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The Incoherence of the Income Tax Act and its implications

The Planning Institute of Jamaica (PIOJ) has recently revised its projected growth estimates from between four to six percent for the fiscal period 2021/22 downwards 2%-5% for the comparative period 2022/23, which seems a bit pessimistic. Nevertheless, a principal catalyst to economic growth within any country is its taxation policies. The said taxation policies is even more effective when backed by robust taxation laws enacted by Parliament. Moreover, annual income tax collections approximate at least 25% of the Government of Jamaica’s (GOJ’s) total revenues. Notwithstanding its importance to the government’s coffers, some of its provisions are very nebulous and inadequate, which further compounds the systemic problems of under-reporting and tax evasion that continuously plague the Jamaican economy, which may permeate the pandemic crime, violence and poignance confronting the Jamaican society.

Inadequacies

Case in point, Section 5(1) of the Income Tax Act (“the Act”) indicates that income tax shall be payable on all income, profits or gains from arsing or accruing to any persons residing in the island from any trade, business, profession, employment or vocation irrespective of whether or not they are carried on in or outside of the island. Yet still, the definition of a business is not sufficiently dealt with in the Act. The Act has also not properly defined the term vocation, which may suggest how a person generally conducts his/her life earning an income. The definition of trade according to Section 2 (1) of the Act is also woefully inadequate and ambiguous, which on the face of it, may stimulate a huge canyon of arguments to be deliberated in any court of law. In fact, the Act defines a trade as every trade, manufacture, adventure or concern in the nature of trade, which appears highly equivocal on the face of it.

Badges of Trade

While it could be easier to pinpoint an employment, a profession or a business, the difficulty surrounds ascertaining a trade for the purposes of levying income tax and to a lesser extent a vocation. As a consequence of inadequately addressing the nebulousness of what is indeed a trade as per the Act, experts, taxation authorities and the judiciary generally infer from a body of legal precedents, which in combination are termed the ‘badges of trade’.The badges of trade is a body of case laws, even though not conclusive, assists with ascertaining what is a trade for the purposes of determining whether a tax liability exists. In arriving at the final conclusion, courts will have to decide as to whether or not one or more badges exists in a particular situation in concluding if a trade was perpetuated. For example, courts objectively glean through various principles such as frequency and similarity of the transactions, subject matter being realized, circumstances of realization, length of ownership and motive of the item/(s) being realized—among others. In proving if a trade was conducted, one or more of the aforementioned principles known as badges must exist even though this may not be conclusive. The fact is, even multiple existences of various badges may suggest that no trade was conducted. Whereas, a single badge could indicate that an individual or entity has conducted a trade, which is under the provisions of the Act and susceptible to income taxes being charged.

 

Illegal or Immoral Activities

Furthermore, an activity could be deemed illegal in accordance with the laws of Jamaica, but could be construed as a trade or a vocation, which is also susceptible to income taxes in Jamaica. However, the illegality and immorality of an activity are also not addressed under the provisions of the Jamaican Income tax Act even though the entity or individual maybe earning significant income. As a result, matters of these nature may need to be pacified in a court of law based on the fact that case laws in past suggest that the illegality or immorality of an activity does not preclude an entity from being assessed under the provisions of the Income Tax Act.

On the other hand, one could indicate that the activity being conducted was not a trade or a vocation, but a hobby, which is generally not taxable under the Act. Nevertheless, it appears that there is very thin line between what might be construed as a trade, vocation or hobby under the Act, which creates a gulf of opportunities for persons or entities to explore as a means of evading taxes, thereby robbing the government’s coffers of valuable economic resources.

Way Forward

Given the importance of income tax collections to the development of the local economy, the government needs to allocate adequate resources to properly draft laws that are robust, unambiguous and coherent to combat widespread evasion and under-reporting of income taxes emanating from gaps as well as shortcomings that exists within the current income tax Act. While, this might not be the only panacea to build a better Jamaica for future generations to live, work, raise families and do business, it might certainly provide an avenue to earn much needed resources to assist with curtailing crime and violence that has held the country in captivity as well as liberating local courts from the overburdens of taxation matters that has inundated the judiciary and depriving the country from the aforementioned much needed growth projected by the Planning Institute of Jamaica.

Kerwin D. Hamil
Taxation, Accounting and Finance Professional
Lecturer
University of Technology, Jamaica

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