VAT to stay at seven percent for a while longer

With a faltering economy and economic growth expected to be less than the original four percent forecast previously, the Finance Ministry has now flagged the likelihood of the Value Added Tax (VAT) rate remaining at its current seven percent rate.

Officials from the Finance Ministry had previously suggested VAT would be raised by a minimum of one percent during the 2015 fiscal year in order to provide added funds to cover the government’s planned budget deficit. The current seven percent VAT rate is due to expire on 30 September this year.

The problem the Finance Ministry, and by extension, the military-installed government, has found, is that the private sector has raised serious concerns and objections to any rise in VAT, arguing that any increase would serve to further weaken what is already tepid domestic consumption.

VAT was first introduced in 1992, at a rate of 10 percent. Yet business at the time asked for it to be reduced as it was considered too high, and the-then technocratic Anand Panyacharun government acceded to this request.

With the land and buildings tax put on hold, the prime minister Prayuth Chan-ocha recently said it would be necessary to raise VAT in order to make up the shortfall.

In February the Finance Ministry gave the Revenue Department approval to cut its collection target from 197 billion baht to 160 billion baht due to falling oil prices, reduced earnings from large corporations and falling import duties.

The Finance Ministry currently faces a serious problem in the search for ways to expand and increase the revenue it needs to cover the major public infrastructure spending plans proposed by the government. The slow pace of global recovery as well as large household debt in Thailand has proved a double-edged income sword for revenue collection.

In further efforts to kick-start economic recovery, the Fiscal Policy Office (FPO) has floated a plan to reduce withholding tax on service fees from three to two percent. This would, the FPO believes, aid in spurring private sector spending.

Coming on the back of previous reductions in corporate and personal income taxes, the reduced withholding tax rate would be expected to encourage spending as taxpayers liquidity would be boosted.

Withholding tax paid by individual taxpayers on service fees totaled 270 billion baht in 2013, while personal income tax amounted to 299 billion baht. So, a 33 percent reduction in the withholding tax rate could prove to be a major spur to discretionary spending.

By comparison, withholding tax paid by corporations in 2013 totalled 143 billion baht, while corporate tax reached 592 billion baht.