Dilemma over how to widen tax base

As soon as the Finance Ministry decided to test the water by indicating its intention to raise the value-added tax rate and cancel tax allowance for long-term mutual funds, most of the concerned parties quickly voiced their objections.

Prime Minister Abhisit Vejjajiva, himself, ruled out any possibility of raising VAT from 7 per cent to 8 per cent in the near future.

Business leaders also rallied behind Abhisit, fearing the adverse impact on consumer and investor confidence amid the fragile economic recovery.

Fund managers also expressed their opposition to the idea of cutting tax allowance for those who invest in long-term mutual funds, arguing it could affect capital market development.

Yet, Abhisit apparently agreed that some tax allowances, which benefit rich individuals, should be scrapped.

So it is likely that some allowances currently given to tax payers may be scrapped, probably in the next six months, the period Abhisit has given the Finance Ministry to study the tax restructuring.

Economists and tax experts at the Finance Ministry have shared the idea that the country needs to expand its tax base due to the relatively low tax revenue to gross domestic product (GDP) ratio of about 16 to 18 per cent.

According to the study by the Thailand Development Research Institute (TDRI), revenue from indirect taxes such as VAT, tax on consumption, was about 9 per cent of GDP and revenue from direct tax such as personal income tax and corporate income tax was about 8 per cent in 2008.

The researchers led by Somchai Jitsuchon found that only 24 per cent of the labour force paid personal income tax in 2008, or about 9 million people. While tax officials at the Finance Ministry said the annual tax filings are about 9 million, the number of actual tax payers is only 3 million. Few people pay tax because many of them work in informal sectors and the other factor is that they have low income.

For personal income tax, although there are progressive tax rates ranging from 10 per cent to 37 per cent of taxable income, the study found that the effective tax rate in 2008 was only 4.5 per cent of income. This was caused by large tax exemptions. This has given rise to the idea to cancel some tax allowances given to individuals. The existing tax allowances include personal exemption, tax deduction for a married couple, allowance for raising children and looking after the elderly. Contributions to social security fund, mortgage interest rate payment, life insurance premium, are also tax deductable.

The Finance Ministry is also considering whether to cut corporate income tax from 30 per cent to between 22 to 25 per cent of profits.

Business leaders have strongly supported corporate tax cuts, arguing it would reduce their production cost and the current corporate tax rate is relatively high compared with rates in competitor countries.

Winai Wittawatkaravet, director-general of the Revenue Department, said that if the government cuts corporate tax, it would also need to cut personal income tax rates, otherwise people would try to evade tax payment.

The TDRI study found that large firms pay less tax than small firms, relative to their incomes. This situation is because large firms receive more tax deductions from the Revenue Department and also get more tax privileges from Board of Investment (BOI).

Abhisit, who chairs the BOI, will find it hard to lower or eliminate existing tax privileges given to large firms as he wants to attract foreign direct investment as well as investment from large local firms.

The BOI's tax privileges also lead to lower tariff revenue collected by Customs Department. The TDRI study found that Bt1.23 trillion worth of imported goods imported in 2008 got tariff waiver from the BOI. If there were no BOI privileges, Customs would have collected tariff of Bt60 billion.

Importers, meanwhile, complain about customs officials' arbitrariness in judging tariff rates for some imported items.

However, tax officials and policy-makers recognise the declining trend in tariff revenue due to free trade agreements.

Some suggested an increase in excise-tax rates to offset revenue lost by free trade agreements. There is also another reason to restructure excise tax: protecting environment.

Tax officials have already submitted to Finance Minister Korn Chatikavanij the pollution tax bill designed to collect tax from those who discharge untreated water into public river, pollute the air or dump toxic garbage.

The Excise Department, under the new tax bill, is assigned to collect water pollution tax. The tax bill will also allow the Revenue Department, Customs Department and local governments to collect other pollution taxes.

Korn is expected to forward the bill to the Cabinet for approval this year.

The Fiscal Policy Office also aims to reform the beer and liquor tax.

Deputy Finance Minister Man Patanothai said recently that officials had not decided whether to collect tax based on alcohol content or on prices.

TDRI's researchers argue that the existing high excise tax rate on imported beer and liquor was the major cause of widespread tax evasion. They also said the government might get lower tax revenue than it should, as consumers might turn to low-quality alcoholic drinks with high alcohol content but lower prices.

A tax on wealth is probably the hardest to introduce. Currently, the property-tax bill, tax on house and land, is pending with the State Council, the government's legal adviser. Economists have for long also urged every government to introduce a tax on inheritance but no government has done it.

Income generated from wealth is largely free from taxation, according to TDRI's study.

The Finance Ministry wants to hike VAT, because it is easy to collect as everyone has to pay the tax when buying goods or services. However, there is a hot debate between those in favour of a VAT rate hike and those opposing it.

Those who favour a VAT rate hike argue that the 7-per-cent rate is too low and the burden would be more on the rich due to their higher spending on consumption. While those who object, argue that the poor will be paying higher VAT relative to their income, so it is unfair to them if the government relies too much on VAT revenue.

Deputy Finance Minister Pradit Pataraprasit said yesterday the Finance Ministry has completed its tax study. He said the ministry was waiting to discuss the tax restructuring with the prime minister.

He said the government has to prepare to collect more taxes to finance public investment. The current routine spending will increase to Bt2 trillion annually in 2015. Without additional revenue, the government will have no money for capital spending or public investment, he said.

He also said the government would need to cut corporate income tax to increase the country's competitiveness. However, a percentage point tax cut would result in revenue loss of about Bt15 billion. So the government has to increase other taxes to offset lower revenue from corporate tax, he said.

"Personally, I don't think the government will increase tax as it is unpopular among voters," he added.