Tax reform comes in dribs and drabs

Tax reform comes in dribs and drabs

Despite the long process and various walk-backs, the existing code will see many changes

Tax reform has been high on the government's to-do list since Gen Prayut Chan-o-cha took the helm in 2014 with a goal of creating a tax base that provides sustainable revenue for the country on a long-term basis.

As the population inevitably ages and massive expenses lurk from big-ticket infrastructure investment, government spending will entail significant burdens.

The government also wants to narrow income disparity and boost the country's competitiveness.

Raising tax revenue contributions based on asset value is the main target when balancing the income structure, as 97-98% of tax revenue is generated by income and consumption taxes, particularly value-added tax (VAT).

But the tax overhaul is focused on cutting the top tax bracket for personal income to 35% from 37%, increasing tax allowances and deductions, and slashing the corporate income tax to 20% from 30%.

New taxes such as the inheritance and gift taxes have not generated substantial income for the government and have been regarded as mere token gestures towards lowering income disparity, as the levies have been watered down.

The Finance Ministry, which is in charge of tax reform, is still pushing for a variety of taxes before the transition to a civilian government, hopefully in 2019.

There are three major taxes in the ministry's pipeline in 2018.

Land and buildings tax

The much-awaited land and buildings tax will soon be deliberated by the National Legislative Assembly (NLA) in the second reading.

The Finance Ministry recently succumbed to demands from the lawmakers' standing committee on the draft bill to water down the proposed property tax rates.

The NLA committee has proposed cutting the proposed land and buildings tax's ceiling rates by 40% in many instances.

The NLA's proposal calls for a ceiling rate for homes of 0.3%, down from 0.5%; an agricultural use rate of 0.15%, down from 0.2%; and other use and undeveloped land at 1.2%, down from 2%.

The NLA's version also proposes to trim the exemption ceiling for first homes to 20 million baht from 50 million, as proposed by the Finance Ministry.

The committee's proposal requires owners of first homes appraised at 20-50 million to pay a property tax rate of 0.02%, or 200 baht for every million baht that exceeds the exemption threshold, and 0.03% for houses valued at 50-75 million, 0.05% for those valued at 75-100 million, and 0.1% for houses appraised at more than 100 million.

Second-home owners will be taxed 0.02% for property with an appraisal value of up to 50 million baht, 0.03% for houses worth 50-75 million, 0.05% for homes valued at 75-100 million and 0.1% for more than 100 million.

The draft bill proposed by the Finance Ministry called for taxes to be levied on first-home owners and farmland appraised at more than 50 million baht.

A tax rate of 0.05% would have been applied to first homes and agricultural land worth 50-100 million baht, and a 0.1% rate for homes above 100 million. People owning second homes would have been taxed 0.03% for homes with appraisal value of up to 50 million, 0.05% for values of 50-100 million, and 0.1% for more than 100 million.

The revised tax rates are expected to almost halve income to 39 billion baht a year from the 64 billion forecast to be fetched under the Finance Ministry's version.

Despite the sharp reduction in estimated tax income, the Finance Ministry expects the income stream to increase in the future as appraisal prices, updated by the Treasury Department every four years, generally increase.

Deputy Finance Minister Wisudhi Srisuphan has rushed to calm jitters over the land and buildings tax, saying tax burdens will be on a par with current property tax liability, while the NLA's version offers a relief measure for business operators by gradually increasing the additional tax burden over the course of four years.

The new property tax, which will replace the outdated house and land tax and the local development tax, is expected to come into force from January 2019.

Land for residential and agricultural uses are not the target for the land and buildings tax, as both account for less than 10% of the total tax to be collected, he said, adding that less than 1% of homeowners around the country will be taxed, though the tax exemption threshold for the first home will be cut to 20 million baht from 50 million.

Mr Wisudhi said applying levies below the ceiling set by law offers flexibility for local administrative organisations to raise the tax as deemed appropriate.

"I am concerned that local administration organisations will not raise the tax rates and could even cut them to please voters, so the law does not permit local administrative organisations to charge rates lower than the applicable rates to be announced by the government," he said.

Land windfall tax

A bill on land windfall tax is being drafting by the Fiscal Policy Office (FPO) and details have not been finalised yet, Mr Wisudhi said.

The main drawback for the land windfall tax is that land value which has recently been inflated by the government's transport infrastructure projects will be taxed.

Those who occupy state land and benefit from the inflated price are also liable to be taxed.

According to the Fiscal Policy Office's proposal on the land windfall tax, those liable for the tax must possess land within a radius of 2.5 kilometres of a station serving high-speed, double-track or electric trains, or the on- or off-ramp of an expressway. Those who own plots 5km from building-restricted zones like airports and ports would also be required to pay the tax.

Landlords whose land value is inflated would be charged the land windfall tax every time ownership is transferred from the time when the transport infrastructure project contract is signed until the project's completion.

Once transport projects begin operations, those owning land for residential and agricultural purposes will not be liable, while those who have land for commercial use and whose land value is higher than 50 million baht would be subject to the tax upon ownership transfer.

Owners of land near infrastructure projects launched before the law governing land windfall tax takes effect would be exempt from the new tax.

The applicable tax rate, which is flat, could be lower than a maximum 5% of the inflated price.

E-business tax

E-business tax, a levy on any online transaction that takes place in Thailand, regardless of the e-commerce operator's location, has passed the public hearing process. The Revenue Department is expected to propose the draft bill to the Finance Ministry in the months ahead.

The draft bill for the e-business tax has set a ceiling rate of 15%, but the applicable rates will vary depending on the nature of the business.

If the bill is enforced, online vendors with an overseas presence but with domestic transactions are required to sign up for the VAT system if they earn an annual income of more than 1.8 million baht from selling products and services.

The draft on e-business tax will also annul the Revenue Department's VAT exemption for online shopping on goods worth less than 1,500 baht that are bought from foreign vendors outside of Thailand.

The move is intended to pave the way for taxing all online purchase transactions.

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