“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.


GST will prioritise wholesalers, but requires administrative tax regulations

Maldives Inland Revenue Authority (MIRA) has said it will give priority to levy the Goods and Services Tax (GST) from merchants who import and sell goods at wholesale prices, reports Haveeru.

The GST bill, which was ratified by President Mohamed Nasheed last Friday, is required to be implemented within a month from ratification.

Commissioner General of Taxation, Yazeed Mohamed, told Haveeru that tax deductions from wholesalers will be the second major source of income. He said certain industries such as construction, food and entertainment would be given higher priority.

Yazeed said the act will be fully implemented in three months, but that administrative tax regulations had to be amended as well, Haveeru reported.

GST payers will be asked to register at MIRA.


DRP Deputy Leader “disappointed” in party, considers resignation

Dhivehi Rayyithunge Party (DRP) Deputy Leader Ilham Ahmed may resign from his post, reports Haveeru.

MP Ilham Ahmed, of Gemanfushi, is allegedly disappointed with some of the DRP’s internal matters. Ilham told Haveeru that party leader Ahmed Thasmeen Ali appeared to be too close with the government, and said tax reform was one area of concern.

Ilham said he would decide whether to resign in the next 2-3 days.

Former President Maumoon Abdul Gayoom, who Ilham allegedly supports, has given the same deadline for his announcement of a new political party.


President claims tax reforms key to addressing national rich-poor divide

President Mohamed Nasheed has claimed tax reforms submitted to parliament last week will let the government bridge the gap between rich and poor in the Maldives, by boosting state income and funding government services.

Speaking yesterday during his weekly radio address, Nasheed referred to a household income and expenditure survey for 2009-2010 he claimed indicated that while 10 percent of the population were spending on average just Rf12 a day, the wealthiest 10 percent had daily outgoings of Rf230.

At present, the president said that four tax bills were awaiting approval in parliament in the form of a Goods and Service Tax Bill, Business Profit Tax Bill, Income Tax Bill and an Amendment Bill to Tax Administration Act that were key parts of trying to provide more equality between the country’s rich and poor.

The government’s proposals to try and boost direct revenue through additional taxation have been met with caution and concern by business groups that fear the president could harm business with economic reforms that needed a gradual introduction. Opposition parliamentarians from parties like the Dhivehi Rayyithunge Party (DRP) and the People’s Alliance (PA) have hit out at the government’s taxation policies claiming they were serving only to stifle development that was needed to boost national income.

According to Nasheed, the proposed legislation relates to replacing current systems of indirect tax such as import duties that affect richer and poorer citizens equally with a system that puts more emphasis on the country’s highest earners.  “[This will change the current] indirect tax on the value of goods to a tax payable by the wealthy, based on the profit of their businesses,” the president stated.

If the government is able to succeed in boosting direct income, measures such as the tax reform would be put into social security and protection measures, the president said.

Nasheed claimed that survey also indicated increased quality of living standards for Maldivians.  The number of people living below the poverty line – defined as earning under Rf23 a day – fell by about 50 percent from figures conducted seven years ago, according to the report.

Despite Nasheed’s optimism, DRP leader Ahmed Thasmeen Ali said last month that the country’s economic reforms – such as plans to devalue the rufiya – would remain a key concern for the DRP during the current parliamentary sitting.

“The government has indicated that it will release proposals to address economic concerns and bring down the dollar rate,” he said. “We do accept the fact that revenue has to be increased, but we would like to see serious attempts to reduce state expenditure and ensure revenue is not being wasted.”

The DRP leader claimed that the party was not specifically calling on the government to slash spending in a single area such as political appointees, but instead asking for a consensus on areas such as in the funding of new offices for local councils formed during local elections held in February.

Similarly, Ahmed Nazim, a PA MP and a member of the Majlis’ Public Finance Committee, said that he believed current government policy was ultimately stifling economic development, with administrative costs within the civil service identified as a notable problem.

“We have small percentage [of funds] to invest in the economy. We cannot move finances to a higher level though as the government doesn’t have the right policies to do this,” he claimed. “For instance, we need to reduce the number of [inhabited] islands by linking them and cutting the overall number of cost centres required for decentralisation.

The comments were made as the IMF claimed that the Maldives economy remained “unsustainable” even after cuts made to the annual 2011 budget, as it concluded its Article IV consultation earlier during the year.

Outside of the Majlis’ floor, business organisations like the Maldives National Chamber of Commerce and Industry (MNCCI) have claimed that further investment was needed to strengthen the business sector before taking on widespread economic and taxation reforms.

MNCCI Treasurer Ahmed Adheeb Abdul Gafoor told Minivan News early last month that he believed that with the planned introduction of the additional GST on general trade and corporate tax, the prospect of policies like a minimum wage would need to be studied in terms of possible impact, particularly in the private sector.

“Introducing these tax reforms and schemes like the minimum wage will be difficult over the next two years. The Maldives is at a disadvantage when it comes to economies of scale as it is,” he said. “What I would like to see is a transitional period rather than introducing these measures straight away.”

Adheeb claimed the government needed more consultation with employers – especially in smaller and medium enterprises – before putting any initiatives like a minimum wage in place, adding that private enterprises had been a key component in the more successful developments of the Maldivian economy.

“We [the private sector] could end up losing some of our competitive edge over other countries. What we need is some breathing space and for these reforms to be bought in gradually,” he said. “We have to build confidence in the economy especially with small and medium businesses. If the minimum wage is going to be introduced it should be set on an economic basis and not for short-term political benefit.”

While sharing the MNCCI’s caution, Mohamed Ali Janah, President of the Maldives Association of Construction Industry (MACI), said this month that he believed that Maldivian businesses should not feel threatened by a shift towards a liberalised economy despite significant changes proposed to tax and regulation.

Janah claimed that government-proposed economic reforms were no different t changes that had already occurred across the western world and parts of South Asia.

Although welcoming market liberalisation in general, the MACI president said he believed that industry would still likely require more time to adapt to the transitions such as a minimum wage and greater taxation on goods and services.

“We are in something of a transition period right now, but what we want businessmen to understand is that they should not feel threatened [by these changes],” he said. “We are being pushed towards a more liberal economic system where we will need more accountability and transparency.”

Janah claimed the proposed changes reflected a potential move away from the style of family-dominated business dealings that he suggested may in some cases be less likely to aim for transparency and detailed accounting.