Duty increases – what effect do they have?

It’s perennial cry in Cayman everything costs so much. And it’s not going to get any better. With the prices for the large majority of dutiable items rising since duty fee increases have taken effect consumers are starting to feel the bite.

The government aims to raise $16.5 million during the budget year from higher duties to generate much needed revenue, but it is consumers and small businesses that predominantly have to pick up the tab.

The duty rates for most dutiable items have increased by 2 per cent. However, some products particularly alcohol and cigarettes have seen significantly higher duty increases.

Supermarkets already announced before the duty rise that much of the duty burden would be passed on to consumers. As a result prices of most imported food are going up, which means even higher grocery bills for consumers.

To cut expenditures consumers only have few options. They can if possible seek out local meat and produce that is not subject to customs duty. Alternatively they can move to similar but lower quality and therefore cheaper produce, for example lesser cuts in meat. It will also be cheaper to buy only fruits and vegetables that are in season.

The biggest impact has been on alcoholic beverages and tobacco products. Customs tariffs for most alcoholic beverages have increased by about 10 per cent, but duties on sparkling wine have doubled from $3.75 to $7.50 per liter.

Again consumers may shift their preference to products that are less affected by the duty fees or simply drink less alcohol.

Wine for example only saw customs duty rise from $3.00 to $3.30 per liter. Beers and ciders still face the lowest duties after an increase from $1.50 to $1.65 per liter.

Duty on cigarettes has doubled from CI$52,50 to CI$105 per 1,000 cigarettes. Given that at the same time a smoking ban in restaurants and public places has taken effect, smokers are experiencing more pressure to quit this vice.

The higher duties come in addition to generally rising food prices.

According to the Economics and Statistics Office’s latest consumer price report for June 2009 overall prices have been stable and in fact slightly declined by 0.3 per cent compared to one year earlier.

But this drop does not concern all items on the monthly household bill.

While housing, transport and clothing prices fell by more than 4 per cent, food, alcohol, tobacco and household equipment prices have risen compared to one year earlier.

Food prices soared 5 per cent overall with bread (7.4 per cent), fruits and vegetables (16.2 per cent) experiencing the highest increases.

Dairy products and egg prices at the same time fell.

Alcohol and tobacco prices were 2.6 and 3.3 per cent higher respectively.

Household equipment and in particular home entertainment products have been over ten per cent more expensive compared to one year earlier.

Most items have now seen their customs duties increase from 20 to 22 per cent, adding effectively up to 1.6 per cent to the end price.

Many residents fly to the US for some of the larger purchases, in particular home entertainment or personal goods, and this does indeed make sense, due to the duty free allowance of $350 that exists per person.

One area involving large purchases that has been hit by the duty increases is the import of cars.

Here duty rates have also risen by 2 per cent and depending on the value of the car a duty of between 29.5 and 42 per cent will apply.

The import duty for vehicles is calculated on the basis of the CIF value, consisting of cost of the car plus the insurance premium for the shipping journey plus the sea freight charges.

While vehicles with a CIF of $20,000 or less are subject to a 29.5 per cent duty, cars with a CIF of up to $25,000 face a 32 per cent duty, increasing to 37 per cent for vehicles with a CIF of up to $30,000 and topping out at 42 per cent for vehicles that have a CIF of more than $30,000.

Exceeding these individual CIF limits by only a few dollars can mean increased import costs of more than $1,000.

In addition to the CIF value of the car, the type of car may represent significant savings. Vehicles for the transport of goods and special purpose vehicles, such as pick-up trucks, are subject to the lower duty of 29.5 per cent.

Residents who are seeking to bring older vehicles, valued at less than $12,000, to the islands have to pay an environmental tax of $1,000 on those vehicles.

This increases the import cost by at least 8.3 per cent, making it slightly more attractive to import a car with a value of just over $12,000.

While the tariff increase may thus add to general transportation costs, it does not apply to gasoline and diesel fuel.

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