Reasons prices will go up more than 10%
To begin tax reform is necessary. The timing and implementation could be better, maybe even a simpler sales tax, but the issue discussed in this editorial is how PGST will impact businesses and consumers.
It is being argued that companies should not increase prices by the full 10% as they will somehow benefit from the 10% PGST. This claim fails to consider the many hidden costs of implementing a 10% tax across the board. Here is why companies will be raising prices by more than 10% which does not even include inflation.
4% GRT is being removed. Yes, however it is being replaced by a 12% profit tax. A business with a 33% margin will end up paying around the same amount of tax. Service based companies with low overhead will end up paying a lot more profit tax than previous GRT.
3% import tax is being removed. Yes, but the cost to companies of implementing, tracking, and managing a very complex PGST and BPT also comes with additional cost including: new systems, additional labor hours and auditing which quickly offsets this reduction. Also consider that companies can recover some PGST but not all. On goods that expire, are damaged or missing the cost of the lost tax is now 10% instead of the previous 3% import tax, this raises the overall total tax companies pay. These additional costs and losses negate the money saved in removing the Import tax. So now the 10% PGST tax is covered but there are additional costs.
The cost of employees is being directly impacted. Employees must pay more for housing, food, expenses and even sending money home. Employers will have to raise salaries to help compensate employees for the 10% PGST. Keep in mind that higher prices and more taxes usually translate to lower tips so again less money for employees. The PGST also applies to service charges reducing those by 10%. Companies will need to add 2-3% to help offset this cost-of-living increase.
Small local companies will not be enrolled in the 10% PGST but will still be paying the tax on their purchases and operating costs. This means purchasing from a local non-PGST vendor will cost 10% more which is not recoverable. Companies will have to raise prices to off-set these local purchases.
Cash flow is also a struggle in Palau. With this new tax the company pays 10% to the government when they acquire the goods. Companies then have a large percent of their operational fund sitting in the government bank accounts earning interest for the government. As a result, the prices must be increased to provide cash flow.
With higher taxes and less spending power in a relatively stagnant economy the general population will have less money to spend, and sales will drop. As sales decrease prices will have to increase to offset operating costs in a phenomenon called the wage-price spiral.
So, before Inflation is considered companies will have to significantly raise prices with the implementation of the PGST to just break even. 14% is around the projected amount, including the 10% PGST.
In addition to the actual tax, inflation is on the rise. Tracking of basic goods shows a 11% increase for 2021 and a 15% increase for 2022. That is a 26% increase for basic needs since PGST was passed into law.
Many companies have held off on major increases because they are aware the local market cannot afford it. The common plan was to minimize price increases until the big projected tourism recovery occurs in the 2022/23 tour season, however that is not happening. Now the implementation of the PGST is forcing companies to increase prices not only by the 10% PGST and associated costs but also inflation. Realistically a 19-24% increase for companies would maintain the same financial position they were in a year ago. This is not creating any additional profit for companies, just allowing them to break even. In this sluggish economy anything less could lead to closure. (Contributed)