The government has submitted a bill to parliament calling for the Tourism Goods and Services Tax (T-GST) to be increased from 8 to 15 percent, effective immediately.
The bill was submitted by Dhivehi Qaumee Party (DQP) MP Riyaz Rasheed last week on behalf of the government.
A T-GST of 3.5 percent was first pushed through parliament by the former government in 2011, with planned increases to 6 percent in 2012 and the current 8 percent in 2013.
Prior to the introduction of the T-GST, the primary sources of state income from the tourism sector included resort rents, import duties, and a flat eight dollar a night ‘bed tax’.
During the first month following the introduction of the T-GST, the government collected US$7.2 million from 800 of the newly registered 871 tax papers, a figure that revealed the Maldives had been underestimating the total size of its main industry by a factor of three.
Economic crisis
The proposal to increase the tax comes as the Maldives faces increasingly dire economic circumstances.
Finance Minister Abdulla Jihad revealed in April that the government had exhausted its annual budget for recurrent expenditure (including salaries, allowances and administration costs) in the first quarter of 2013, and announced the suspension of all development projects.
The State Bank of India’s refusal to roll over loans at the start of the year has seen central bank reserves at the Maldives Monetary Authority (MMA) “dwindle to critical levels”, as noted by the World Bank, to barely a month’s worth of imports.
The State Electric Company (STELCO) – the country’s main supplier of electricity to inhabited islands – meanwhile revealed this week that the government had failed to pay electricity bills to the tune of MVR 543 million (US$35.2 million), and warned Parliament’s Public Accounts Committee in a letter that it faced cash flow problems and an inability to roll out new projects as a result.
T-GST rise contentious
Tourism industry figures have previously warned that a sudden increase in T-GST would have an immediate effect on the industry’s bottom line, as many resorts are locked into year-long supply and pricing agreements with tour operators.
An overnight near-doubling of the tax to 15 percent would have “serious ramifications on tourism and the Maldivian economy,” warned one resort manager.
“Most wholesalers will not accept price increases mid-contract irrespective of what clauses we put in a contract, as laws within the EU prevent this. Hence, this will have to be absorbed by the resorts,” he explained.
“I am aware that many resorts are struggling financially and this may be enough to put them over the edge. It will be very difficult to attract much needed foreign investment when the government continues to give these signals,” he added. “Why hamper and reduce demand to a destination that is already struggling to attract its core and traditional markets?”
The resort manager said that it was unreasonable to expect the resort industry to foot the bill for the state’s financial irresponsibility, “considering there have been limited efforts within the government to reduce its expenses. [The proposed tax increase] is short term thinking that will lead to a major default within the Maldivian economy and industry, if this proceeds.”
“What continues is a large bureaucracy that makes it as difficult as possible for tourism to provide high end service to its guests in order to maintain our positioning [in the market],” he observed.
“What is basically required is that these slow and lethargic government departments to go through a productivity and efficiency program. Make the processes more efficient, make civil servants accountable for productivity targets, reduce the government workforce and increase the percentage of Maldivian workers in resorts,” the manager suggested.
The issue here is that the resorts will need to cut costs and increase efficiency to counteract this. This may hamper guest service, product enhancements and refurbishment, and staff benefits which is again detrimental to the industry as a whole. The Maldives is a premium destination with premium levels of service and this tax increase would hamper this positioning. The Maldivian people will need to expect cost cutting and in some aspects retrenchments.”
New tax fatwa
Prior to the submission of the government’s proposed increase to the T-GST, local media reported that the Fiqh Academy had issued a fatwa (an Islamic ruling) prohibiting the government from levying taxes of any sort except under exceptional conditions.
Announcing the Fiqh Academy’s ruling in a statement on May 22, the Islamic Ministry noted that taxation was only permitted under Islam in certain circumstances.
“Tax can be taken from citizens to fulfill their basic needs, and only up to the amount required to fulfill these needs in cases where the state does not have enough money [for this],” the statement read.
According to local media, the fatwa requires that any tax money collected be “invested fairly and according to Islamic principles”.
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