Fleming: Rules must be strong

By DALE LUMA
THE rules that guide policy makers must be efficient at closing business tax loopholes that are widely agreed to be wasteful and protecting the revenue base, says Bank South Pacific Financial Group Ltd chief executive officer Robin Fleming.
Responding to questions from The National on whether the salary and wage tax should be reduced, Fleming said there was a good argument to be made for reducing income taxes, especially at the lower end of the tax scale in favour of a more broad-based tax such as the value added GST (goods and services tax).
“Firstly, it is evident that relying on a narrow-based and progressive income tax system puts the tax burden on only a small part of the economy and ignores the large informal sector, not to mention that a tax on income is one of the most challenging taxes to administer,” he said.
“The most obvious impact would be reduced government revenues and an increase in the amount of money that an individual can spend or save.
“The bottom line is that there is no tax reform wherein everyone ends up better off.
“A key consideration is whether PNG can maintain a sustainable revenue base in the future while shifting the tax burden from narrowly-based income taxes towards a more broad-based GST – this shift may require an increase in the GST rate.
“Policy makers than should consider, given that PIT (Personal Income Tax)/CIT (Corporate Income Tax) combined account for roughly 50 per cent of the Government’s tax revenue (2021 Budget), whether
an increase in the GST from 10
per cent to 15 per cent would alter PNG’s reliance on these other tax sources.
“Setting a GST rate depends on revenue goals, the overall mix between direct and indirect taxes, fairness and whether there are better alternatives to name a few factors.
“These are essentially political decisions that need to be made in the context of these respective environments.
“In general, the success of GST depends on the tax administration’s capacity, especially modernised processes for enforcement and compliance.
“An ineffective administration can make the system more complex and open to abuse, more so if increasing the rate leads to increased non-compliance.
“In PNG, for example, the design of some elements of the tax system have facilitated GST refund fraud.
“If more reliance is to be placed on GST revenue, than effectively administering GST refunds would need to be a priority.”
In terms of corporate tax rates, Fleming said the current corporate tax rate of 30 per cent was reasonable compared to countries in the Oceania region such as Australia (30 per cent), New Zealand (28 per cent), Fiji (20 per cent) and the Solomon Islands (35 per cent).
“Corporate tax is an important tool the Government could utilise to reduce inequality within PNG and any advocates for decreasing the corporate tax rate may underestimate the difficulty of replacing the revenues generated,” he said.
“Similarly, any advocates of increasing the corporate tax rate may underestimate the impact this would have on the competitiveness of PNG’s business environment as well as the harm on economic growth and job creation.”
Flemming said the 2021 budget papers indicated that company tax represented approximately 30 per cent of total tax revenue which BSP pays almost 15 per cent of the total company tax in PNG.