Policymakers urge slow VAT hike to 10%

ECONOMY / TAXATION

Policymakers urge slow VAT hike to 10%

WICHIT CHANTANUSORNSIRI

Value-added taxes should be gradually increased to 10%, according to the Fiscal Policy Office.

The FPO, which is currently reviewing a sweeping overhaul of the country's tax system, proposes that VAT rates should be increased by one percentage point per year from the current 7% to the full 10% limit permitted under the law.

Thailand last used a 10% VAT rate in the midst of the 1997 economic crisis, when the Chavalit Yongchaiyudh government hiked rates to raise fiscal revenues at the urging of the International Monetary Fund.

The rate increase, however, helped worsen the economic recession, eventually leading to rates being rolled back to 7%.

Since the 1997 crisis, successive governments have maintained the VAT rate at 7%, despite the legal leeway to set the rate as high as 10%.

The FPO says that the timing of any rate increases would depend on overall economic conditions.

The new tax regime would also feature a decline in personal tax rates under the principle that a lower tax burden would help increase the tax base and reduce evasion.

Personal income taxes are now based on a progressive scale, with the first 100,000 baht in annual income free from taxes, and income from 100,000 to 500,000 baht taxed at 10%.

The rate is 20% for income from 500,000 to one million baht, 30% on one million to four million baht, and 37% on income over four million.

While only 1% of Thailand's estimated eight million individual taxpayers pay taxes in the 37% bracket, this segment accounts for 37% of total personal income tax revenues.

The 2% of the tax base with annual income of more than one million baht and with liabilities in the 30% bracket accounts for 34% of total personal income tax revenues.

FPO officials said the revised tax brackets would help reduce overall tax liability for middle-class workers, with the maximum rate reduced to 32.5%.

Corporate income taxes, meanwhile, are also set to be cut from the current 30% rate to 25% to help increase the competitiveness of the private sector, given that rates in many neighbouring countries are lower than Thailand's.

Under the new tax structure, the base rate would be reduced to 25%, while existing incentives for newly listed companies in the stock market would be eliminated.

For several years, the government has allowed companies entering the Stock Exchange of Thailand to pay 25% corporate taxes for three accounting periods, with new Market for Alternative Investment companies pay just 20%.

FPO officials said the new tax rates would still allow the country's budget position to return to balance within two years.

Thailand maintained budget deficits from 1997 to 2005. After two years of balanced budgets, the fiscal 2007 budget showed a deficit of 146.2 billion baht, with the deficit rising to 165 billion in the current 2008 budget.