Zero-rating stays where it is, current rate of 9% VAT will increase – Prof. Prasad

Deputy Prime Minister and Minister for Finance Professor Biman Prasad has confirmed that the government will leave the zero-rating where it is and the current rate of 9 percent VAT will increase.

While speaking during the Fiji Institute of Chartered Accountants Congress, Professor Prasad says the cabinet has now largely agreed to the required revenue measures to be implemented in the 2023-24 Budget.

He says they have very few choices outside increasing VAT.

Professor Prasad says they will provide some increased support to people currently on the social welfare system, because they are the ones who will be hardest hit by these increases.

He says they have been told by both the World Bank report and the Fiscal Review Committee report that zero-rating of essential items benefits the rich more than it benefits the poor and they understand that logic but the government also understands the concerns of the ordinary people about the price of food and essential items.

Professor Prasad says they understand that if they unified the VAT rate, even with additional targeted assistance, there would be severe impacts on thousands of people and this is not the time to do this.

He says they may look at this measure in the future, but they believe that they must first grow the economy and try to improve incomes overall before they can take this step.

Professor Prasad says the government needs at least $500 million in additional revenue if it is to begin to make any difference in its fiscal status – that is, to make the critical infrastructure investments that are required and to begin to reduce the debt to GDP ratio.

He also confirms that the government will be raising the main corporate tax rate which will collect an additional $70 million a year.

The Deputy Prime Minister also confirms that the government will be phasing in increases in departure tax between now and 2025 and in consultation with the tourism industry.

He says this will raise an additional $70 million when it is fully implemented, but full implementation is still more than a year away.

Professor Prasad says increases in customs and excise duty, including on alcohol, will generate about another $100 million.

He also says they are told that to increase personal tax on the richest people but asks how realistic is that.

Professor Prasad says only 20,000 people in Fiji actually pay personal tax and at the moment FRCS collects about $200 million in personal taxation – that is all.

He says this is about 2 percent of the GDP.

The Deputy Prime Minister says that is because of a policy choice made by the previous government, to put the threshold for personal tax at $30,000.

He says if the government reduced the threshold back to $16,000, they would have another 20,000 people paying tax - but this would raise only $50 million.

Professor Prasad says that is potentially a lot more tax administration and burden on individual people for $50 million so although they think the current personal income tax threshold is too high, they are not going to disturb it.

He further says in the area of personal tax, there are less than 300 people who have more than $270,000 a year in taxable income and these are the individuals who pay the so-called “Social Responsibility Tax.”

The Deputy Prime Minister says they contribute nearly $30 million a year in tax on their own.

He says however, there are distortions here which they will have to fix.

He says there are many more people who earn these levels of income but many of them pay much less personal tax because they take most of their income in tax-free dividends.

Professor Prasad says as a matter of principle, this must change.

He says they will be asking them to contribute more and the government will have to work on a dividend taxation policy, but this is quite involved.

The Deputy Prime Minister says they will be consulting widely on this as they have to keep it administratively simple while ensuring it is fair to everybody.

He says he cannot talk about the budget in detail because Parliament must hear the specific budget measures first.

Professor Prasad confirms Prime Minister Sitiveni Rabuka will also be making an address to the nation on some of these issues on Wednesday.

The 2023-2024 National Budget will be delivered at 10am next Friday.