A faulty system: Why income tax must be reduced and GST & tax free threshold raised

In 2015, the Tax review committee presented its findings to the government.   The review was a long time coming and  very much needed.   Since its presentation,  various aspects of  the review  have  been met with both support and mixed reactions.

 Chairman of the Tax review committee was Sir Nagora Bogan. He  is one of  Papua New Guinea’s foremost experts on tax reform.   This week, he reiterated  the need to implement the  reforms  which include a diversification  of  the tax base.

 “The tax system is struggling to keep pace with the way the country is going at the moment and we have to do a lot to restructure the tax system.”

 Generally speaking,  Papua New Guinea uses a tax structure that burdens the  citizen instead of helping them  become self-sufficient.

 There are several faults with the current tax system.

• Personal Income Tax is too high and the base from which it is drawn is too small.  It  is a structure more suited to countries with high employment rates. This means that only 400,000 people in formal employment are taxed.  These taxpayers  shoulder  the income tax burden for more than more that 9 million other Papua New Guineans.  It’s like trying to stand up a pyramid on its point.

 

• Papua New Guinea’s Tax system does not support small business growth and prosperity. It is a well known fact that  if you’re a trying to start up  a small business in Papua New Guinea,  there is no  real incentive for you despite the rhetoric about support to SME.   You still have to pay  the tax percentages  that big companies pay while the resource sector  continues to get various tax incentives.

 

• “The current tax regime has evolved over many years, in an ad hoc manner, and without regular refinement and update has become alienated from the realities of PNG society.The current tax system largely ignores the fact that tax systems are part of a nation. The level, depth and magnitude of changes in PNG have outstripped the capacity and effectiveness and efficiency of the tax regime.”

 

• The tax system remains largely undiversified and tax exemptions are overused and misapplied.

 “The problem is that as a country, we have not articulated a broad based macroeconomic policy.  What I also recommended at the time was  a shift away from our over dependence on the resource and extractive sector. We can’t put all our eggs into one basket,” Sir Nagora said.

 Some  of the most important recommendations proposed by the   Tax Review Committee  include a reduction in   personal income  and company taxes  as well as an  increase the Goods and Services Tax to as much as 20 percent over time.

 Those recommendations  are  not a stand alone measure.  The committee also proposed increasing the tax free threshold from the current K15,000 to K20,000.  This means anyone paid an annual salary of K20,000 will not be taxed.

 For Papua New Guinea, it makes a lot of sense.  It removes the tax burden from the relatively small number of  income taxpayers  and draws from the larger, more diversified GST base.

 Reducing company taxes, works both ways.  It helps trigger  investment an innovation  and encourages more Papua New Guineans to go into business without worrying unfair taxes that currently smother  any new venture with limited financial muscle.