Tue | Sep 18, 2018

Government imposes new gas tax

Published:Friday | March 13, 2015 | 12:00 AMDaraine Luton
Finance Minister Dr Peter Phillips

The Jamaican Government has taken the decision to hedge against an increase in the price of petroleum on the world market and is to impose a $7 per litre tax on petrol to pay for the mechanism, which finance minister Dr Peter Phillips has likened to an insurance policy.

While government officials were yesterday unwilling to disclose the volume of petrol and the price at which the hedging will take place, Phillips, in opening the Budget Debate in the House of Representatives, said the new tax will yield $6.4 billion. The measure takes effect on Wednesday.

Brian Pengelley, president of the Jamaica Manufacturing Association (JMA) welcomed the announcement saying the build-up of a hedge fund shows good planning.

"It is hard but it is good financial planning. In our sector we have to plan long term because we don't know what prices are going to do, so we do long-term planning and part of that is certainly building in hedge," Pengelley told The Gleaner yesterday.

"Financial planning in business is something that we have to do and that helps us with stability so I guess the minister is taking lessons from the private sector," he added.

The additional gas tax is part of a $22.6 billion in tax measures announced by Phillips to help finance the 2015-2016 budget which is projected at $641.6 billion. The minister said tax compliance measures are expected to yield $12.7 billion due mainly to the amendments to the Property Tax Act, new transfer tax laws and withholding taxes on payments which are statutorily due.

Phillips said the successful implementation of those tax measures will mean a revenue gap of $10.4 billion which he will be seeking to collect through new taxes.

In announcing the gas tax, Phillips said the Government took the decision to purchase a hedge in the market against the risk of a sharp increase in prices.

"It is like an insurance premium. You pay it, just like you insure your house, not because you expect a fire, but if a fire does come, you want to make sure that you are not living outdoors," Phillips said.

"We have taken the decision to buy an insurance premium against the prospects of prices going up sharply again and derailing the economic progress," he added.

Phillips said that a financial institution will be paid for a hedge contract for a specific volume of oil. That amount, Phillips said, will be 50 per cent of the non-electricity consumption.

"If oil price is to move above the contracted price, then the country will get a payment which will allow us to cushion the effect of this movement to the general public ... and protect the balance of payment of the country," the minister said. "If the price does not go up at all, then like the insurance you would have paid the contract and that is money that is gone."

Yesterday, Phillips said while the consumers have been benefiting from the decrease in oil prices on the global market, the situation presents significant risks to the country's fiscal situation.

"The first risk is that we relax our efforts at conservation or we relax our efforts to make us less dependent on oil over the medium term. We have made this error before. After the oil price shocks of the 1970s, when oil prices came down, we failed in the 80s to do anything about it and as a consequence, today we still depend on oil for about 95 per cent of our energy needs," the minister said.

"Secondly, there is the risk that oil prices will move up again shortly. This would have profoundly negative effect on our balance of payments and on the economy generally. If oil was to move from its present state to say $80 per barrel again, it would involve an additional US$500 million on our balance of payments accounts," the minister said.