Level the playing field
IMF calls for thorough review of excise tax system
The International Monetary Fund (IMF) says a thorough review of Barbados’ system of taxation is definitely in order. Among the specific areas identified by the fund for urgent adjustment is that of excise taxes.
The IMF complains that the current policy of exempting goods from excise duties simply does not make any sense, from a revenue and economic efficiency standpoint.
Following a detailed review, it also called for a more level playing field in terms of the treatment of domestic and imported goods.
Following is the section of the report that deals with excise taxes.
39. Excise duties are levied on domestically produced alcoholic beverages and on imports of a few select goods. Rum and beer produced domestically are subject to duties. Imported goods subject to duties include a wide variety of alcoholic beverages, tobacco products, fuels, and motor vehicles. It appears that domestically produced cigars are not subject to duties, although imported cigars are.
40. Barbados relies rather moderately on excise duties for revenues. Table 5 provides details on excise duty collections on domestic production and on imported goods. The vast bulk of revenue comes from imports, which is expected, given their importance relative to domestic production. Duty revenues show large fluctuations from year to year and have declined significantly after 2011/2012.
The ratio of duty revenue to GDP is contained in a tight band between 1.4 to 1.9 per cent of GDP. In comparison, the excise duty to GDP ratio in 2010 in several countries in the region amounted to 2.4 per cent. (See Table A2.) Nonetheless, even this regional average remains quite low by international standards. Revenues segmented by group of excisable goods were not made available to the mission and are thus not shown in the table.
41. The excise duty rate structure generally follows international norms with some reservations. Alcoholic beverages are subject to specific duties that increase with the level of alcohol per volume. Tobacco products are subject to specific duties per unit or kilogramme. Conventional fuels are subject to specific duties per litre, but other fuels such as butane, propane, and ethylene are subject to ad valorem duties. Motor vehicles are subject to ad valorem duties.
According to a database export of import taxes by tariff, excise duty rates in 2013/2014 ranged from zero per cent to a high of 120 per cent on certain types of motor vehicles. Rates on domestically produced alcoholic beverages were unfortunately not made available to the mission. Nevertheless, it would be advisable to convert these duties to ad valorem rates, which are graduated to increase with alcohol content per unit of volume.
It is important to note that excise duty rates on domestic production should be the same as on comparable imported goods. If the Government’s objective is to protect the domestic production of a particular good, then an import duty should be used instead of a lower excise. The latter violates the WTO’s rules on non-discrimination against imports.
It appears that not all imported alcoholic beverages, tobacco products, and fuels are subject to a positive duty rate (before exemptions and waivers). Rates are subject to frequent changes by means of and Excise Tax (Rate Of Tax) Order, a statutory instrument. The Minister of Finance recently announced an increase in the excise tax on gasoline of 20 cents per litre, effective April 1, 2014.
42. Exemptions of excise duties are granted based on a number of circumstances. Statutory exemptions apply to certain wines, spirits, tobacco products, and motor vehicles based on international conventions. In addition, excise duty exemptions are granted under some of the special tax regimes in force in Barbados. Beyond raising revenue, excise duties are primarily justified to address the negative externalities that arise from the consumption of goods that damage health, the environment, roads, and so forth. Exempting those goods from excise duties makes no sense from a revenue and economic efficiency standpoint.
43. Excise duty waivers are granted in significant amounts. In 2013/2014, statutory and non-statutory waivers of excise duties amounted to $60.2 million and $43 million, for a grand total of $103.2 million. This total represents 85 per cent of all excise duty collections in that year.
44. Automotive fuels are expensive and subject to price controls. The impact of an incremental excise duty imposed for revenue reasons on imported automotive fuels sold domestically would require an analysis of prices as well as the impact the tax would have on consumption and business competitiveness. During the mission’s stay, petrol and diesel were priced at $3.55 and $2.80 per litre.
45. The excise rate structure and levels should be subjected to a thorough review. The review should compare current rates to those in the region (especially CARICOM countries) and ensure that they are high enough for revenue requirements, as well as externality correction needs. In addition, specific tax rates should be periodically adjusted for inflation.
Using specific rates on excisable goods is appropriate, as externalities are usually related to volume of consumption, not to the goods’ quality or price. It also makes tax administration easier as only volumes (not values) need to be monitored. Yet, specific tax rates run the risk of a gradual decline in revenue as a share of GDP if rates are not adjusted periodically for inflation. In the case of tobacco, it is interesting to note that the World Health Organization believes that only eight per cent of the world’s population lives in countries that impose sufficiently high tobacco taxes.
46. The base excludes some goods often subject to excises in other countries. Soft drinks are the best example and they are manufactured and bottled domestically. The imposition of excises on soft drinks is common in developing countries. An economic argument can be made in support of a soft drinks tax if one of its objectives is to discourage the consumption of sugar and mitigate obesity, diabetes, tooth decay, hyperactivity, and related problems. Soft drink taxes have, in addition, been considered in a number of developed countries, in particular the United States. In any event, a decision in this regard should treat domestic production and imports equally.
47. Mobile airtime excises are becoming increasingly popular in many countries. Mobile telephone airtime may be subject to an excise calculated based on minutes of airtime usage. There are other taxes as well, including VAT, which should always apply on telecommunication services. Of course, the excise tax should be included in the VAT base, which increases revenue further. In 2011, over 20 countries imposed an airtime excise, the majority of which were located in Africa. The situation has evolved a lot since with adoptions in other regions.
48. An excise tax on mobile airtime services poses a small risk but presents an attractive revenue opportunity. In developing countries with poor land line systems, mobile telephones can contribute to development and growth by facilitating the creation of new market networks and reducing the need for expensive transportation. In Barbados, there were 122.5 mobile telephone subscriptions per 100 inhabitants in 2012, a number substantially above the global average of about 94 calculated over 228 countries. It is therefore unlikely that a moderate excise tax would significantly hamper the network or the adoption of new subscriptions in the future.
49. Motor vehicles can produce additional revenue after they enter the domestic territory. In addition to fuel excises, motor vehicle registration fees and driving licences can be used to extract additional revenue from the use of motor vehicles in the domestic territory. Several advantages are evident.
Firstly, the measure can allow the recapture of revenue on low-value imported damaged vehicles, if any.
Secondly, the price elasticity of demand for those fees is likely to be low, but the income elasticity is likely to be above one in the case of motor vehicles for personal use. An increase in those licence fees is unlikely to change behaviour much, which makes those fees good sources of revenue from an economic efficiency standpoint.
Thirdly, the relevant authorities can make the granting of those licences conditional on full payment of other local Government obligations such as traffic tickets, fines, vehicle examinations, regulatory charges, trade licences, stamp duties, and other fees.
Finally, the fees can be used to compensate for the revenue loss from exemptions of duties and other taxes at import. Consequently the relevant Government agencies may wish to investigate the scope for raising further revenue from this source. For example, an increase in all fees by 20 per cent could raise about $12 million.
1. Benchmark all rates against those in comparable jurisdictions and revisit rate levels and the rate structure to ensure that excise duties contribute more revenue.
2. Convert alcohol duties to ad valorem with graduated rates that increase with alcohol content per volume.
3. Ensure that all excisable goods are subject to a positive duty rate, whether they are produced domestically or imported.
4. Index all specific rates to inflation, at least once a year.
5. Consider the introduction of an excise on carbonated soft drinks with an ad valorem rate graduated by sugar contents.
6. Introduce a mobile airtime excise duty.
7. Consider increasing licence fees for motor vehicle registration and driving licences and make the award of those registrations and licences conditional on the discharge of all other obligations towards local governments.
Recommendations (medium and long-term).
1. Implement an excise regime that provides equal treatment of domestic production and comparable imported goods.
2. Remove provisions granting excise duty concessions out of all special regimes and agreements.
3. Phase out non-statutory or discretionary excise waivers.