“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.


Vice President meets Sri Lankan President Rajapaksa during UN General Assembly

Vice President Dr Mohammed Waheed Hassan has paid a courtesy call on Sri Lankan President Mahinda Rajapaksa at the 66th session of the UN General Assembly in New York.

The Vice President’s Office later refuted reports that Dr Waheed discussed the Sri Lankan human rights situation with Rajapaksa during the meeting, following media reports quoting Sri Lankan officials to the contrary.

Haveeru on Tuesday quoted a senior Sri Lankan official as saying that during a meeting between Rajapaksa and the Vice President, Dr Waheed “assured that he will be supporting Sri Lanka’s stance on the human rights issue.”

The Vice President’s office later claimed the meeting was a courtesy call during which Dr Waheed said it was refreshing to  hear the Sri Lankan President talk about trade unions and north-south cooperation in his speech [to the UN], and that there was “no mention of the human rights situation in Sri Lanka.”

Sri Lanka is currently conducting an internal investigation of these allegations, which refer to acts of violence committed by both government and rebel forces in the final phases of Sri Lanka’s civil war.

Numerous human rights groups, including Amnesty International (AI) and Human Rights Watch (HRW), have rejected Sri Lanka’s investigation on the grounds that its Lessons Learnt and Reconciliation Commission (LLRC) does not meet international standards.

The British Broadcasting Corporation (BBC) has reported that human rights groups found the commission flawed because “its members were appointed by the government, it has no real mandate to investigate war crimes in the last stages of the conflict, lacks any mechanism to protect witnesses and falls short of minimum international standards of a commission of inquiry.”

The Sri Lankan government has denied committing any offenses. The Maldivian government said it supports Sri Lanka’s wish to solve internal issues without external involvement.

Today, the Maldives President’s Press Secretary Mohamed Zuhair issued a statement expressing support for the Tamil people.

“The President of the Maldives would like to express his good wishes to all Tamil people. The Tamil people have always been like brothers to Maldivians. The President would like to see peace and harmony in our region and has expressed his desire for all people to live peacefully together.”

Human Rights Watch recently applauded the Maldives as one of the seven most important countries on the UN Human Rights Council. It expressed puzzled concern, however, over the Maldives’ “regrettable” support of Sri Lanka at this time.

“The Maldives should revisit its approach on Sri Lanka in order to bring it in line with its otherwise principled approach to human rights at the Council,” said the report.

Minister of Foreign Affairs Ahmed Naseem said he did not wish to comment on the issue.

Meanwhile, UN secretary general Ban Ki-Moon has appointed a panel to advise him on accountability issues in Sri Lanka, reports the BBC. The Sri Lankan government rejected the panel, however, and said it would not issue visas to UN panel members visiting Sri Lanka.

The UN Office for the High Commissioner of Human Rights (OHCHR) today said they are urging Sri Lanka “to ensure there is a genuine accountability process to address the serious violations believed to have been committed during the last months of the  war in Sri Lanka.”  The OHCHR is waiting to see how member states take action on the issue, “but, of course, the United Nations hopes Maldives – like other UN members – will encourage Sri Lanka to address this important issue.”

Late last week, President Mohamed Nasheed met with Sri Lankan Prime Minister Disanayaka Mudiyanselage Jayaratne regarding the upcoming South Asian Association for Regional Cooperation (SAARC) summit, due to be held in Addu City in November. The heads of state also discussed ways to strengthen ties between the two countries.

The SAARC summit could afford the Maldives an opportunity to promote human rights in south asia, a region that is reportedly slower than others to adopt international human rights standards.

The Maldives recently became the 118th member of the International Criminal Court (ICC), a close partner of the UN.

“As a chair of the SAARC summit, Maldives will have quite an influence on South Asian countries attending this year’s event,” she said previously. “It will certainly be constructive in reviewing human rights, a key point we plan to address at the summit.”

Evelyn Balais-Serrano, Asia-Pacific Coordinator for the ICC’s advocacy NGO Coalition for the International Criminal Court (CICC), called the Maldives’ accession to the Rome Statute a significant step for human rights in south asia.

She noted that Sri Lanka is “a long way” from membership at the ICC.

ICC membership requires the Maldives to uphold ICC standards and rulings. “The Maldives cannot do anything if the ICC decides to investigate and put into trial the perpetrators of crimes in Sri Lanka,” said Balais-Serrano. “If suspected criminals from Sri Lanka seek refuge in the territory of the Maldives, as a state party to the ICC, the government is obliged to cooperate with the Court by arresting  the criminals.”

Sri Lanka’s findings are due for release on November 15.

Clarification: This story has been updated to reflect a clarification from the Vice President’s Office that human rights were not discussed at the meeting with Sri Lankan President Mahinda Rajapaksa.