VAT rate reversion postponed again - but we need a more stimulating tax story

The current reduced rate was set to expire in October of this year. This is the latest in a series of extensions dating back several years. The motivation for postponing the increase appears to be a concern over potential drag on the economy during the post-flood recovery period.  

As an example of the potential impact on tax collections resulting from discontinuance of the current reduced rate and reversion to the statutory rate of 10 per cent, if the 10 per cent VAT rate had been in effect in 2011 the government could have collected approximately Bt248 billion in additional tax revenue, based on Revenue Department figures. The MoF has asserted and the Cabinet has agreed that allowing the reduced rate to expire at this time could have a negative impact on consumption and investment and potentially slow the current economic recovery. Thus, the decision to extend the reduced rate until 2014 has been taken. This could put the government in a tight spot as the current rates on corporate income taxes (CIT) have been reduced significantly from 30 to 23 per cent this year and to 20 per cent for tax years 2013 and 2014, and presumably beyond. 

The reduction in corporate tax rates will have a significant impact on revenue collections in 2012 and beyond. Using 2011 revenue collections as an example, the rate reduction from 30 to 23 per cent would have reduced corporate income tax collections to approximately Bt440 billion, a decrease of about Bt133 billion. Reversion to the 10 per cent VAT rate could result in collections that nearly doubled the revenue lost to the CIT rate reduction. It even seems as though the increased collections from a reversion to the 10 per cent VAT rate could make up not only for a reduction in the CIT rate but may also cover any revenue lost from eliminating both stamp duty taxes (SDT) and the Specific Business Tax (SBT).

The SDT is a tax on documents that evidence certain types of transactions over a specified amount. The origins of the SDT are fairly dubious. The story behind their initial adoption in the Netherlands, Denmark and the UK in the 1600s is that these governments were in need of funds to support wars with other European states. These three countries have since almost entirely abolished the tax and there are currently calls in the UK for its complete elimination.

Thailand still imposes SDT but it is considered by most taxpayers to be fairly insignificant – an administrative nuisance and a potential trap for the uninformed. From the government’s perspective the revenue collected from SDT is also fairly insignificant, accounting for less than 1 per cent of tax collected in 2011. The administrative burden on taxpayers combined with the relatively small amount of tax collected argues in favour of SDT’s discontinuance. If there had been no SDT in 2011, the government would have only suffered a reduction in collections of about Bt10 billion. 

A second tax that could be eliminated is the SBT, a tax imposed on certain types of businesses, such as banking, insurance and real estate dealing, where imposition of VAT has been considered difficult. In 2011, the collections from SBT were only 2.36 per cent of total tax collections and amounted to Bt36 billion. While this amount seems large, it is minuscule in comparison to the overall amount of tax collected from VAT in 2011 of Bt578 billion. Again, this amount is easily made up through the increase in the VAT rate. 

Elimination of the SBT on these types of transactions could result in increased access to capital and investment for Thai businesses and individuals who bear the weight of this pass-through tax. The lower tax costs would encourage investment in Thailand by providing higher rates of return on such investments.

By agreeing to extend the “temporary” reductions in the VAT rate to October 2014, the MoF and Cabinet have considered the impact on the Thai economy and the economic recovery. They would do well to also consider the positive impact on the economy of abolishing the SDT and SBT. If these two taxes were abolished at the same time the reduction in VAT expires, then the reduction in tax collections from their elimination should be more than offset by increased VAT collections, and the positive impact on business and investment could be stimulative indeed.

 

This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.

 

Jonathan Blaine is associate principal at KPMG Thailand.