Budget and tax

Coinciding with the third reading of Budget 2022 today, Verité Research this week released a public report detailing the research organisation’s analysis on the estimates and assumptions used in the formulation of the Budget. In it, Verité broke down how the Government had failed to achieve three crucial outcomes, namely, establishing fiscal stability, building credibility and instilling confidence.

Just by the outline alone, it is clear that these would be some serious failings on the part of the Government in most years, but in the context of the current crises enveloping the country, failing to address them going forward would be almost tantamount to criminal negligence.

While we delve into every criticism of Budget 2022, here we will look at one major fault highlighted by Verité – taxation structure. The proposed Budget seemingly undermines the tax structure established as recently as January 2020, which was aimed at setting in place a predictable regime of lower taxes for at least five years. However, with the new Budget introducing tax increases, one-off taxes and retroactive taxes, it completely destabilises any attempt at a solid fiscal regime.

This, allied with previous governmental flip-flops in terms of policy, has had the added effect of further reducing trust in Government policies, with Verité pointing out that “businesses and investors are left speculating about the new tax measures that might be taken in 2023 to address revenue needs met with the one-off taxes in 2022”.

Further, the Verité analysis highlights the unreliability of the Government’s tax revenue estimates for the coming year, based on past levels of tax compliance. “The average annual growth rate of total income tax from 2010 to 2020 is 8%, with the highest Y-o-Y increase of 38% occurring in 2019,” it notes. “Thereby, a projected increase of 68.4% in income tax collection in 2022 seems to be an extremely ambitious projection given that the economy will still be in recovery mode from pandemic related shocks.”

What Verité does not say here, as it was not their desired objective, is that an adequate tax compliance model is essential for every Tax Administration.

The model is based on two elements: attitude to compliance and compliance strategy. The strategy of the Tax Administration should be to create pressure down, or in other words to use the compliance strategy to help taxpayers to pay taxes on one side and to fight against tax evasion on the other. Namely, the vast majority of taxpayers want to comply with their taxation obligation. This is very important because the Tax Administration has to take an adequate compliance model in this respect.

Tax policy and tax administration are the most important part of every tax system reform.

Facilitating compliance requires improving services to taxpayers by providing them with clear instructions, understandable forms and assistance and information as necessary. Monitoring compliance requires the establishment and maintenance of taxpayer current accounts, management information systems that cover both ultimate taxpayers and third-party agents (such as banks) involved in the tax system, and appropriate and prompt procedures to detect and follow up on non-filers and late payments.

Improving compliance requires a judicious mix of both these approaches as well as additional measures to deter noncompliance, such as establishing a reasonable risk of detection and the effective application of penalties.

Unreliable Budget forecasts and their unyielding consequences will only cease to exist when the Government can ensure all these systems are in place.