A side view of the Ministry of Finance and the Public Service, from where Jamaica's finances are monitored and managed. - Norman Grindley/acting Photography editor

The government could resort to a hike in the general consumption tax (GCT) rate, a finance ministry technocrat has proposed to plug the J$1.4 billion hole in revenues to the state which will be created under the recently signed Economic Partnership Agreement between the European Union and Cariforum.

While cautioning that Govern-ment's response during the adjustment period provided by the pact should not be focused only on recovering tax revenue given up to the EPA, Oronde Small, acting director of international trade in the finance ministry, said a rate hike and/or widening of the GCT net are among the most practical options open to the Government to recover the displaced revenue.

Small says adding half a percentage point to the current GCT rate of 16.5 per cent would net about $1.7 billion. This is a little more than the amount - representing 75 per cent of current revenues from EU goods entering Jamaica - that will be sacrificed over the 25-year implementation period of the EPA.

Tax reform

The figure is likely to increase, however, as other trade agreements are negotiated and implemented, for example, CaribCan.

Small told a forum on implementing the EPA, held at the Knutsford Court Hotel in New Kingston Tuesday, that the GCT was singled out in keeping with the Government's historical tax reform objective of moving away from direct towards more indirect forms of taxation.

This, he said, comes against research showing that direct taxes have the net impact of stifling economic performance.

"In this mode, the GCT is perhaps the most practical candidate to recoup the revenue lost," he said, adding that the optimal point for GCT is believed by the authorities to be between 17 per cent and 18 per cent.

Initialled on December 16, 2007, by the European Commission, the EPA was not signed until October 15 last year, when leaders of 13 Caribbean countries affixed their signatures to the document in Barbados, after prolonged wrangling over certain details. With Guyana inking the deal later in Brussels, 14 of the 15 Cari-forum states have now signed up. Haiti is still to join the trade and development pact.

The EPA provides, as of this month, for duty-free and quota-free access to the EU market of 27 countries and 400 million people for Cariforum goods with the exception of rice, which will enjoy the benefit in 2010 and sugar in 2015.

Cariforum countries (CARICOM and the Dominican republic) will start reducing tariffs on a phased basis in 2011, with the EU committing some 165 million Euros to assisting signature Caribbean economies brace for increased competition.

"The EPA carries with it an additional challenge in the form of revenue displacement," Small said at the forum, targeted at small businesses, and put on by the Ministry of Foreign Affairs and Foreign Trade and the EU-funded Private Sector Development Programme, being carried out by Jamaica Trade and Invest.

He noted the fiscal rebalancing scenario he outlined was developed from research analysis done in the finance ministry taking into account the opening-up schedule set out in the agreement, which provides for a maximum liberalisation period of 25 years for the most sensitive items.

Tariffs on some very sensitive goods, such as food items and processed food, imported into CARIFORUM, will not be removed. Altogether 13.1 per cent of such products imported from Europe will continue to attract tariffs.

These products make up what is known as the exclusions list.

The revenue displacement associated with liberalisation at its earliest point in 2011 is estimated at some 154 million or 8.0 per cent of total trade tax revenues previously collected from EU imports.

Revenue displacement

The finance ministry official said revenue displacement is expected to intensify in year eight and remain high into year 15, by which time liberalisation tariffs on motor vehicles, a significant source of revenues for the country, are expected to go.

By the end of the liberalisation period, about 87 per cent of traded goods will be liberalised and about $1.4 billion in tariffs, customs user fess and stamp duties are expected to be lost.

While this accounts for 75 percent of trade tax revenues previously collected from EU imports, it makes up just 0.7 per cent, in fact, of total tax revenues collected over the 2006/2007 fiscal year.

huntleymedley@gmail.com