GCT on electricity
Political promises tend to electrify voters but they can be costly.
Our understanding is that the general consumption tax (GCT) on electricity generates approximately J$3 billion in revenue per annum for the Government of Jamaica.
The full and unconditional removal of GCT from electricity bills would therefore reduce gross revenues by a similar amount, further increase fiscal deficit pressures, and represent a further narrowing of the tax base.
The Government has not, so far, indicated how this revenue loss would be compensated, and given the urgent need to balance our fiscal accounts, we believe it is safe to assume that the lost revenue will need to be made up by some other tax measure.
In the absence of any such proposed tax measures, The Gleaner Council has decided to critically assess the fiscal and welfare effects of the revised basis of application of GCT on electricity being proposed by the Private Sector Working Group (PSWG).
GCT on Residential Electricity Bills
The PSWG proposals firstly contemplate an increase of the current rate of GCT on electricity from 10 per cent to an 'across-the-board' standard rate of 12.5 per cent.
Importantly, the PSWG also proposes a simultaneous 50 per cent increase in the threshold that would incur GCT from 200 kWh/per month currently, to 300 kWh/per month.
Of the 508,000 JPS residential electricity customers, approximately 51,000 of them are liable to incur GCT on their bills based on their consumption levels.
Under the PSWG's proposals, that number would fall by 28,000 to approximately 23,000. Therefore, less than five per cent of JPS customers would continue to pay GCT on their electricity bills.
Put another way, based on current consumption patterns, 95 per cent of residential JPS customers would no longer pay GCT on their electricity bills.
The Government's policy is that 100 per cent of JPS residential customers, irrespective of consumption, will no longer pay GCT.
Again, the Government is yet to articulate the mechanisms that will be imposed to make that policy change at least revenue neutral.
We can conclude, firstly, that for residential electricity consumers, there is very little difference in terms of outcomes between the PSWG proposals and the alternative of removing GCT from electricity altogether.
Second, since there is undeniably a high correlation between income levels and rates of electricity consumption, leaving GCT in place for those customers whose incomes afford them the opportunity of consuming large quantities of electricity could justifiably be argued to contribute to the overall progressivity and equity of the tax system.
By contrast, the removal of GCT altogether would have the opposite effect - rendering the tax system more regressive and less equitable.
GCT on commercial electricity bills
We believe that the case for continuing to apply GCT to the electricity bills of commercial entities is even stronger.
Given that GCT is a value added tax, the proposed 2.5 percentage point rate increase to 12.5 per cent will not impact the cost structures of commercial entities, as they will be in a position to claim the GCT input tax against output tax liabilities in their monthly returns.
The increased rate of GCT will also not affect the final price to consumers of products and services, given that the standard rate of GCT would be reduced by five percentage points, from 17.5 per cent to 12.5 per cent.
In the case of non-compliant commercial taxpayers, it is true that the GCT on electricity represents a part of their cost structure and any increase in the rate, as proposed by the PSWG, would add to their cost.
If we have rational buyers in the market for these products and services, then, all else being equal, they would buy from the suppliers with the lowest cost, which in this case would be GCT registered firms.
This point is worth restating - the removal of GCT from electricity would have absolutely no impact on compliant taxpayers or their customers; rather, such a policy would simply reward the non-compliant taxpayer ("he who plays by the rules gets the shaft").