“Democratisation has its costs”: Maldives comes to terms with tax reform

The Maldives is coming to terms with a reformed tax system, following the introduction of a General Goods and Services tax this week.

Finance Minister Ahmed Inaz said the new system, which has raised the eyebrows of businesses, consumers and politicians alike, is a natural consequence of recent political changes and requires everyone’s support to function sufficiently.

“I think anybody could see that after the 2005 democratic reform, costs increased. These costs had to be met by additional revenue, but they weren’t,” he said.

Currently, the Maldives’ has a state deficit of Rf1.3 billion (US$85 million). Since democratisation, the Maldivian government has surpassed other national governments’ employment rates by employing 10 percent of the national work force. One third of government spending goes to state employees, and nearly half of the 2011 budget was spent on salaries and allowances.

The Goods and Services Tax (GST), which became operative on October 2, has raised a 3.5 percent tax on certain items. Contrary to an earlier tax which was paid for at the point of import and effectively invisible to the customer, the GST requires most businesses to charge an additional 3.5 percent directly to the customer at point of sale.

Certain items are tax exempt, a detail which has allegedly made it difficult to implement at stores selling a variety of products.

Inaz is optimistic that new tax reform system will cut costs and improve business operations. He said many businesses are compliant with the new measures, and are trying “their level best to be sure that this happens.”

“Business owners will have to crunch the numbers, and that will show them more about what is happening in their businesses. They will be able to better see how things operate.”

The GST is part of a larger tax reform system described in “a package of policy reforms that will help stabilise and strengthen the Maldives’ economy” agreed to by the Maldives and the International Monetary Fund (IMF) in May.

The policy reforms include raising the Tourism Goods and Services Tax (TGST) from 3.5 percent to 6 percent from January 2012, and to 10 percent in January 2013. Tourism is one of the Maldives’ leading economic contributors.

Inaz stressed that the tax was a step towards self-sufficiency for the Maldives.

“The international community will not give us the money required to balance our deficit, it is us who have to raise that money and that’s everyone’s responsibility. We have to make sure we can stand on our own feet.”

Meanwhile, opposition party Dhivehi Rayyithunge (DRP) has expressed concern over the tax. After supporting its initial pass through Parliament, DRP released a booklet titled “DRP’s response to the government’s economic nuisance package.” The booklet said businesses were not sufficiently prepared for the transition, and requested a six month delay.

Noting “administrative confusion” and the country’s heavy reliance on imports, the DRP also suggested levying a customs duty at the entry point to the country as a more effective means of raising revenue.

“We believe the GST is a regressive expense. The government doesn’t have the infrastructure to support it, implementation of GST means it will have hire a lot of people.”

DRP Spokesperson Ibrahim ‘Mavota’ Shareef said today that the tax system had not been implemented prematurely, but that it would only benefit large businesses while harming smaller ones.

“The government is doing the opposite of what it preaches,” he said. “Our main problem with the bill is that the government has decreased the tax burden on the very rich, especially in the tourism sector. We want to see the current tax system overhauled and replaced with a modern one.”

Shareef said DRP supports other progressive taxes, and was in favor of the recently announced plan to decrease import duties starting in January 2012.

President Mohamed Nasheed yesterday said a policy to reduce import duties would bring prices down starting early next year.

The President’s Office Press Secretary Mohamed Zuhair told Minivan News that the waiving of certain import duties would be significant.

“Once the new tax system is fully operating, all will fall into place. Prices will drop to even lower than originally,” Zuhair said.

A bill to finalise the tax system is currently before the Majlis, and is expected to take another two or three months to be properly processed.

During the President’s tour of retail, grocery, and supermarket stores on October 3, Zuhair said that operations were “running smoothly”.

“The only issue was that many businesses had a shortage of coins. Maldivians have a habit of rounding up to avoid coin transfers, but in a successful economy coins are important. Maldives Inland Revenue Authority (MIRA) has been doing a commendatory job in distributing coins, and the Maldives Monetary Authority (MMA) foresaw the issue and has a distribution system in place,” he said.

When asked about the DRP’s opposition to the GST, Zuhair alleged that the party’s motives were political.

“They made their case to the President, but the President was advised by his advisors and economic experts that a taxation system needed to be implemented,” said Zuhair.

“It is true that the very rich have not been taxed appropriately as per their earnings,” he acknowledged. “Once the tax system is fully in place, things should stabilise.”

Shareef did not accept that there were political motivations behind the DRP’s objections. “It’s an economic and social issue, concerning the distribution of wealth,” he said.

Inaz did not wish to comment on the matter. “This is an economic issue,” he said.

State Minister for Finance Ahmed Assad previously observed that even with the new taxes proposed by the government, the Maldives still had the most generous tax system in the region – even compared with other island nations, and neighbouring countries such as India and Sri Lanka.


5 thoughts on ““Democratisation has its costs”: Maldives comes to terms with tax reform”

  1. I am a stout opponent of taxing the rich more, if the system is not corrupt what the rich make is legitimately their property, everyone should be taxed the same. To alleviate the the poor, there should be programs aims at distributing more to the poor.

    First get rid of the corruption, make big approval fair, and other business transactions transparent and open. Corruption in the independent commissions and Parliament should be addressed pronto.

    “Once the new tax system is fully operating, all will fall into place. Prices will drop to even lower than originally,” Zuhair said.

    Yet again one of Zuhair's gems, lol

  2. Minister Inaz is certainly right - in that the key issue was a matter of balancing the budget. The country was at a fundamental imbalance - with spending much much higher than what we were earning. Like any balance, when the lenders of the last resort (the IMF) came - they offered us three choices:

    a) Spend less dmoney
    b) Raise taxes
    c) Devalue the currency

    Initially, the Govt tried to do (a) - thinking that this was their easiest option. A political battle ensued, from which they have now come out on top. This has allowed them to do (c) and then (b).

    However, the irony of this to me is that the initial reaction from the Govt to commit to (a) must be put firmly back on the agenda. It was this very same government that told us upto 70% of all existing revenue went to fund a bunch of wasteful civil servants. Without redundancies there, would the additional money raised just go to these civil servant pockets?

  3. I support the GST but do not believe it should be implemented together with the current import duty. With the low USD ( on the international market) and high fuel prices costs are very high.

  4. When Maldivian went from sail to motorized boats we saw the same reluctance. It is always difficult for people to change their habits especially when money is involved in it. It takes time and people will understand the benefits sooner than we think. In general many support the financial reform package.

  5. The problem is not the tax itself but the way it has been done and the reason. No one with any sense of economic knowledge would increase or implement tax when the economy is in such a bad state.
    Countries who already tax, also reduce taxes or give tax benefits in such a bad time economically.
    The problem in Maldives is that during Gayoom's final years, he tanked the economy and this government has people without much knowledge making economic policies. Arif Hilmy, probably the best Finance Minister we ever had balanced the budget and he says that we do not need to tax anyone to balance the budget. We need to tighten our belts for 2 years and the economy would be in shape then.
    Yet MDP has no clue as to run a country and Zuhair is one of the most idiotic people around and he spouts all nonsense all the time. His so called advisors are from the British Conservative Party who still lives in the days of Margaret Thatcher. They sold all the National Assets like the British Rail, British Gas, the Airports etc and now it is in such a shape there are talks of nationalising these back.
    Maldives would go down the same route.

    DRP talks sense on the economy and it is a pity that this is the only thing they are sensible about.


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