The future of value-added tax in Thailand

The future of value-added tax in Thailand

Do you know the "official" value-added tax (VAT) rate in Thailand? Most people either do not know or may have forgotten. Introduced in late 1991, the official VAT rate under Section 80 of the Revenue Code is 10%.

So why is it currently 7%? Well, businesses complained from the start that the 10% rate was too high, so the government settled on 7% instead. The rate went up briefly to 10% following the economic crisis in 1997 but was quickly reduced in light of dire economic conditions.

The VAT rate is reviewed each year, but no government has wanted to make change it, believing the prevailing rate promotes economic growth and stability. So the question is will the reduced tax rate continue or should it return to 10%?

Increasing the VAT rate to 10% from 7% is certainly a hot topic. Since VAT is imposed on the domestic consumption of goods and services, an increase in the rate potentially hampers consumption and may ultimately negatively effect the economy. And it also increases the financial burden on end-consumers.

But lessons can be learned from Japan. In 1997, Japan raised its consumption tax rate to 5% from 3%. Shortly after, the Japanese economy went into recession. Japan's consumption tax rate remained at 5% for the following 17 years and was raised to 8% in April 2014.

The Japanese government initially planned to increase the rate to 10% next month but was forced to delay another tax hike until at least April 2017 following an unexpected economic contraction and a fall in private consumption.

The Thai economy is currently showing negative signs such as sluggish consumption and high household debt. Seasonally adjusted GDP growth declined to 1.1% in last year's fourth quarter compared with 1.2% in the previous quarter and fell further to just 0.3% in this year's first quarter. Household debt as a percentage of GDP has also been on an uptrend. As households have more debt, they are less likely to spend, leading to lower consumption.

Taking the economic statistics and the experience of another country into account, increasing the VAT rate may not be feasible at the moment. At its July 14 meeting, the cabinet approved the draft of a royal decree to be issued under the Revenue Code governing the reduction of VAT. This will extend the 7% VAT rate for another fiscal year as a short-term measure to maintain economic growth.

But in the long term, the VAT rate may need to return to 10% due to the changing nature of the country's tax-collection mix. For fiscal 2014 ended last Sept 30, VAT accounted for 41% of tax collected. And with the rate of corporate income tax pegged at 20%, in order for Thailand to be internationally competitive, VAT is becoming an increasingly important source of government revenue. 

Besides tax collection, the government has a spending plan for its 2.72 trillion baht worth of megaprojects. With only 181 billion baht remaining in the Treasury, the government needs to increase its ability to collect taxes to keep up with its spending plans. This is where an increase in the VAT rate comes into perspective. But it remains to be seen whether the rate will return to 10% as a one-time adjustment or be gradually increased over time.

This article was prepared by Sirisuk Manmettakul, director of PwC Thailand's tax and legal services practice. We welcome your comments at

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