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Take advantage of the government’s tax package! That is the message to micro, small and medium enterprises (MSMEs) from Winston Lawson, President of the Montego Bay Chamber of Commerce, recently. For anyone who may not have known, the Minister of Finance announced a stimulus tax package that will cost the GoJ around $14 billion in revenue.
Minimum Business Tax abolished!
The Finance Minister, Dr. the Hon. Nigel Clarke, announced on March 7, 2019, that minimum taxes on business are abolished. So are asset taxes payable by non-financial institutions? This change came into effect on April 1, 2019.
This move is a departure from the modification introduced in 2012 that created a tax regime for non-financial institutions in addition to the tax obligations for financial institutions.
Abolished minimum business taxes are to ease the burden on small businesses that are barely turning a profit. Prior to this change, such businesses were required to pay a minimum tax regardless of their earnings and profits.
Also, asset taxes have always been onerous for businesses with non-functioning assets for which they must also pay taxes.
GCT Tax Threshold goes up – 3,500 small businesses relieved
Plus, the annual General Consumption Tax (GCT) threshold moves from $3 million to $10 million. This adjustment is a weight lifted from the shoulders of approximately 3,500 small, medium and micro businesses. They can now use the surplus capital for re-investment into business operations. By extension, small business customers can experience relief at the cash register which translates into more consumer spending.
Naturally, the adjustment in the GCT threshold is also a relief to the Tax Administration Jamaica (TAJ). It can now redirect their resources to pursue larger businesses to ensure that they comply.
Flat Rate for Ad Valorem Stamp Duty
Another area touched by the Finance Minister was the introduction of a flat rate duty to replace the various rates for Ad Valorem Stamp Duty paid on instruments including collateral for loans. The flat rate duty to be introduced is $5,000 for each document. Essentially, this adjustment means cheaper transaction costs for securing loans and preparing legal and business documents. These documents normally require a stamp in accordance with the Stamp Duty Act.
In a follow-up announcement, the Finance Minister amended the Ad Valorem Duty relief. The government agreed to reduce the flat rate to $100 per document or parcel for any transaction valued less than $500,000. The $5,000 flat rate, however, remains applicable to documents relating to transactions valued more than $500,000.
This stimulus tax adjustment is even better news for MSMEs.
Transfer Tax on Real Estate and financial paper reduced
Furthermore, the transfer tax paid to transfer real estate and assets and financial instruments is reduced to two percent. Previously, this rate was at five percent. The rate reduction is welcome news for sellers and buyers of real estate, as well as for investors in the equities and bond markets. Naturally, any reduction in transfer tax rate will translate into increased business activity and lower costs. For example, many real estate transactions that were put on hold pending this transfer tax rate reduction have been reactivated.
Estate Transfer Tax Threshold goes up
Beneficiaries and administrators of the estates of deceased persons can also breathe a sigh of relief. That is following the Finance Minister’s announcement that the transfer tax (estate tax) threshold moves from $100,000 to $10 million. Significantly, this adjustment frees the thousands of estates valuing less than $10 million in cash and realty from paying any costs for transferring assets to beneficiaries. For any business, this change means more flow into the productive and business arena of assets that would otherwise remain immobile.
The GoJ has already taken stock of the effect of the stimulus tax package on the revenue side. From the abolition of the Minimum Business Tax, the government coffers will potentially lose $1.1 billion this financial year. Furthermore, with the increase in the GCT threshold, the government stands to lose another $0.7 billion.
While businesses stand to save on the cost of doing business with stamped documents, the government forgoes $6.7 billion in tax revenue on Ad Valorem Stamp Duties. As Dr. Clarke asserted during his Budget Presentation, the
“Ad Valorem Stamp duties are distortionary…disincentives to the very activities we want to encourage. (The Ad Valorem Stamp duty) discourages transactions, competition, and impedes access to finance for all but particularly, micro and small businesses.”
He is right.
For years, micro, small, and medium-sized businesses found it tough to secure even the smallest of loans. This difficulty is owing to the huge paperwork and the associated costs involved. Many MSMEs give up trying to access financing through legitimate channels – much to their detriment.
Furthermore. from a two percent transfer tax, the government will receive $3.4 billion less in revenue. In addition, the coffers will miss approximately $1.8 billion from the removal of the asset taxes on non-financial institutions. The asset tax removal is effective for the 2019 assessment year.
Another $0.29 billion will not make it into the government’s coffers owing to the increase in the estate transfer tax threshold.
Revenue losses Marginal says Finance Minister
The good news for the Administration, however, is that the potential intake from the General Consumption Tax (GCT) will be in the region of $200 billion. Subsequently, the $14 billion losses projected for the surrender of the taxes abolished or reduced are negligible compared with the GCT gains. It is also one of the rationales for the GoJ’s decision to increase the consumption tax threshold rather than reducing the tax rate to businesses and their consumers. The other was that to reduce the GCT rate would also pass on benefits to other economies. Approximately 50% of goods that attract the consumption tax are imported goods.
So, to introduce the necessary stimulus tax package into Jamaica’s struggling economy, the government of Jamaica has taken the bold step to forgo a significant chunk of its revenue intake.
The GOJ is to go without $14.03 billion in tax revenue so that business and economic activity increase and Jamaica’s economy grow.