Playing with taxes could prove costly
- 21 Mar 2017 at 04:25
- WRITER: SURANAND VEJJAJIVA
In a public appearance at Prachin Buri on March 9, Prime Minister Prayut Chan-o-cha floated a trial balloon of raising the VAT by 1% through national sacrifice, but he failed to sell the idea. (Photo courtesy Government House)
' In this world nothing can be said to be certain, except death and taxes," Benjamin Franklin once wrote. However, as the Reaper is sure to collect the dead, governments may not always be able to do the same with taxes.
Prime Minister Prayut Chan-o-cha tested the waters two weeks ago to gauge public reaction to a government idea to raise Value Added Tax (VAT) from 7% to 8%. Met with an outcry, he backed down the very next day, mumbling in denial that he had never said such a thing. The 7% rate is seen a burden enough for consumers during the current economic doldrums.
To be fair, Gen Prayut's idea may have validity. Since Thailand adopted VAT in 1992, the rate has always been a sore point for debate. From the beginning, the rate was set at 10%. And it was easy to calculate. And with future economic growth fairly predictable during that time, the flow of revenue was seen as being enough to cover government expenditures for decades to come.
But politicians, eager to please voters, later reduced the rate to 7% through a special royal decree passed by every government. The 7% rate, thus, has become the norm (except during a few months when the International Monetary Fund [IMF] took the reins after the 1997 Tom Yum Kung economic crisis and forced Thailand to raise VAT to 10%). Since then, no government has dared return to the original plan.
Suranand Vejjajiva was secretary-general to the prime minister during the Yingluck Shinawatra government and is now a political analyst.
The government depends mostly on VAT for state revenue. The dwindling excise duties and custom tariffs due to the changing nature of the economy and free-trade agreements shift collectible taxes to a consumption tax system. Few can avoid paying VAT since it is ingrained in every transaction that occurs.
Corporate income tax foots the other bills for governments, while the base rate for personal income tax is small in Thailand.
But government expenditure programmes are expansionary. The current military government has been running a budget deficit: 250 billion baht for the fiscal year 2015, 390 billion for 2016 plus an extra mid-year special budget of 130 billion baht and 390 billion for 2017. The deficit for the next fiscal year, 2018, is expected to reach 450 billion baht.
No wonder Gen Prayut had to look for more revenue. It is estimated that an VAT increase of 1% could bring in around 100 billion baht.
But when floating the idea of a VAT hike, Gen Prayut never tried to provide a rationale for it, and his economic team leaders, Deputy Prime Minister Somkid Jatusripitak and Finance Minister Apisak Tantivorawong, didn't voice their support.
So maybe the prime minister is on his own in this matter, probably having listened to advice from technocrats as he oversees the Bureau of the Budget himself and is in the process of formulating next year's fiscal expenditure budget.
The military regime has been in conflict with its own rhetoric. Gen Prayut seized power from an elected government on the premise that elected politicians have abused spending on populist projects and programmes without regard to fiscal or monetary responsibility. But his government has gone about doing the same. Various stimulus packages were implemented. Waste and budget loopholes remain.
Even worse, military spending has increased. Large schemes such as the planned purchases of three submarines, at a total cost of 36 billion baht excluding support facilities, are questionable. The military is ramming them through against public furore anyway. They will appear in the next fiscal budget.
Although it is conceivable Thailand may eventually need to raise VAT to 10%, either incrementally or at one time, this or the next government needs to do more homework.
Before more spending is sanctioned, waste must be cut. The Thai bureaucracy is full of divisions and departments with programmes and projects that are remnants of pet projects of past and present governments. Many outlast their uses and are not in sync with the changing world. Red tape hinders development and becomes the basis for corruption. They must be streamlined. Loopholes must be closed. Budgets reallocated. Money saved.
At the same time, programmes must be explained to the public in detail. The regime itself has indicated politicians must provide financial and budgetary plans for their promised policies and programmes during election campaigns.
However, the military regime is drafting a 20-year strategic plan which includes every kind of shopping list under the sun, without presenting any financial plan or consideration of constraints.
Even more questionable is legitimacy. Who has authorised the regime to commit to a plan that will allocate taxpayers money for the next 20 years?
More recently, Gen Prayut has called for reform of the tax system. But it is not the comprehensive tax reform the country needs. This one is specifically related to the alleged tax evasion tactics of former prime minister Thaksin Shinawatra.
The government and the National Legislative Assembly must tread very carefully. Tax loopholes always exist. Each specific tax, or tax exemption, is designed for different purposes. For example, the capital gains tax is not enforced in Thailand to encourage trading and retaining positions in the stock market. A smart businessman with a good tax lawyer finds ways to get around this to take advantage of the system. It is not illegal, and may not even be an unethical one -- from a business point of view.
If the government wants to use Thaksin's sale of Shin Corp stocks in a political game, then that is another matter. But law enforcement must be equal and fair. Since the leak of the Panama Papers in which many prominent Thais appeared on a list of those using offshore facilities, has the government pursued any leads? Deputy Prime Minister Wissanu Krea-ngam's "miracle of law" should be applied equally to everyone.
If tax is a certainty, but programmes to spend taxpayers' money are murky and law enforcement is discriminatory, a tax revolt is likely. Who will be the dead casualty? One must ask the Reaper.
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