IMF recommends raising VAT in Thailand to 10%

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Siam Paragon Mall Bangkok
Siam Paragon Mall, one of the largest shopping malls in Thailand

The International Monetary Fund (IMF) in its economic report on Thailand released on March 28 recommends that the country’s government raises value-added tax (VAT) imposed on most goods and services to 10 per cent from currently 7 per cent. If implemented, this would bring Thailand on par with Cambodia, Indonesia and Vietnam, but above Malaysia and Singapore.

The IMF said that despite a current lackluster outlook for the Thai economy and downside risks from the slowing Chinese economy, shrinking foreign direct investment due to political uncertainties and outflow of capital, Thailand still has “strong fundamentals” that would provide “room for manoeuvre to lift economic prospects in both the near and the long run.”

One such manoeuvre would be a gradual increase of the value-added tax rate to 10 per cent when the economic recovery returns to stand “on sound footing,” the IMF said, without indicating when this might happen.

In fact, the IMF analysis says that the Thai economy recovered somewhat in 2015 after a slowdown induced by political uncertainty and was expected to strengthen “moderately” again this year and next. Projections are that real GDP growth could reach 3 per cent in 2016 and 3.2 per cent in 2017, after a growth of 2.8 per cent last year when headline inflation dropped to -0.9%, mostly due to a fall in energy prices.

This forecast is more or less in line with that of the Asian Development Bank (ADB). Senior ADB analysts expect economic growth for the country in 2016 to reach 3 per cent as well, but reduced their outlook from 3.5 per cent as earlier projected. It is based on the assumption that inflation this year reaches 0.6 per cent, exports contract by 1 per cent and current account surplus will come in at 7.5 per cent of GDP. They further estimated the Thai economy would grow by 3.5 per cent in 2017 with inflation reaching 2 per cent.

However, a VAT rise would be a risky undertaking given the fact that Thailand’s economy keeps struggling with falling agricultural commodity prices and persistent high household debt levels of 81 per cent of GDP which broadly impacts consumer spending.

VAT rates ASEAN

In fact, VAT Thailand had been 10 per cent for many years, but was cut during the global financial downturn with the condition that the rate must be renewed every October 1. There had been plans to raise Thai VAT to 8 per cent in 2015, but the measure was postponed due to weak macroeconomic conditions, namely low consumer spending and weakening growth of Thai exports. The next decision is due on September 30, 2016.

Thailand’s Finance Ministry suggested that an increase in the VAT rate from 7 to 8 per cent would result in an added 50 billion baht ($1.4 billion) in annual state revenue and would aid in financing the cost of the planned huge public infrastructure investment scheme. It, however, cautioned against a quick increase in the VAT rate, stating that it will have to happen at some point within the next seven years, and the rate rise must be “timed to the economic climate.”

A possible VAT raise would also be critical in terms of local competitiveness. Malaysia just last year introduced a Good and Services Tax of 6 per cent to replace a complex consumption tax system of between 5 and 15 per cent, but granted considerable exemptions. Singapore also just levies 7 per cent in VAT.

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Reading Time: 3 minutes

Siam Paragon Mall, one of the largest shopping malls in Thailand

The International Monetary Fund (IMF) in its economic report on Thailand released on March 28 recommends that the country’s government raises value-added tax (VAT) imposed on most goods and services to 10 per cent from currently 7 per cent. If implemented, this would bring Thailand on par with Cambodia, Indonesia and Vietnam, but above Malaysia and Singapore.

Reading Time: 3 minutes

Siam Paragon Mall Bangkok
Siam Paragon Mall, one of the largest shopping malls in Thailand

The International Monetary Fund (IMF) in its economic report on Thailand released on March 28 recommends that the country’s government raises value-added tax (VAT) imposed on most goods and services to 10 per cent from currently 7 per cent. If implemented, this would bring Thailand on par with Cambodia, Indonesia and Vietnam, but above Malaysia and Singapore.

The IMF said that despite a current lackluster outlook for the Thai economy and downside risks from the slowing Chinese economy, shrinking foreign direct investment due to political uncertainties and outflow of capital, Thailand still has “strong fundamentals” that would provide “room for manoeuvre to lift economic prospects in both the near and the long run.”

One such manoeuvre would be a gradual increase of the value-added tax rate to 10 per cent when the economic recovery returns to stand “on sound footing,” the IMF said, without indicating when this might happen.

In fact, the IMF analysis says that the Thai economy recovered somewhat in 2015 after a slowdown induced by political uncertainty and was expected to strengthen “moderately” again this year and next. Projections are that real GDP growth could reach 3 per cent in 2016 and 3.2 per cent in 2017, after a growth of 2.8 per cent last year when headline inflation dropped to -0.9%, mostly due to a fall in energy prices.

This forecast is more or less in line with that of the Asian Development Bank (ADB). Senior ADB analysts expect economic growth for the country in 2016 to reach 3 per cent as well, but reduced their outlook from 3.5 per cent as earlier projected. It is based on the assumption that inflation this year reaches 0.6 per cent, exports contract by 1 per cent and current account surplus will come in at 7.5 per cent of GDP. They further estimated the Thai economy would grow by 3.5 per cent in 2017 with inflation reaching 2 per cent.

However, a VAT rise would be a risky undertaking given the fact that Thailand’s economy keeps struggling with falling agricultural commodity prices and persistent high household debt levels of 81 per cent of GDP which broadly impacts consumer spending.

VAT rates ASEAN

In fact, VAT Thailand had been 10 per cent for many years, but was cut during the global financial downturn with the condition that the rate must be renewed every October 1. There had been plans to raise Thai VAT to 8 per cent in 2015, but the measure was postponed due to weak macroeconomic conditions, namely low consumer spending and weakening growth of Thai exports. The next decision is due on September 30, 2016.

Thailand’s Finance Ministry suggested that an increase in the VAT rate from 7 to 8 per cent would result in an added 50 billion baht ($1.4 billion) in annual state revenue and would aid in financing the cost of the planned huge public infrastructure investment scheme. It, however, cautioned against a quick increase in the VAT rate, stating that it will have to happen at some point within the next seven years, and the rate rise must be “timed to the economic climate.”

A possible VAT raise would also be critical in terms of local competitiveness. Malaysia just last year introduced a Good and Services Tax of 6 per cent to replace a complex consumption tax system of between 5 and 15 per cent, but granted considerable exemptions. Singapore also just levies 7 per cent in VAT.

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