NCPO treads carefully on taxes

The direction of the country’s tax reform plan remains inconclusive, as any changes to it are likely to affect the popularity of the National Council for Peace and Order (NCPO), either positively or negatively.

Tax reform has been at the top of the NCPO’s agenda ever since the May 22 takeover. Early last month the junta ordered the Finance Ministry to formulate a tax reform plan within a month. But the regime has not yet decided which direction it was likely to take — Thais have long been influenced by populist policies, so any adjustments will almost certainly affect their acceptance of the junta.

Some NCPO advisers favour imposing wealth, land and inheritance taxes while curbing tax incentives given to investors in long-term equity funds, but the NCPO has yet to decided on the specifics of any tax reform.

However, the NCPO is likely to find some way of easing tax collection for small and medium-sized enterprises (SMEs) in order to help them stay competitive. Recent proposals have included that the first 300,000 baht in SME revenue be tax-free and 300,001 to 1 million baht be taxed at 15%.

Corporate income tax used to stand at 30%, while SMEs paid 20-25%. But the corporate income tax has now been reduced to 20%, which somewhat dampens the competitiveness of SMEs.

A Finance Ministry source admitted the NCPO was being cautious about its tax reform plans, particularly any adjustments that might place a higher tax burden on taxpayers. Hence, the tax reform plan is leaning towards easing rather than increasing taxpayers’ burden.

“Any reform plan is likely to be carried out by the new government that will be set up by the NCPO,” the source said.

The military regime has already laid out some guidelines for the reform — it must not raise the burden of low-income earners but foster fairness in the system, increase the responsibility of large business operators, address weaknesses in the existing tax system and meet government revenue collection targets.

The ministry source said in the 17 fiscal years from 1998-2014, the government has run a budget deficit in 14 of them including the latest one. Reasons are continued rises in government expenditure and state investment in the country’s development, all of this without tax revenue collection keeping pace.

It is hard to anticipate if, when and how the seemingly endless budget deficit will take the country’s economy into a crisis. But if the government’s economic policies head in the wrong direction, create an economic bubble and offer no immediate measures to curb it, then the economy could enter into crisis.

A serious contraction in exports would also send the country into deficit, which could cause a twin deficit in the economy, meaning deficits in both the current account and fiscal budget. The situation could induce ratings agencies to reduce the government’s credit rating, which would push up the country’s overall costs.

Lengthy deficits have long been a chronic problem, one not seriously addressed or resolved, as no government has revised up the tax structure in order to increase tax revenue and thereby resolve the deficits. For many years  now, most governments have implemented populist policies that greatly boosted its expenditure.

No government has dared to increase value-added tax (VAT), which has been kept at 7% for years despite analysts suggesting a ceiling of 10%. Additionally, a land tax, particularly on wealthy individuals hoarding land for speculation, has been continuously suggested, albeit cautiously, by the Finance Ministry for the past 20 years.

Last week, the NCPO announced it would extend the current VAT rate of 7% until Oct 1, 2015. The Finance Ministry source said ending populist policies completely might be tough due to the large inequality gap between rich and poor that exists in this country. The Fiscal Policy Office (FPO) has proposed the idea of implementing a negative income tax by benchmarking the country’s poverty line. Reform of the tax system could also include a restructuring of the various tax collection departments, with policymakers, the FPO and the Revenue Department studying ways to design a new semi-autonomous revenue agency.

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