Tax reforms a test of government’s political will

Concerned state agencies have been asked to urgently consider tax reforms to enhance state revenue collection, Finance Minister Pichai Chunhavachira revealed recently.

The tax reforms may include reducing the corporate tax rate from 20 to 15 per cent, aiming to make Thailand competitive with the rest of the world. Many other countries have already made the adjustments under the guidelines of global minimum tax.

Pichai, who is also a deputy prime minister, suggested that the government may need to increase consumption tax as Thailand's value-added tax (VAT) rate is 7 per cent, while the law stipulates that it can be increased to 10 per cent, as compared to 15-25 per cent in the rest of the world.

“This means we are collecting too little consumption tax. This matter must be considered carefully and gradually. We are listening to opinions from all sections of society,” he said.

As examples, he said China collects VAT at 19 per cent, Singapore at 9 per cent, while many countries collect almost 20 per cent.

“If we levy a low VAT rate, everyone pays less, but the money sent back to the government will be limited. If we collect a higher rate, the amount of money used in the government's annual budget will be larger,” he explained.

This extra tax money will be spent to support low-income groups through various measures, such as healthcare and education, to give low-income people opportunities, and to create competitiveness for the private sector by developing infrastructure and lowering private costs, he said.

Strong opposition to VAT hike

Pichai’s proposal on tax reforms, in particular raising the VAT rate, is encountering strong opposition from the private sector.

Sanan Angubolkul, chairman of the Thai Chamber of Commerce and the Board of Trade of Thailand, argued that the Thai economy has been stuck in a rut of sluggish growth of less than 2 per cent for years, so this was not the right time to hike VAT.

The government needs to consult with the private sector on whether to increase VAT to 10 per cent or 15 per cent, about its impact on people and businesses. The VAT hike would potentially also encourage more people to evade tax payment, he said.

“Currently, the government has not been collecting VAT from a large number of businesses as they are out of the VAT system, especially small and medium-sized enterprises [SMEs], and a higher rate may encourage more businesses to evade tax payment,” he warned.

He suggested that the government encourage businesses to join the VAT system and boost economic growth to 5 per cent annually and redistribute the income to the people, then a hike in tax would be welcome.

Saengchai Thirakulvanich, president of the Federation of Thai SMEs, shared Sanan’s view. He said this was not the right time to raise VAT because of slow economic growth, high household debt and high debts of SMEs.

“The best option for the government is to widen the tax base to include underground businesses, such as illegal activities or proxies of foreigners, which would increase government revenue,” he said.

Somchai Jitsuchon, research director at the Thailand Development Research Institute, a leading independent think-tank, said the government should increase VAT gradually, targeting a 10 per cent rate over a five-year period.

The government should not inform the public in advance, as that would increase inflationary expectations.

Somchai has been an advocate of a VAT hike for a long time and suggested earmarking the extra tax collection for social welfare purposes.

He said he did not agree with the idea of the government implementing a flat rate for personal income tax, because it would not narrow the gap between the rich and the poor.

The government should remove some of the tax allowances for higher income groups and could introduce a flat rate for dividend payment and interest rate to make tax collection easier.

If the government wants to cut corporate income tax to 15 per cent, it should cancel tax privileges granted by the Board of Investment’s incentives to attract foreign direct investment.

This would create a level playing field for various industries, he said. Instead, the government should provide support for skill development of labour and deregulation that would curb corruption. He also advocates more taxes on wealth, such as introducing capital gains and windfall taxes.

Somchai added that the tax reforms proposed by the finance minister were necessary due to the country’s stagnant tax revenue and most importantly the government needs to expand its wealth tax base.

Pichai plays down VAT hike fears

Faced with strong opposition, Pichai later explained that the government was just exploring the idea of increasing VAT by more than 7 per cent. It will take time to study the pros and cons because it affects people’s lives, he said.

“We have to look at the overall picture, study it and inform people what the global trend is,” he said.

Sensing public anxiety about a possible VAT hike, Prime Minister Paetongtarn Shinawatra joined the debate and assured the people that VAT would not be raised to 15 per cent.

“There’s no plan to hike VAT to 15 per cent. The Finance Ministry is exploring tax reform, which will have to take into account every dimension in order to make the tax just and to reduce inequality and increase the country’s competitiveness,” she posted on her Facebook page “Ing Shinawatra” after she met with Pichai and her advisers to discuss the issue.

She added that the tax hike would be gradual and reminded people that tax reforms in some countries had taken 10 years to implement.

World Bank urges comprehensive tax reforms

The World Bank has long suggested that Thailand needs to implement tax reforms.

“Revenues have remained stable at relatively low levels through much of the last two decades. Averaging around 16 per cent of GDP, Thailand’s tax revenue is low by the standards of upper middle-income countries, as well as regional and OECD [Organisation of Economic Cooperation and Development] comparators,” according to the World Bank report on Thailand’s public revenue and spending assessment in June 2023.

Thailand has a sizable structural ‘tax gap’ – the difference between tax collection capacity based on the performance of peers at a similar income level and actual tax revenue – estimated at 5.6 per cent of GDP.

While VAT collection efficiency is high, the current VAT rate at 7 per cent is well below the regional average of 11 per cent and the world average of nearly 16 per cent.

Personal income tax collection in Thailand is also well below cross-country benchmarks. Despite relatively low tax-free thresholds, only about 30 per cent of the labour force pays personal income tax, well below the levels of peer countries, suggesting low compliance rates.

The World Bank suggested that the tax gap could be narrowed by pursuing reforms: Adjusting the VAT rate and exemptions; broadening the personal income tax base and streamlining allowances; improving tax compliance on e-commerce; and expanding property tax collection.

By implementing these measures at a gradual pace over the remainder of the decade, revenue would increase to 24.3 per cent of GDP by 2030 from 20.9 per cent in the baseline scenario.

Among the proposed reforms, several of them could be implemented relatively quickly from a technical perspective, including increasing the VAT rate, streamlining VAT exemptions, and rationalizing personal income tax allowances.

Other reforms – such as broadening the personal income tax base, and increasing property tax collections – are likely to take longer, as they require changes to slower-moving variables such as compliance and informality rates, or improvements in administrative capacity, according to the World Bank.