Since the introduction of value-added tax (VAT) in Thailand in 1992, no government has dared to increase the rate because of concerns regarding the economic impact, the greater burden in terms of living expenses, and most importantly how politically unpopular such a move would appear.
Over the past decade, technocrats in the Finance Ministry and the National Economic and Social Development Council (NESDC) have highlighted a growing need to raise the VAT rate from 7%, but senior officials at the ministry insist any VAT rate hike must take account of the country's economic conditions.
The NESDC proposed using income gained from a VAT hike to help take care of the elderly as the country's ageing population continues to rapidly increase.
NESDC secretary-general Danucha Pichayanan said the government should consider a VAT increase as a viable option to help care for the elderly population.
However, the council has not formally proposed such a policy to the government for its consideration.
STABLE POSITION
Rumours of a VAT increase immediately after a new government was formed by Prime Minister Srettha Thavisin would likely generate significant criticism, which prompted the Finance Ministry to issue a swift response.
Fiscal policy advisor Wuttipong Jittungsakul, a spokesman for the Fiscal Policy Office, said the Thai economy grew by 2.2% in the first half of 2023 and is expected to expand by a greater rate in the second half, supported by improving domestic consumption and the tourism sector's revival.
Inflation is expected to stabilise within the central bank's target range thanks to a decline in energy prices, he said.
Government revenue for the first 10 months of fiscal 2023 exceeded its target by 7.6% and was 5.2% higher than the corresponding period last year.
Mr Wuttipong said maintaining the rate of VAT at 7% would help reduce the cost of living and improve confidence in doing business, resulting in continued economic expansion.
He said the country's fiscal position is stable and sufficient for the implementation of various policies, including the allocation of welfare for the elderly.
A welfare fund supports the country's elderly population, funded by excise taxes on alcohol and tobacco products at a rate of 2%. The fund has not exceeded 4 billion baht per fiscal year since 2018.
Funding is also allocated to help low-income elderly people eligible for the state welfare scheme.
A VAT rate increase to generate more funds to take care of the elderly would raise the prices of goods and services, which would reduce consumer purchasing power. Such a rate hike should be introduced at an appropriate time, said Mr Wuttipong.
In addition, the 2018 State Fiscal and Financial Discipline Act stipulates the earmarking of government revenue for a particular purpose within a specified public agency is prohibited unless a specific item of legislation is enacted to allow it to take place. As a result, relevant agencies must discuss the feasibility of such an initiative.
HUNGRY FOR CASH
Athiphat Muthitacharoen, a lecturer in Chulalongkorn University's Faculty of Economics, said the need for a VAT hike depends on the government's budget spending plans.
For example, if the administration needs more money to implement its 10,000-baht digital wallet scheme pledged to every Thai age 16 and older, this would require a huge budget, he said.
The government may need to increase the VAT rate to vastly ramp up government revenue, as there are still many limitations in place in terms of trying to reduce government expenditure, said Mr Athiphat.
However, he recommended the government avoid a sudden VAT increase, instead planning out any potential rate hike.
NOT SO FAST
One example of a country successfully implementing a VAT increase is Japan. The country planned its VAT increase many years in advance of implementation and gradually increased the rate in increments to give people time to prepare and make adjustments, said Mr Athiphat.
A sudden hike in the VAT rate can cause pull demand, he said.
An example to illustrate this point would be a person who plans to purchase a vehicle in the future opting to buy one immediately in order to reduce their VAT burden, said Mr Athiphat.
A source from the Finance Ministry who requested anonymity said there are several tax reform proposals in line with the 2023-27 tax reform plan. One example is the government's cancellation of the financial transaction tax waiver for share sales by individual investors trading on the Stock Exchange of Thailand.
Other examples are the cancellation of the personal income tax exemption for the first 150,0000 baht of net income, as well as a VAT increase.
Value-added tax represents the majority of the income processed by the Revenue Department. SEKSAN ROJJANAMETAKUN
RUNNING THE NUMBERS
The ministry estimates if VAT were raised to 8%, government revenue would increase by 74 billion baht. Of this amount, 50 billion baht would go to the central government, while the remainder would be handed over to local government.
The government is also limited by a requirement to maintain financial and fiscal discipline, thanks to its limited debt serviceability amid rising interest rates. The interest payment-to-government revenue ratio is 8.5%, leaving room to borrow 1.5% before hitting the threshold of 10% set by the Financial and Fiscal Policy Committee.
The government's outstanding public debt was 61.6% of GDP in June, while the debt ceiling is set at 70% of GDP.
The Finance Ministry issued a medium-term fiscal framework covering 2024-27 to reduce the budget deficit and ensure fiscal stability.
The framework was endorsed by the cabinet in December 2022. According to the framework, the budget is projected to be less than 3% of GDP by 2027.
The budget deficit in the current fiscal year is 3.7% of GDP and is forecast to be 3%, 2.84%, 2.81% and 2.79%, respectively, from 2024 to 2027.
The government's estimated net revenue under the 2024-27 fiscal plan will expand at rates of 10.7%, 4%, 3% and 3%, respectively, assuming the economy continues to recover.
Under the plan, fiscal policy would be rationally implemented based on a strong and sustained fiscal position.
Counter-cyclical fiscal measures would be deployed during economic downturns, while targeted fiscal measures would be used to mitigate the economic impact among vulnerable groups.
Fiscal policy expectations would be managed to create an appropriate fiscal space to support various government policies, while remaining resilient to risk and uncertainty with the aim of achieving a balanced budget, according to the plan.
VAT represents the majority of the Revenue Department's income.
In fiscal 2023, revenue from the Revenue Department is estimated to account for 73.5% of the government's total revenue.