water to avert a possible cataclysm on the micro-economic front.

 

The Government, in its 2010 budget and economic policy statement to parliament, announced a variation in the mineral royalty rate from a range of 3%-6% to a fixed rate of 6%. The statement also announced a 20% excise duty on packaged water, 50% on beer and 80% on local gin. Prior to this, parliament had approved up to 1,000% increase in road tolls, arguing that the tolls have not been increased for about 9 years. Fees for various services provided by the Driver and Vehicle Licensing Authority (DVLA) have also been increased by 100% - 300%, while fees for registering companies have also been increased by up to 100%.

 

“We welcome the variation in the mineral royalty rate from a range of 3%-6% to a fixed rate of 6% because mining companies have had a good year, with gold prices rising to an unprecedented $1,118 per ounce and so they must give back a bit more of their profits;? said Bishop Akolgo, Executive Director of ISODEC. “Our worry however, is about those taxes, levies and fees that are likely to push the inflation levers up due to their potential knock-on effect. He added.

 

Of particular concern is the fact that all of the other new taxes, levies and fees are taking effect almost at the same time, between February and March 2010 and so are likely to have a compound effect on general price levels which will threaten whatever gains that have been achieved in the government’s bid to bring down inflation.

 

Already, commercial drivers are passing on the increases in road tolls which will in no doubt translate into increases in food prices.

 

ISODEC is convinced that the excise duty on packaged water was unnecessary within the context of the fact that pipe-borne water quality has declined tremendously since the inception of the Aqua Vitens Rand‘s management contract, forcing many families to depend on filtered sachet and bottled water for domestic consumption. Given the inelastic nature of demand for water and the health risk that pipe-borne water poses in this country, the organization has reason to believe that many will have to cope by cutting back on other equally important family expenditure.

 

Again, since the announcement did not exempt intravenous infusions from the 20% excise duty, we fear the measure will push its price up and make healthcare much more expensive than it is currently.   

 

The most absurd of all the announced revenue mobilization measures is probably the increases in the fees for registering various categories of companies. ISODEC notes that one of the major challenges to domestic tax mobilization has to do with the fact that the national economy is dominated by the informal sector. The surest way, in the view of ISODEC, to widen the tax net is to find innovative ways to bring more of the informal sector into the formal sector. This can only be achieved by getting informal sector entrepreneurs to register their businesses. Increasing the fees for the registration therefore becomes a disincentive for the informal sector to register their businesses and will invariably lead to a stagnation of corporate tax receipts, if fewer companies register their interests.

 

The way to deal with the revenue mobilization challenges that the government faces, in the view of ISODEC, is to widen the tax net and not simply to increase the rates. This is a fundamental principle in equitable taxation. The approach taken by the government is an easy but unjustified option, and can have dire implications for inflation.

 



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