# **4.2 Assumptions and Implementation of the Fiscal Incidence Analysis**

# **_PIT paid by households_**

We assume that PIT is only paid on the labor income of the employed population in the formal sector. Because we do not have a direct measure of labor income, we use an approximation based on our definition of market income. The following steps were taken to calculate the PIT payment for formal workers using the SLCHBS from 2018: (1) we identify the disposable income; (2) we obtain the net market income, subtracting direct transfers; (3) we divide the resulting value by the number of employed adults; (4) we calculate the taxes paid based on the PIT rates corresponding to the brackets; and (5) we aggregate again at the household level.

# **_VAT paid by households_**

The VAT is levied on all forms of consumer spending—goods and services. The tax is computed on the value of imports and the value added (or markup) that one business charges another or the final consumer when a good or service is provided. The VAT rate is 15 percent on the selling price; however, hotels and dive operations are charged a rate of 10 percent. Some goods and services, for example flour, rice, sugar, and powdered and evaporated milk are not taxed, nor are postage stamps and supply of textbooks as prescribed by the regulations.

Expenses associated with cell phone services have a tax rate of 20 percent and water and electricity services are partially subsidized, based on consumption bounds. In the case of electricity, the quantities are obtained from the costs paid by the households and the exogenous estimates of the prices per kwH are obtained from the Grenada authorities. Households who consume less than 99 kwH per month are exempt from paying the VAT, while households who exceed this consumption pay the VAT on the excess over the limit. Similarly, the water consumption limit is 2,900 gallons per month, with households paying the VAT on the excess consumption over the stated limit.

Because the VAT is already incorporated in the price, a pretax rate is first calculated for each E <u>E</u> good using the equation P = and then the rate is applied to the pretax value. v jj 1+rr vv Although the VAT regulations require companies to have a special registration document showing that they offer taxable products for EC$12,000 per year or operate for at least 12 months, this information is not available in the data source consulted. Therefore, it is difficult to know whether households buy in stores exempt from the VAT registration requirement or sell informally. Likewise, the application of the incidence of indirect taxes does not consider cascading effects, given the difficulty of imputing household deductions to reduce the net payment of these taxes. Consequently, there is an overestimation of the effect of the VAT and excise taxes.

# **_Transfers received by households_**

Direct transfers in the model are mainly associated with the SEED program and the School Feeding Programme. The SEED transfer is identified in the SLCHBS through a direct question to the households. Based on administrative records, we identify the amounts of program transfers to children, youth, and elderly individuals. Finally, we aggregate the amounts at the household level. The SEED amounts are reduced for households to ensure that base/market 10