Government Sees Decline in Direct Taxes but Offsets Loss with Increased VAT and Other Transaction-based Taxes: Central Bank Report

The government’s haul in direct taxes shrank by $131.1 million from the start of the fiscal year in April up to September, the Central Bank of Barbados said Friday.

But the apparent blow to the government’s coffers was softened as it raked in higher receipts in Value Added Tax (VAT), excise taxes, import duties and the fuel tax.

The fall in direct tax revenues is being blamed on a shift in the timing of land tax bills and corporation tax collections, coupled with the expiration of the pandemic levy, according to Central Bank Governor Dr Kevin Greenidge.

The Central Bank said the decline in direct tax receipts and increased interest expenses led to a small overall deficit in the first half of the 2023/24 fiscal year, from April to September.

“However, more than half of the decline in direct taxes was offset by increases in transaction-based taxes such as VAT, excises, import duties and the fuel tax. The expenditure outturn was driven by an expansion in interest expenses which continued to mirror the rise in international interest rates and the step-up rates on domestic restructured debt,” said the governor.

“Other contributors to higher spending included public sector wages and salaries, grants to public institutions and to a lesser extent, capital spending. These developments resulted in a fiscal deficit of $61.1 million (-0.5 per cent of GDP) and a primary surplus of $274.9 million (2.1 per cent of GDP).”

He reported that the main shortfall of $80.5 million in property taxes resulted from the late issuance of land tax bills compared to the previous fiscal year.

“At the same time, corporate income taxes contracted by $50.1 million, as entities that would have settled their corporation taxes in June 2023, were now compliant with the requirement to prepay in the third quarter (October – December) of FY2022/23. The discontinuation of the pandemic levy resulted in a $28 million drop in collections at the end of the period.”

“However, personal income taxes, which continued to benefit from rising compensation levels and employment, rose by $29.7 million,” Dr Greenidge said.

“Economic activity continued to boost indirect taxes. Timely transfer of import-related taxes supported a $94.9 million increase in indirect taxes. Excise and the fuel tax benefitted from a combination of higher imported fuel volumes in the sub-categories that attract these taxes and the timely transfer of collections that were stalled in the previous fiscal year. The $31.5 million boost in VAT receipts was in line with rising consumption and robust economic activity.”

The Central Bank Governor said the country’s gross financing needs increased due to a lower primary surplus while the government paid down more on the country’s debt.

“For the first six months of FY2023-24, government’s gross financing needs rose by $134.6 million compared to the corresponding period of the previous fiscal year. The increase in the financing requirement resulted from a $61 million reduction in the primary surplus and higher debt service payments of $80.6 million,” he said. Greenidge noted that the expansion in the debt service was driven by higher interest expenses as amortisation fell marginally.

(EJ)