11 July 2024

COVID-19 has dealt a double blow to Thailand’s finances, reducing tax revenue while increasing the amount of money the government must spend to keep the economy afloat.

The Cabinet recently called on the Finance Ministry to study how tax revenue can be boosted, leading to speculation that value-added tax (VAT) may be hiked in the near future.

However, Finance Minister Arkhom Termpittayapaisith has insisted that the government will not raise the VAT rate for now.

The Revenue Department’s job

No major tax reforms have taken place since VAT replaced business tax (BT) in 1992. The government set VAT at 10 percent but eventually settled for 7 percent.

However, during the 1997 Asian financial crisis, the International Monetary Fund (IMF) forced the Thai government to hike VAT to 10 percent from August 16, 1997 to March 31, 1999.

The IMF’s aim was to strengthen Thailand’s financial position, but instead, the tax hike deepened the economic downturn. Eventually, the IMF was blamed for prescribing the wrong medicine for Thailand, and VAT was cut back to 7 percent.

Since then, the rate has remained unchanged. But given VAT represents more than 30 percent of the country’s annual tax revenue, raising the rate would significantly boost government income.

Impact on consumers

A Fiscal Policy Office study on the impact of VAT showed that low-income families shoulder a higher tax burden compared to high-income families. This is because poor families end up spending more on basic necessities in proportion to their earnings.

However, when calculated from the spending viewpoint, high-income families shoulder a higher tax burden because their overall consumption of goods and services is much greater.

VAT is not charged on necessities like unprocessed agricultural products, fruits, vegetables, public transport, education, healthcare and professional services.

The best time to hike VAT

Somchai Jitsuchon, a director at Thailand Development Research Institute (TDRI), agrees with the government that VAT should not be raised this year. Instead, VAT can be increased once the economy recovers from the impact of COVID-19, when the government can explain to people that the extra revenue will be spent on strengthening social welfare for the poor.

Few people, businesses pay taxes

Of Thailand’s 66 million people, only 4 million actually pay annual personal income tax, with rates varying from 5 to 35 percent according to their income. These rates are high compared to corporate tax, which stands at 15 percent and 20 percent for small and large firms respectively.

A former Finance Ministry senior official said the different rates encourage people to avoid paying personal tax, for instance by creating shell companies where they shift their income in order to pay lower taxes.

“High-income earners with yearly income above Bt5 million have no incentive to pay 35 percent in personal income tax when corporate tax is just 20 percent,” the source said.

He also suggested that the Revenue Department reduce tax allowances for corporations and get them to pay more taxes.

From September, the Revenue Department will enforce an e-services tax on global online platforms selling goods and services to Thailand residents. However, this is expected to generate only about Bt5 billion annually.

In response to pressure to collect more taxes, Revenue Department director-general Ekniti Nitithanprapas said the department is trying to increase justice in the system so that more people and corporations pay taxes.

Expanding the tax base in this way would benefit the individuals and corporations who already pay tax, he added.

He also plans to expand the corporate income tax base from 460,000 to 600,000 businesses.


Option of hiking excise tax

There also is room to collect more “sin tax”. The department’s investigation of taxes on wine indicates that importers are declaring unrealistically low prices to cut their excise tax bills, said Lavaron Sangsnit, director-general of the Excise Department.

However, hiking tax on cigarettes would only encourage smokers to shift to rolling tobacco, he said.

Meanwhile, raising tariffs on imported goods would not be possible under the many free-trade agreements Thailand has with other countries.

Should privileges be scrapped?

Many people have suggested that tax privileges offered by the Board of Investment (BoI) should be dropped. Tax cuts offered to lure foreign investors have long been a subject for debate. Those who say these incentives should be scrapped argue that they cause significant losses in tax revenue. They also say that granting large foreign corporations tax breaks is unfair on local small- and medium-sized enterprises, who get no tax breaks.

Also, tax breaks are often not the first thing foreign companies look for when seeking investment opportunities.

According to the World Bank’s global investment competitiveness report 2019/2020, parent companies base their investment decisions on political stability, macroeconomic stability, legal and regulatory environment and talent and skills, in that order – with low taxes coming in last.

For years, Thailand has run a fiscal deficit due to slow economic growth after the 1997 financial crisis coupled with a steep rise in expenditure on social welfare.

Last year, the COVID fallout forced the government to borrow an extra Bt1 trillion to finance relief schemes.

The government’s total revenue, including income from state enterprises, dropped to Bt2.4 trillion or 6.7 percent in the fiscal year of 2020 (October 2019 to September 2020) from the previous fiscal year, missing its revenue target by 12.3 percent.

Revenue was below the expenditure set at Bt3.2 trillion for the 2020 fiscal year.

Meanwhile, revenue in the first five months of the current fiscal year has dropped 14.7 percent to Bt842 billion compared to the same period of last year, missing the target by 11.1 percent.

Accumulated public debt, meanwhile, is now approaching 60 percent of gross domestic product (GDP) identified as the threshold for fiscal sustainability.

No surprise, then, that Finance Ministry permanent secretary Krisada Chinavicharana has insisted that tax restructuring is necessary to boost government revenue.

By Thai PBS World’s Business Desk