Business Page
The export allowance visited
By Christopher Ram
Stabroek News, Sunday, February 3rd 2008
Cost and benefits
Export allowances were introduced as an incentive for companies engaged
in foreign exchange earnings, and looking at the countries where they
are still available several years after their introduction, there must
be some doubt as to whether they have achieved their objective. When
the allowances were introduced in Guyana in 1988, the country was in
desperate financial straights, the black market for foreign exchange
was thriving and America Street was the dominant non-bank foreign
exchange market. Things have changed substantially since then with the
introduction of the Economic Recovery Programme by Hoyte and its
faithful continuation by the PPP/C government. In other words the
economic justification for the export allowance seems to have reduced
substantially. Whether Guyana should have abolished it earlier would
depend on those changing circumstances as well as an analysis of its
contribution, its benefits and its costs.
Tax data in Guyana at sectoral or geographical levels are impossible to
come by which would make tax policy formulation difficult indeed.
Who are the beneficiaries and to what extent does the economy benefit
from the tax foregone? Such information simply is not publicly
available, but from the legislation the furniture sector would surely
be among the beneficiaries in respect of non-regional sales.
The direct cost of the allowance is the tax foregone against which we
should consider whether the incentive was the real cause of the
investment and whether efficient companies would not find it attractive
to invest in, for example, value-added processing of what many consider
to be among the best wood in the world, without both tax holidays and
export allowances. What would be the justification for similar
exemptions for shrimps and minerals (other than gold, diamonds and
bauxite) which are in international demand, when the law already allows
tax holidays of up to ten years, carry-forward of losses till eternity,
initial allowances of up to 40% on qualifying plant and machinery as
well as annual tax allowances? Anything more than those suggests that
the beneficiary business is a state-financed venture in disguise.
In other words, other than for the beggar-thy-neighbour policies on tax
incentives pursued mainly by developing countries, there may have been
little justification for the generous concessions in the first place,
concessions which detracted from the broader issue of generally high
rates of tax. Instead of fixing the whole tax system we consolidated
the high tax rates for some in order to give relief to others - a story
replicated in so many other sectors of the economy.
Incentive rewards evasion
There are two other consequences of the allowance that are worthy of
mention. The first is that it not only discourages sales to the
domestic market which may not only have the same needs as the overseas
market but helps to cover some of the fixed costs, therefore making the
company's export prices more competitive - a different issue from
dumping.
The second in some ways stems from the first, but is also inherent in
the system. Even where such a company serves the domestic market it has
an incentive to 'duck' those sales by not bringing them into the books,
thereby evading the tax which would have otherwise been payable.
Loss of respect
Guyana needs to encourage all its earners - workers as well as
entrepreneurs. It can do so by enlightened policies that do not
discriminate against those who can least afford it and in favour of
those who can. As long ago as 1993, I presented a paper entitled 'Tax
Reform - A Vehicle for Economic Recovery,' in which I pointed out the
unjustness of the tax system and that we were ignoring the experiences
of other countries in a blind pursuit of attracting businesses at any
cost.
Just incidentally that paper was quoted extensively but selectively in
the parliamentary debate on the VAT legislation. Not that we should
underestimate the contribution of businesses in general or exporters in
particular. But in relation to the export allowance, the example of
Trinidad and Tobago would be useful more than just for the fact that
their manufacturing has taken off since its abolition, which may only
be part coincidence and part lower energy costs.
Accompanying the removal of the export allowance, that country
introduced lower rates of income and corporate taxes and very directly
granted 150% allowance for expenses incurred in export promotion. We
should encourage exports but let us do so within good logic, fairness
and international treaty obligations.
This particular column arose out of discussions on the private sector,
its independence and willingness to look the government in the eye. If
our entrepreneurs are unable to compete internationally without undue
reliance on government and subsidies in areas where we have natural
advantages such as rum, forestry and wood products, then their claim to
being world class will be no more than empty boasts.
No comments:
Post a Comment