Three years of wasted opportunity for tax reform
“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.
