The Finance Ministry reasoned that the tax rate should be maintained for another two years, given the enormous flood impacts on the economy. Thailand in 2011 registered economic growth rate of only 0.1 per cent, against 7.8 per cent in the previous year. Keeping VAT at 7 per cent would spur purchasing power after the floods, to allow the normalisation of consumption and investment and stabilisation of the economy.
"The extension of 7% tax rate will spur the purchasing power, private consumption and private investment which are a key factors in economic recovery," said Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong.
Deputy Finance Minister Thanusak Lek-uthai said that last year's floods affected the labour market, as purchasing power declines. Maintaining VAT at 7 per cent for two years would hence boost the purchasing power and reduce the cost of living.
Revenue Department Director-General Satit Rangkasiri said once the economy gets back on track, the government would be able to raise tax revenue in the long term.
Earlier, Kittiratt said that though the 7 per cent rate is relatively lower than those of many other countries, the government has worked diligently in including all parties into the taxation system. One solution is to reduce the corporate tax rate, as this would discourage companies from evading all types of taxes including VAT.
Thailand imposed the 10 per cent VAT in lieu of a variety of trade-related taxes in 1992. On April 1, 1999, the tax rate was temporarily cut to 7 per cent, to ease the impacts from economic crisis. VAT is the biggest tax revenue-generating item.
According to KPMG's survey in 2007, average VAT rate in the European Union was 19.2 per cent, against 14.2 per cent in Latin American and 10.8 per cent in Asia Pacific.