THE Fiji Revenue and Customs Authority has advised the Parliamentary Standing Committee on Economic Affairs to ensure there is a balance between economic efficiency and equity if Government wishes to introduce any tax policy.
FRCA national manager for Policy, Economic Analysis and Research Fazrul Rahman said striking a balance between the two was the hallmark of any tax policy development.
In his submission to the committee on the proposed 5 per cent service fee for the tourism industry, he said striking this balance simply meant the policy should generate maximum revenue as possible but with least welfare loss.
“We like to tax people, we like to tax things, or anything that has to be taxed, but at the same time, it should lead to a minimal welfare loss, which means the person is not losing out as a result of the tax policy,” Mr Rahman submitted.
“So striking a balance between economic efficiency and equity is a paramount feature of any tax policy development. Along with this, whatever is a tax policy should be supported by simplicity, which means that the policy needs to be easily implemented and easily understood, and it does not create any form of distortion.”
Noting that the service fee appeared to be similar to the service turnover tax (STT) in the tourism industry, which was applicable on hotel accommodation, Mr Rahman said there was a need to avoid tax cascading, citing existing taxes such as VAT and STT, to ensure there is no double taxation.
He also noted neutrality, which meant the STT or VAT or any sales tax should not be a cost to the business but it should rather flow through the business.
“Our advice, which is consistent with what is happening in any economy in the development of tax policy, is to see that there is efficiency and equity balance because if you want to tax a particular sector or a particular group, it is going to change the taxpayer behaviour from switching their activities into another sector in which there is no such tax.
“So basically, the point here is that taxes need to ensure it minimises distortions. But tax by itself is a distortion to the economy and every effort need to be made to maximise revenue, of course the policy should be to maximise revenue, but with least welfare loss.”
The FRCA team provided some options that could be considered by the committee, one of which was not to pursue the policy now because of other stimulus measures.
“The other option would be to pursue with other labour policy adjustments — look at the minimum wage rate — of course with consultation with the industry. We are not saying here that minimum wage should go up tomorrow. We are saying here is that it is a mechanism that can be used in consultation with the industry, taken of course is to see the fiscal stimulus (like the free education and medicine initiatives) that have been introduced by the Government.
“The last possible option is if there is a decision, perhaps consider using the STT mechanism, but the downside to it is the impact on rental car operators and other operators.”
