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NEWS UPDATES 12 July 2010

Finance Ministry reviews taxes

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An increase in the value-added tax (VAT) is possible, along with a cut in personal income and corporate tax rates.

Finance spokesman Ekniti Nitithanprapas said at the seminar that many allowances could also be scrapped as each year the Revenue Department lost Bt50-Bt100 billion as a result of tax allowances. Chief among them was permission for individual taxpayers to deduct taxable income of up to Bt300,000 for investment in long-term equity funds (LTFs).

"The Fiscal Policy Office is studying tax restructuring as part of government efforts to increase tax revenue to support more social programmes," he said.

The LTF allowance, he said, only benefited high-income earners. But many other tax allowances needed to be reviewed. While some would be cancelled, others could remain.

Some allowances would wither away, and the ministry would propose a cut in income tax rates. Personal income taxes currently range from 10 to 37 per cent, but the top rate could be cut to 32 per cent.

Meanwhile, the corporate income tax ceiling of 30 per cent could also be lowered.

He also noted that the VAT rate of 7 per cent may be raised to 10 per cent. "Each increase of a percentage point will raise about Bt50 billion in tax revenue," he said, noting that VAT in Indonesia and Vietnam was 10 per cent, while in Singapore it was 7 per cent.

"Tax hikes should be implemented when the economy fully recovers." It also depended on government policy, he said.

Chakkrit Parapuntakul, head of the Public Debt Management Office, said public debt was likely to rise as the government planned to run a budget deficit throughout the next three years.

However, he assured that maximum debt would be around 52-53 per cent of gross domestic product and would not pass the 60 per cent threshold.

To achieve that goal, the office reiterated the need for the Bank of Thailand to buy into the ministry's zero coupon rate with its "massive" foreign exchange reserves, and for proceeds to be used to pay off the Financial Institutions Development Fund (FIDF)'s Bt1 trillion in debt.

Chakkrit said this option would be presented to the new central bank governor, Prasarn Trairatvorakul, who will take his post in October.

The ministry would then be freed from an interest burden of Bt50-Bt60 billion per annum, for debts incurred from financial bailouts after the financial crisis in the late 1990s. All up, the ministry has paid over Bt600 billion in interest.

"The ministry has to shoulder market rates for bonds issued to refinance the FIDF debt. After 10 years, the principal has been cut by only Bt100 billion," he said.

"We discussed this option with Finance Minister Korn Chatikavanij and MR Chatu Mongol Sonakul, chief of the Bank of Thailand's court of governors.

"An obstacle to this proposal is the central bank cannot buy into the bonds in the primary market. [So] there could be a special arrangement between the ministry and the central bank."

At the end of March, public debt stood at Bt4 trillion, or 42.2 per cent of GDP. In the next three years it could rise to 46-47 per cent, 48-50 per cent, and 50-53 per cent, respectively. Public debt was also expected to decline if the economy recovered and grew, Chakkrit said.

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