Majlis committee recommends changes to tourism taxes and resort lease extensions

A People’s Majlis committee has recommended revising the Maldives Tourism Act and tax legislation in order to realise President Abdulla Yameen’s revenue raising measures as proposed in the 2014 state budget.

The committee has recommended collecting resort lease extension fees upfront over a two-year period, reintroducing the discontinued US$8 bed tax until November 30, and hiking Tourism Goods and Services Tax [T-GST] from 8 to 12 percent from November 1.

Further recommendations include increasing the airport departure charge from US$18 to US$25, and levying a 6 percent tax on telecommunications.

The revisions will be debated at an extraordinary parliamentary sitting scheduled for February 3.

Opposition Maldivian Democratic Party (MDP) MP Abdul Ghafoor Moosa has said the party will not support the revisions, claiming they amounted to an estimated 40 percent tax on the tourism industry.

“This will be a huge burden on the tourism industry. Instead of over taxing our most productive sector, the government needs to raise revenue through other sources,” he said.

MVR3.4 billion needed

Meanwhile, Finance Minister Abdulla Jihad said the revisions are not sufficient to raise the expected MVR 3.4 billion (US$224 million). The amount accounts for 18 percent of the MVR17.95 billion budget passed for this year.

The government had initially proposed collecting resort lease extension fees all at once within this year, collecting bed tax for 12 months, and raising T-GST in July.

The parliament committee revised the government’s proposals after a meeting with the Maldives Association of Tourism Industries (MATI) in which the organisation opposed continuation of the bed tax alongside an increase in T-GST.

According to the Maldives Tourism Act, bed tax must be abolished within three years of the introduction of T-GST. Bed tax was discontinued on December 31, 2012.

Committee Chair and Jumhooree Party Leader MP Gasim Ibrahim said if the new revision was passed, the bed tax and T-GST hike would only overlap in the month of November.

“This is because we may not be able to collect bed tax for January,” he said.

MATI Secretary General Ahmed Nazeer has also questioned the practicality of collecting resort lease extensions in a lump sum.

Speaking at the subcommittee on Tuesday, Nazeer said that only 17 out of the more than one hundred resorts had paid lease extension fees upfront when given the opportunity to do so under President Mohamed Nasheed’s administration.

He pointed out that Nasheed’s policy had been invalidated through the courts at the time. Moreover, resort owners had amended their lease agreements to pay lease extension fees in installments during Dr Mohamed Waheed Hassan’s administration, and revising agreements for a third time may present legal challenges, he said.

Meanwhile, MATI board member Solah Shihab has said resort owners might not have the cash at hand to pay lease extension fees upfront.

The government has also recommended revising import duties and leasing an additional 12 islands for resort development to raise money, though these measures have not yet been discussed.


Government’s revision of import duties “doesn’t make sense”, say former economic ministers

Minister of Finance and Treasury Abdulla Jihad yesterday announced the government’s intention to revise the changes made to import duties and to reduce the Goods and Services Tax (GST), after arguing that these policies had failed to improve the state’s finances.

The measures, introduced under the previous government, followed consultations with the International Monetary Fund (IMF) over how to strengthen and stabilise the economy.

These policies included introducing a general Goods and Services Tax (GST); raising import duties on pork, tobacco, alcohol and plastic products; raising the Tourism Goods and Services Tax (T-GST) to 6 percent; and reducing import duties on certain products.

The shortfall from reduced import duties was expected to be more than compensated for by Rf 2 billion (US$129.8million) in Tourism Goods and Services Tax (T-GST), effective since February 2011, and Rf1 billion ($US64.9 million) as general Goods and Services Tax (GST), introduced in August 2011.

Jihad yesterday explained that it was the failure of these taxes to cover lost import duties that prompted a revision of these policies.

“There hasn’t been an increase in State revenue by increasing GST after reducing duties. The GST had been increased from this year to cover the cut down on duty rates. But GST revenue does not even come close to covering it,” Jihad told Haveeru.

Amendments to the Export-Import Act were passed in the Majlis in November last year. The amendments eliminated import duties for items such as construction material, foodstuffs, agricultural equipment, medical devices, passenger vessels and goods used for tourism services.

Duties were raises for tobacco, whilst the motion to increase pork and alcohol duties – items considered haraam under Islam and therefore consumed only on the resort islands – was defeated.

T-GST, as well as GST, was raised to 6 percent in January this year. The IMF has more recently urged that T-GST be raised to 12 percent in order to expedite the government’s deficit reduction efforts.

Jihad is reported as having told Haveeru that the government will also look to increase T-GST as it works to reduce a budget deficit that is anticipated to reach 27 percent of GDP this year – Rf9.1billion (US$590million).

Last month Jihad told Minivan News that the government was seeking to reduce all non-wage expenditure by 15 percent. He also explained that a pay review board was to be convened in order to “harmonise” the pay of all government employees, although he was keen to add that wage cuts would only be considered as a last resort.

“It doesn’t make sense”

Haveeru yesterday reported that around Rf1 billion (US$64.9 million) had been lost after the reduction in import duties.

Former Finance Minister Ahmed Inaz, who presided over the previous government’s economic reforms, said that this figure was inaccurate. He argued that the import duties lost amounted to a figure closer to Rf500million (US$32.5million).

Inaz also pointed out that Jihad’s proposed policy revision went against the Maldives’ previous commitments to free trade.

“We are founding members of the World Trade Organisation (WTO) and members of the South Asian Free Trade Area (SAFTA). We should be increasing trade – tariffs are not the best way to do this,” said Inaz.

“GST is a more transparent system [than import duties] which also enhances opportunities for the business sector,” he added.

GST benefits companies with less initial capital as products are taxed at the point of sale rather than up front upon entry to the country.

Jihad’s assertions that the previous government’s economic reforms are failing appear not to be borne out by the Maldives Inland Revenue Authority (MIRA) figures, the most recent of which show that the state has received Rf 418 million (US$27.1million)  and Rf 789 million (US$51.2million) in GST and TGST respectively, over the first five months of this year.

Should this revenue stream continue on a similar path, the government can be expected to receive around Rf 2.9 billion (US$188.3million) from GST and TGST. The government income from import duties over the past five years has been just over Rf 2 billion (US$129.8million).

Jihad was not responding at time of press.

Former Minister for Economic Development Mahmood Razee believed that the government was “trying to confuse the issue”.

“They are trying to create the illusion that this is the case but the calculations were confirmed and passed through the Majlis,” he said.

Failing a large reduction in the amount of goods coming into the country, Razee continued, these calculations should  still be valid. He added that he had been unable to get specific details on such figures from customs.

Both Razee and Inaz were confused as to the merit of the seemingly contradictory measures of increasing import duties whilst reducing GST.

Speaking to Minivan News separately, both said: “It doesn’t make sense.”

Inaz last night Tweeted: “Rationalising state expenditure and increasing revenue from tax is the only way forward”.

“We need political agreement to reduce expenditure in order to achieve maintainable economic stability,” he told Minivan News today.


Taxation debate begins in parliament

Parliamentary debate on the government’s economic reform package began today with preliminary debate on legislation to introduce a five percent General Goods and Services Tax (GST).

The International Monetary Fund (IMF)-sanctioned economic reform package also includes bills on business profit tax and income tax as well as amendments to the Tax Administration Act and the Import-Export Act.

Introducing the draft legislation, MP Mohamed Aslam of the ruling Maldivian Democratic Party (MDP) explained that the government’s aim was to replace the current indirect tax in the form of import duties with direct taxes.

“When this bill becomes law and the government stops depending on import duties for income, the main benefit would be that businesses would not have to pay a tax before selling their goods,” he said. “As a result, businesses will expand, there will be increased cash flow for investment and business confidence will be strengthened.”

Once direct taxation was in place, Aslam continued, import duties would be reduced or eliminated on January 1, 2012 concurrently with a hike in the Tourism Goods and Service Tax (TGST) introduced this year from 3.5 per cent to 6 per cent.

Moreover, the government plans to raise the TGST to 10 per cent in 2013 and abolish the current bed tax of US$8 per tourist in the same year.

If the legislation is enacted, said Aslam, tax revenue in 2012 is estimated to be Rf3.2 billion (US$249 million) and Rf4.9 billion (US$381.3 million) in 2013.

The “fundamental purpose” of taxation was equitable distribution of wealth and reducing income disparity, Aslam said: “This is how it’s done in civilised societies. Without taxation, we cannot bring development and prosperity for the people.”


“I believe that while taxation is important, the dates for introducing taxes as well as the tax rates should not be determined before properly studying the effects on the whole economy,” said Dr Abdulla Mausoom of the main opposition Dhivehi Rayyithunge Party (DRP).

As a result of inconsistency and “sudden changes to the government’s economic policy,” Mausoom claimed that investors had lost confidence in the Maldivian economy.

While welcoming the elimination of import duties, the DRP MP for Kelaa urged the government to protect the local agriculture industry from foreign competition.

Mausoom also called on the government to revise government working hours to allow civil servants to complement their incomes with part-time jobs, arguing that civil servants deserved a 20 percent pay rise in light of the decision to float the exchange rate within a 20 percent band.

Mausoom further claimed that the main source of “wastage” in the budget was expenditure on political appointees.

“The government should not waste tax revenue needlessly,” he said. “There was a time when the King took taxes from merchants, impoverished the people, and used it for revelry. That time is past.”

“At a time when the gap between rich and poor is widening, I don’t believe at all that this is the best time, the perfect time, the ripe time to take taxes,” said DRP MP Ali Azim, adding that “such an important step must only be taken after proper research and study.”

Azim however conceded that taxation was necessary for the government to provide public goods and services, but repeatedly insisted that the time was not right.

“I am reminded of the Jewish way of doing things,” he said. “That is, further impoverishing those who are already poor. Forcing citizens to beg and telling them, if you sign this [membership] form, you’ll get things done.”

Azim added that citizens should not have to pay taxes even if the bill was passed, claiming that the government continued to disregard laws passed by parliament if it did not suit the current administration.

DRP MP for Vaikaradhoo Ali Arif argued that the public would be adversely affected if a number of different taxes were introduced all at once.

“We are now taking seven per cent from every worker as a contribution to our pensions,” he explained. “We are saying do this gradually. When you take everything at once, the Maldivian citizen is going to fall down.”

Maafanu West MP Abdulla Abdul Raheem, who defected from DRP claiming that “a few tycoons” were opposing taxation, meanwhile underscored the need for sustainable sources of revenue by pointing out that the state was in debt to the tune of Rf18 billion (US$1.4 million) because of deficit financing through loans.