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GCT increase a retrograde move

Published:Friday | February 12, 2010 | 12:00 AM


The recent increase in the General Consumption Tax rate (GCT) from 16.5 to 17.5 per cent, as part of the Government's latest tax package to raise in excess of $21 billion to help balance the current fiscal year budget, is a retrograde move. The higher rate will almost certainly result in a shortfall in the amount budgeted for, and could actually result in a decline in the tax collected compared with the corresponding period last year.

Government has reported a shortfall in GCT collection against budgeted amount for the previous and current fiscal year to date. Any increase in the rate at this time can only exacerbate the situation.

Taxation increases prices and reduces demand for the goods and services affected. An increase in consumption tax during a recession can only put us deeper in recession. It will contract aggregate demand and trigger downswing and closures of marginal firms. New businesses will find it extremely difficult to survive.

Heavy taxation policy

While the present government was in opposition, one of their more frequent criticisms of the then government, and justifiably so, was that the country was being overtaxed, and that the heavy taxation policy was stifling production and inhibiting economic growth. Now that they form the government, they are pursuing a similar, or even a more draconian, taxation policy and simultaneously trying to convince us that this is the path to economic recovery.

An increase in GCT will only result in a further contraction or stagnation of our economy, push us deeper in recession, and increase unemployment and poverty. At present, countries all over the world that are going through the recession are giving tax breaks to businesses and doing all the necessaries to stimulate the demand for goods and services. We seem to be doing the exact opposite.

Reduce GCT

Government needs to reduce GCT rate, not to increase the rate at this time. The reduced rate will give consumers more purchasing power. As a result, aggregate demand for goods and services will increase, allowing for the expansion of businesses. This would naturally expand the tax base of the economy and would thus have a positive impact on GCT collection. The expansion of businesses increases employment and the multiplier effect will result in significant growth in the gross domestic product.

A significant reduction in the GCT rate, and all other tax rates that are seriously eroding consumer purchasing power, is what is needed to bring vibrancy to the business community that will get us out of the present economic rut that we are now in.

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