ECONOMY & TOURISM

Three years of wasted opportunity for tax reform

By WICHIT CHAITRONG 
THE NATION

 

BANGKOK: -- “REFORM before election” has been the theme of the coup d’etat led by General Prayut Chan-o-cha who promised sweeping economic and political reforms. Needless to say over the past three years, the government has mishandled economic reforms, in particular tax reforms.

 

The National Legislative Assembly (NLA) appointed by the junta has been trying to do something about tax reform by proposing to increase the value-added tax rate to 8 per cent from 7 per cent. Deputy Prime Minister Somkid Jatusripitak denied such a move on Friday and added that a VAT rate increase had to come at the right time and in the right economic conditions. 

 

Somkid may be right as the overall economy remains weak and a tax hike could potentially dampen economic recovery. Thailand can learn from Japan’s experience. Prime Minister Shinzo Abe increased the sales tax rate in 2014 but instead of boosting economic recovery, it had a negative impact on consumer spending.

 

Thailand had to increase the VAT rate to 10 per cent in August 1997 under conditions set by the International Monetary Fund in exchange for a financial bail-out during the Asian financial crisis. The IMF forced Thailand to adopt austerity measures, including the VAT hike, aimed at strengthening the fiscal position and winning market confidence. The VAT rate hike increased revenue in fiscal 1998 to Bt163 billion from Bt 139 billion in the year before, according to the BOT’s annual economic report issued in 1999.

 

The move, however, adversely affected the economy which had already been severely damaged by the impact of the crisis, as a result gross domestic product in 1998 contracted sharply by 10.2 per cent. 

 

This led the IMF and Thai government to reverse the austerity measures by implementing an economic stimulus package in March 1999, which included an increase in government spending and bringing the VAT rate back to 7 per cent. The then government had intended VAT rate cut to be a temporary move but successive governments have extended the VAT rate. Looking back at previous results, one can get a clue on the thinking of Thai officials and policy makers as to why they are wary of a VAT rate hike.

 

In response to the NLA proposal last week, Somchai Sujjapongse, permanent secretary for finance at the Finance Ministry, plans to ask the Cabinet to extend the 7 per cent VAT rate, which will come to an end by the end of September, for another year.

 

His reason was the same: hiking the VAT rate could impact the economy. It is now almost certain that the government will not increase the VAT rate this year or next year. Looking at the next 3-5 years, the chance to raise the VAT rate is still slim as the government needs domestic consumption to drive economic growth. 

Thailand is becoming an ageing society and raising the consumption tax rate would hit consumer spending hard.

 

However, the rising cost of public healthcare ,education and other social welfare as well as investment for the future would continue to put pressure on the annul budget, making it necessary for the government to raise revenue, without relying on borrowings.

 

The government must look at other taxes in particular tax from wealthy people. A land and property tax would be a good choice. The bill on land and property tax is currently being vetted by the NLA in its second reading.

 

The bill proposed by the government is weak, with too many exemption clauses. The NLA could strengthen it by reduce the tax exemptions. The government has proposed collecting tax from home owners only if the property is worth more than Bt50 million. Statistics suggest that only 8,556 homes nationwide will be subjected to this tax. In order to expand the tax base, the NLA should reduce the exemption on residential unit price to no more than Bt 5 million or Bt10 million. 

 

A recent report suggested that the NLA’s vetting committee is considering reducing exemption to Bt20 million, which is still high.

 

Source: http://www.nationmultimedia.com/news/business/EconomyAndTourism/30315875

 

-- © Copyright The Nation 2017-05-22

2 hours ago, webfact said:

The government must look at other taxes in particular tax from wealthy people.

The coup was for the wealthy.  Doubt they will be increasing their tax contributions anytime soon. 

50 mill home exemption is WAY too high;  people that have 20 mill home wouldnt blink at paying prop tax

47 minutes ago, yellowboat said:

The coup was for the wealthy.  Doubt they will be increasing their tax contributions anytime soon. 

Any government, anywhere in the world, Sir, will always support the wealthy and big business while the poor and small business will, one way or another, pay for that support.

 

These economic tax things are in the too hard bin.  Easier to focus on the pressing issues such as what people can wear for Songkran 

1 hour ago, hansnl said:

Any government, anywhere in the world, Sir, will always support the wealthy and big business while the poor and small business will, one way or another, pay for that support.

 

Sure, but some just sell out and placate a whole lot better than others. 

VAT should be at least 15%. it is the best tax system there is. next thing is it needs to be enforced. this should be enough to fix the hospital crisis as long as the funds are not spent on submarines or some other silly things.

7 hours ago, webfact said:

Minister Somkid Jatusripitak denied such a move on Friday and added that a VAT rate increase had to come at the right time and in the right economic conditions. 

I guess that means you can shelve it permanently. 

8 minutes ago, williamgeorgeallen said:

VAT should be at least 15%. it is the best tax system there is. next thing is it needs to be enforced. this should be enough to fix the hospital crisis as long as the funds are not spent on submarines or some other silly things.

I think it is close to 15% in the west but here hmm doubt if it will fly unless wages pick up and there is a universal status quo. The vat is a form of defacto tax here which of course the rich could afford because they dodge a lot of income tax but the poor have no such protection. When they buy something it comes right off the top. 

Looking for more domestic consumption to spur economic growth seems to be the governments thing here and abroad. The poor old consumer is really tapped out but governments still seem to want to take the spurs to him. He is surviving on cheap money but his wage increase is stagnant or declining. I am really puzzled as to how the new "contract worker" generation can go to a bank and sign up for a 30 year mortgage on a overpriced house when they could be looking for a job next year. Has the bank manager lost his mind??

1 minute ago, elgordo38 said:

I think it is close to 15% in the west but here hmm doubt if it will fly unless wages pick up and there is a universal status quo. The vat is a form of defacto tax here which of course the rich could afford because they dodge a lot of income tax but the poor have no such protection. When they buy something it comes right off the top. 

the poor need health services  and VAT is the most effective method. would be nice to tax luxury car imports  but that does not work. nice to tax cigarettes and alcohol but that just hurts the poor the most. VAT seems to be the only way to get some tax from those who have the most to spend. need to do something to pay for these subs.

3 years of failure in economic reform hmm cast the net a little further I think you will find more 3 year "failures"

3 minutes ago, elgordo38 said:

Looking for more domestic consumption to spur economic growth seems to be the governments thing here and abroad. The poor old consumer is really tapped out but governments still seem to want to take the spurs to him. He is surviving on cheap money but his wage increase is stagnant or declining. I am really puzzled as to how the new "contract worker" generation can go to a bank and sign up for a 30 year mortgage on a overpriced house when they could be looking for a job next year. Has the bank manager lost his mind??

very few people can get mortgages and so most of thailand are renters, and will be renters for generations.

Just now, williamgeorgeallen said:

very few people can get mortgages and so most of thailand are renters, and will be renters for generations.

Thanks for your reply my comment was to renters in general and maybe slanted a bit towards the west. Sorry to confuse you. 

Just now, elgordo38 said:

Thanks for your reply my comment was to renters in general and maybe slanted a bit towards the west. Sorry to confuse you. 

easily done.

4 hours ago, Jimbo2014 said:

These economic tax things are in the too hard bin.  Easier to focus on the pressing issues such as what people can wear for Songkran 

and worrying about looming thunderstorms

3 hours ago, elgordo38 said:

I think it is close to 15% in the west

Globally it's 15% with Europe average of 20% (2015). The US has no VAT but its average state & local sales tax is about 8%, the same as Switzerland's VAT.

https://taxfoundation.org/how-many-countries-world-have-value-added-tax/

The Scandinavian countries average 25% VAT!

https://taxfoundation.org/how-scandinavian-countries-pay-their-government-spending/