Parliament will vote on Monday whether to introduce one of the government’s four key pieces of tax legislation that it has promised the International Monetary Fund (IMF) will help the country claw its way out of a crippling budget deficit.
The combined goods and services tax (GST) bill contains a general GST of 5 percent, and an increase to the existing tourism GST (TGST) from 3.5 percent to 6 percent.
Parliament voted on July 18 to send to committee four bills of the government’s economic reform package: the GST bill, an income tax, a corporate profit tax and a bill governing excise and reduction of import duties.
At the time all four bills received more than 50 votes apiece from the 72 MPs present and voting, hinting at broad cross-party acceptance of the need for taxation. Of the 72 MPs acting as a committee, 51 voted approval of the bill with the proposed amendments.
To expedite the process, an 11-member sub-committee was chosen to review the bills with five MPs of the ruling Maldivian Democratic Party (MDP), three MPs of the opposition Dhivehi Rayyithunge Party (DRP), Jumhooree Party (JP) Leader Gasim Ibrahim, one MP of the minority opposition People’s Alliance (PA) and Dhuvafaru MP Mohamed Zubair as an Independent MP.
On Monday, parliament will vote whether to finally pass the GST bill when it is presented to the chamber.
Most of the many amendments proposed to the bill by the committee are administrative, but several concern additional commodities to be exempted from GST, including petrol, diesel, cooking gas, telecoms and adult diapers.
The amendments also replace the government’s proposed start date of October 1 to within a month of whenever the legislation is published in the government’s gazette (following presidential ratification).
Following consultations with the opposition and the apparent support of 51 members for the bill, the Dhivehi Rayithunge Party (DRP) issued a pamphlet declaring it no longer supported the bill.
“They already essentially voted to support it, but now the DRP are bringing out statements and newspapers interviews saying don’t support it, and they have issued a whip line for the party not to support it [in the vote tomorrow],” said a source in the President’s Office.
The source said the government was also hoping the amendments to the Export-Import Act of 1979 would also be passed, as the GST was intended to replace it and crossover would see the same commodities being taxed twice.
At its press conference today, the DRP handed out a booklet titled “DRP’s response to the government’s fiscal and economic nuisance” with seven main points against the economic reform package.
The DRP objected to a projected growth of Rf1 billion in the budget for 2013 and expressed concern with expenditure out of the budget reaching 66 percent of GDP in 2009 – compared to 32 percent in Seychelles and 21.6 percent in Mauritius – claiming that the purpose of the new taxes was to “find money to influence the public for the 2013 [presidential] election.”
On the second point, the DRP notes that the 27 unemployment rate “proudly announced by the President” meant that 1 out of 4 people were unemployed, advocating diversification of industries to increase productivity. The DRP observed that the government’s policy for controlling inflation and spurring job growth was vague and unclear.
Thirdly, the DRP would oppose the introduction of a personal income tax on the grounds that the country’s unique geography, limited natural and human resources, and high cost for investments in the country did not make a direct tax advisable in the current economic climate.
While the government proposed that only those who earn above Rf30,000 would have to pay the tax, the DRP noted that all citizens would have to file tax returns.
“The charts of the government’s fiscal and economic nuisance package show Rf300 million will be received in 2012 from income taxes and 475 million in 2013,” it reads. “Instead of making all citizens file tax returns in order to earn 475 million two years after taxes are introduced, it would be far better to reduce the government’s useless expenditure by that amount.”
It adds that administrative costs for collecting income taxes from Maldivians living abroad would be disproportionate to the returns.
As its fourth point, the DRP noted that the General GST would affect small businesses such as cornershops, cafes and teashops, which would “need a lot of preparation” to maintain accounts and provide customer’s statements showing the GST percentage.
Morever, taxing “total value of business transactions” would not be possible with GST at zero percent for some items.
Considering the potential “administrative confusion” and the country’s heavy reliance on imports, the DRP argues that levying a customs duty at the entry point to the country was more effective.
The DRP is also against abolishing the Foreign Investment Act as it would remove protectionist restrictions, urging instead “amendments to the law to pave the way for foreign parties to invest in the Maldives and conduct businesses”.
The DRP “could not agree to sell the country’s remaining assets to the MDP’s friends” after “[losing control of] the country’s main gate, the international airport, the national telecom service, and Maldivian seas and shallows.”
Proposed amendments to the Immigration Act was meanwhile intended to “provide an opportunity for MDP’s friends to settle in the country and establish a foothold.”
Offering residential visas, it continues, would worsen unemployment and crop up “more challenges” for Maldivian professional workers.
On its final point, the DRP claims that the fiscal responsibility bill was “a scheme” to negate parliament’s amendments to the Public Finance Act and “reclaim the fiscal discretion offered to councils in the Decentralisation Act”.
In prior meetings with the government, the President’s Office source told Minivan News that “we agreed that state expenditure needed to be lowered, something the IMF was also asking for, but they mentioned none of these [other] things. We’re keeping our side of the bargain, but it’s hard to reach an agreement with them when they keep changing their minds.”
Unless the bills are passed before parliament goes for a month’s recess on Tuesday, the government may miss its commitments made to the International Monetary Fund (IMF) on announcing the economic reforms package. These included:
- Raise import duties on pork, tobacco, alcohol and plastic products by August 2011 (requires Majlis approval);
- Introduce a general goods and services tax (GST) of 5 percent applicable to all sectors other than tourism, electricity, health and water (requires Majlis approval);
- Raise the Tourism Goods and Services Tax (TGST) from 3.5 percent to 6 percent from January 2012, and to 8 percent in January 2013 (requires Majlis approval);
- Pass an income tax bill in the Majlis by no later than January 2012;
- Ensure existing bed tax of US$8 dollars a night remains until end of 2013;
- Reduce import duties on certain products from January 2011;
- Freeze public sector wages and allowances until end of 2012;
- Lower capital spending by 5 percent
At the announcement of the economic reform package, Governor of the Maldives Monetary Authority (MMA) Fazeel Najeeb acknowledged that “there will be some eyebrows raised and some reservations on the measures – this is inevitable in any country changing its taxation regime.”
“There are instabilities and I hope these will be short term. But I think what we are doing is in the interest of the economy and will bring it out of the mess it is in. I think it is necessary that we act together now,” Najeeb said.
The IMF package, he noted, represented “a joint commitment by the Ministry of Finance and the central bank: a state affair in the interests of the economy and the country. Everybody in the country realises and recognises that there needs to be a change in the status quo. The status quo is a fiscal stance that is unmanageable.”
Asked whether he felt the new taxes were likely to be passed by parliament, “I think when it comes down to the details of what and how the legislation takes shape, that should be left to Majlis. What I can say is that status quo needs to change, and I don’t think this can be only reduction [in expenditure]. There needs to be a considerable amount of income increase. A combination of revenue as well as expenditure.”
Last week, at a launching ceremony for the “Fiscal and Economic Reform Programme,” Mohamed Umar Manik, chairman of the Maldives Association of the Tourism Industry (MATI), observed that a sustainable source of government revenue was necessary for providing public goods and services.
“Today we have democracy in our country, but democracy can only be strengthened if we are able to deliver,” said the Chairman of Universal Enterprises. “To do this, our government must have sources of income. A detailed reform agenda has been proposed for this. In my view, it is an ideal reform programme.”
Sunland Travels Director Hussain Hilmy stated that the Maldives’ “economic policy and legal framework needs to undergo modernisation and reform.”
“We in the business community welcome the bold initiative being undertaken to carry out a programme of comprehensive economic and fiscal reform,” Hilmy said.
He added that businesses were “delighted” with the government’s policy of a “shift away from import duties as a major source of government revenue.”
Meanwhile, speaking to Raajje TV last night, Finance Minister Ahmed Inaz said that the proposed tax system should have been in place 10 years ago, and that any further delay was unnecessary.
Inaz said the additional revenue was needed to pay civil servant salaries, and provide services such as water, power, independent institutions, sewerage, hospitals, schools “and the salaries of Majlis members and their committee allowances.”
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