Remove this unconstitutional tax

Editorial, Normal

The National, Friday August 2nd, 2013

 A TAX review has been in progress headed by former chief tax collector, Sir Nagora Bogan these past three months.

The results were to have been announced last month but we expect this is going to take a little longer than anticipated.

Let the committee take its time. This matter is much too important to rush.

The letters pages of the newspapers are often swamped with taxation issues, most complaints about the unfairly high income tax set at 35-plus per cent and the 10 per cent goods and services tax, which are always passed on to the consumer.

In addition, we sit by and watch as multi-billion kina operations are given generous tax offers in the name of attracting business into the country.

It seems grossly unfair that the simple worker, already hit by the high cost of living, has to pay through the teeth to maintain government coffers.

Either the income tax comes down or government must scrap the Goods and Services Tax.

The latter has been judged unconstitutional in any case. When it was first introduced in February, 1999, it was called Value Added Tax. 

The main reasons given for the introduction of VAT was that there was a need to rationalise the then existing indirect tax regime, including taxes on domestic and international trade, in order to reduce distortions and increase private sector efficiency. 

There was a need to secure a broader and more sustainable revenue base to finance government expenditure.

The solution proposed was VAT. With VAT, the government was to use import duties for protective po­licy reasons, satisfying the revenue raising requirements of both the national and provincial governments through a single broad based consumption tax. 

This was to allow for reduction of import duty rates and thereby allowing for reduction of production and living costs, while providing reasonable protection to domestic industries for a limited time.

Problems arising from the complex tax regime would be eliminated by VAT, which would substitute one national sales tax for the numerous previous provincial sales taxes.

VAT was to result, in theory, in a win-win situation for all where both the national government and the provincial governments received more or at least as much as before at virtually no administrative costs to the provinces.

The arrangement was pre­mised on certain critical assumptions:

First, that the national and provincial governments had to agree to how the new revenue would be shared.

The provincial governments had to have confidence in the national government’s ability to transfer funds in a timely manner when they were due; and that the national government was able to collect as much as or more than the taxes that were being foregone in favour of VAT.

That was where the VAT was destined for problems. 

The provinces had a vast mistrust, borne out of experience, that the national government would collect the taxes efficiently and even if it did, they were even more disdainful of its ability to share the taxes collected equitably and on time.

Over time provincial governments had learnt to rely more and more on their internal revenue to pick up slacks while waiting for contributions from the national government. 

Now they were being told that their only independent revenue source was being re­moved and vested in the national government.

Many provinces protest­ed. Only one, Morobe, decided to take the National Government head on.

In February 2002, the Morobe provincial government filed a Supreme Court reference contesting the legality of the law and if it were held to be legal, whether it was “harsh and oppressive”. 

On September 27 that year a three-man Supreme Court Bench ruled that the law was indeed invalid and “harsh and oppressive”.

Following the decision the National Government was hard put to find redress for a law the highest court in the land held to be in violation of basic rights of the people.

In the end what the government did was to change the name of the tax from Value Added Tax (VAT) to Goods and Services Tax (GST) but everything else remained the same. 

In essence the GST is unconstitutional and ought to be scrapped.