The Maldives Association of Tourism Industry (MATI) has declared its support for the government’s economic reform programme and the introduction of direct taxation.
In a press statement yesterday, the association of industry leaders noted that the absence of a taxation system in the country “similar to tax regimes successfully implemented in other countries” was a serious impediment to development and economic growth.
“The introduction of such a taxation system to the Maldives is long overdue,” MATI said in its statement.
As the enactment of direct taxation would increase state revenue and reduce government borrowing from banks, “this association believes that banks lending to private businesses will increase and job opportunities will be created.”
“This association believes that as a result of [the economic reforms], economic growth will quicken and challenges faced by the Maldives tourism industry will be solved,” the statement reads.
MATI warned that “it is certain” that if state revenue was not increased “with immediate effect” the domestic economy would be adversely affected.
The statement of support from MATI comes after the Tourism Ministry last week condemned “misleading statements in the media” by the organisation about the government’s proposed economic reforms.
The Tourism Ministry claimed that “MATI’s misleading statements in various media recently about the tax bills of the government’s economic reform agenda imply that the government’s efforts were undertaken without consulting officials from the tourism industry.”
The Ministry said it had “consulted a number of parties active in the tourism sector and sought advice for shaping the tax bills so that it would not be a disproportionate burden on the industry.”
“After these consultations, the Ministry is assured that businesses in the tourism industry support the reform agenda. Likewise, those in the front ranks of the tourism industry as well as MATI support it. Therefore, [the ministry] regrets an organisation like MATI making statements that are contrary to the advice and suggestions of senior industry leaders.”
President Mohamed Nasheed has meanwhile welcomed MATI’s support for the government’s fiscal and economic reform plans.
“The President believes that the fact that MATI agreed to fully support the government in its economic reform programmes, after deliberations between MATI and the government, is a sign that they support the measures taken by the government to improve the state of the Maldivian economy and increase the state’s income,” reads a statement from the President’s Office today.
Following consultations with the government, MATI proposed a series of recommendations on the new taxes.
In its comments on the proposed legislation – obtained by Minivan News – MATI stressed the need to educate the public and ease in the taxes gradually.
“There is a need to study the effects of the combined burden of having to pay all these taxes on those affected,” the association noted.
On the introduction of a five percent General Goods and Services Tax, despite the successful introduction of a Tourism Goods and Services Tax (T-GST) in January this year, MATI noted that “T-GST was collected from a highly regulated sector of the economy. The same cannot be said of the other sectors of the economy or of the general public who would end up paying this tax.”
MATI argued that the GST could stoke inflationary pressures, urging “careful study of the effects of GST on the economy.”
“For the tourism industry – Costs of local purchases will go up by the GST amount or more. Direct imports will increase in order to avoid GST. Resorts will have to pay both T-GST & GST,” MATI noted. “Confusion will arise due to different rates being applied. In view of this it is suggested that eventually the two taxes should merge into one GST.”
The organisation also recommended delaying the introduction of a private income tax (PIT) to January 2013 to establish a regulatory framework and raise public awareness.
The organisation contended that the progressive income tax rates – from 3 percent to 15 percent for incomes above Rf30,000 (US$1,900) – were “especially targeted at the very rich.”
“Under the proposal, people earning one million rupees per year will pay about 2.8% of their income as PIT, whereas a person earning MRF10 Million per year will pay about 13.25% of the income as PIT,” it noted.
Moreover, MATI urged that plans to raise the current 3.5 percent T-GST to 6 percent in January 2012 and 10 percent in January 2013 be scrapped in favour of retaining the current rate until a recommended hike to 7 percent in January 2013.
“Tourism industry is already paying a lot to the Government and therefore, we urge the Government to give the industry a breathing space to help the industry revive from low occupancy, heavy operating costs and the economic chaos caused by recent financial crisis in Europe,” MATI said, cautioning against high taxes leading to the Maldives becoming “an even more expensive destination.”
MATI further noted that the taxes were “especially heavy on the tourism industry and will result in a very negative impact on the industry.”
“Tourism will cease to be an attractive industry to invest in. As a result, new investments will be slowed. Proposals to banks to borrow will not look that attractive any more. Bank lending to this sector will become more and more selective. This is not what we like to see in this country,” MATI stated. “Finally, should we continue to ‘milk the cow dry’? Certainly not is the answer.”
President Mohamed Nasheed responded to MATI’s recommendations in a letter yesterday, expressing the government’s gratitude for the comments.
“The purpose of these reforms are to set in place the foundation needed to build a strong and modern economy befitting the Maldives’ status as a middle-income country, and to enable the state to provide the necessary services that the people of this country expects,” the letter reads. “In addition to the tax reforms that will allow for a sustainable revenue base, the government’s programme include important reforms such as facilitating the ease of doing business and strengthening property rights.”
On the recommendations by MATI, the President’s letter noted that “the government is agreeable to reduce the proposed rate of tourist sector GST to become effective from January 2013 to 8 percent from the current proposed rate of 10 percent.”
The government was also “agreeable” to MATI’s proposals on capital allowance, pension payments and deducting interest payments from banks and other financial institutions in full, the President’s letter states.
On the impact of the taxes on the economy, the letter notes that “studies have shown that proposed tax rates are lower than those in other island economies and thus will not have an overbearing effect.”
Addressing skepticism of balancing the state budget with the new revenue sources, President Nasheed said that “the revenue impact on the proposed taxes will bring income up to a level where necessary expenditures can be met and lead to a balanced budget in 2015.”