Call for reduction of tax burden for business, individuals

The Chamber of Commerce has urged the government to reduce the tax burden for business and individuals in the forthcoming budget.

The call was made in proposals made to the government within the Malta Council for Economic and Social Development.

"Industry and business in general, and even the greater majority of workers, are being highly taxed to the extent that the current tax policy is acting as a disincentive for effort, investment, innovation and work on the part of employers and employees," the chamber said.

It proposed that the current system of tax parameters be altered.

"A reduction in the tax burden is conducive towards an increase in revenue particularly through the inclusion of underground economic operators into the fiscal system. Within this context, the government may consider a gradual harmonisation in marginal tax rates applying to direct and indirect taxation. This could possibly be implemented in a pre-specified period of time. This measure shall also serve as an incentive for investment and a stimulus to aggregate demand."

It added that this had to be accompanied by proper tax enforcement.

"The enforcement task would be appeased by the very reduction in tax rates which would render tax evasion a less viable practice."

The chamber argued that lower tax burdens would grant a much needed increase in spending power to middle income earners who are empirically proven to contribute most towards the generation of economic momentum through their contribution towards aggregate demand and private expenditure.

"Changes in tax structures should complement social security considerations, especially benefits which are means tested. In such cases, workers may opt out of work because any additional income would deprive them from remaining eligible for such benefits. In worse case scenarios, similar situations may tempt workers to perform undeclared productive activities thereby depriving the government from its rightful tax revenue and in the process draining the same coffers with the social benefit.

"The Chamber believes that those social benefits which are liable to abuse and consequently serve to disincentivise work and effort should be suitably and effectively monitored so as to eliminate their undesirable consequences. At the same time, those truly deserving cases should be entitled to adequate benefits which rightly reflect the realities of today's social requirements."

The chamber also proposed that fiscal incentives similar to those stipulated by the Business Promotion Act for reinvestment of profits be extended to local companies.

"Re-investment of profits should be tax exempt in order to stimulate economic activity in the present circumstances. All companies should be made eligible for such a concession even if it has to start from a pre-determined percentage level of tax exemption. A correct implementation of this measures would also be conducive towards enhancing the capital gearing of local businesses which in general suffer from under-capitilisation and, in the process, easing their dependence on bank loan facilities. This is particularly significant for small family businesses which constitute a vast proportion of the local company population."

The chamber also recommended measures to exempt family businesses from capital gains tax in the event that shares in such companies were sold to third parties. The present scenario was an obstacle to concerns which were aiming to reorganise themselves particularly in terms of their internal shareholding structures.

The chamber said VAT should fall due on payment of an invoice rather than on issue of the same. Several companies were run on an invoice basis with credit terms, in many cases extending to well over 270 days. Nevertheless, VAT had to be paid strictly after 90 days, irrespective of whether payment was effected or not.

"Ideally, companies would be allowed to issue a Request for Payment (as in professional cases) and a fiscal receipt would eventually be issued after payment is received."

It said it understood that this decision would constitute a serious dilemma for the minister of finance particularly in the light of the current public finances position and the programme for consolidation set in 1999.

However, the government should be encouraged by the international experience of other low-tax economies such as Ireland and the United States, which had significantly out-performed their trading partners in terms of economic expansion over the past decade or so.

Indeed, in Malta, the reduction in the maximum tax rate of income tax from 65 to 35 per cent in the late eighties proved to exert a highly expansionary effect on the economy stimulating work, investment, employment creation and most importantly prosperity and wealth.

The chamber said the government's targets for the current year did not materialise, mainly due to a shortfall of privatisation proceeds with respect to the combined projected figures for the past two years.

The government had also not made significant progress in rationalising its structural pattern of expenditure. Consequently, the credibility of the fiscal strategy being proposed by the government for 2003 was at stake.

In view of the particular circumstances that await the country in the coming months, the chamber also urged the government to ensure that concrete steps were taken so that the economic momentum was stimulated, the spending power of workers was increased and judicious use was made of public funds to further tackle the deficit problem.

"The government must not be conditioned by the fact that this is the final budget for this legislation before the electorate is called to vote in less than a year's time. The country cannot escape from the economic realities and challenges it faces and the chamber prefers any remedial action not to be postponed because of political and election sensitivities. Otherwise, the country would have to endure even harder and drastic measures at a subsequent date."