Saturday, March 21, 2009

Taxes: Finding the next perch before flying off


Customs duty is regressive, riddled with corruption and against free-trade treaties. It may be all that and more; but there is one thing that cannot be denied about Customs duty: It works. For the past three decades it has been a steady and reliable source of income contributing about a third of total government revenue. It is doubtful whether any of the alternatives – corporate tax, income tax or value added tax – would measure up to this standard.

The success of Customs duty depends on its simplicity. Almost all goods entering the Maldives pass through Male airport and seaport, making it rather simple to detect all dutiable goods using a relatively small number of staff. Because of this the percentage of revenue recovery was high, despite the legendary corruption.

Compared to this, all the alternative taxes would require officials to cover a very large number of revenue generating outlets and scrutinize their accounts. Checking all retail shops in the country for VAT would be particularly cumbersome, while checking the company accounts for profits would be technically challenging. Income tax would be particularly worrisome for government staff because they are the only category of people who cannot underreport their income.

In view of these challenges, the combined revenue from these sources could be considerably lower than customs duty. So, one must think twice before replacing customs duty.

13 comments:

Anonymous said...

There will be so much cheating in income tax. it will never work.

Anonymous said...

In many countries the tax man acts very independently. A tax audit is very feared. Would we, in the Maldives be able to give him the independence and authority to do that? Additionally, our systems have a lot of instances where cash transactions are the general practice while still constituting a big chunk of an individual income - fish purchases. Yes the tax system is going to be difficult. But if we try to institute just a corporate tax i think the biggest loophoe will be companies trying to give their shareholders big salaries/bonuses while keeping the main company profit low.

Yes.. indeed it is going to be difficult but do we have a choice..

Rayyith Ahmed

Anonymous said...

@ Rayyithu Ahemed, companies will also produce false audit reports. then they will bribe taxmen to accept the false reports.

Anonymous said...

Import duty is definitely the easist to practice. In all others there will be so many loopholes.

Anonymous said...

Corporate tax will not be difficult. It will be just like tourism tax. no problem.

Anonymous said...

We have signed SAFTA . So we have no choice but to discard custom duty

Anonymous said...

When you introduce VAT will all the Kanmathee fihaara start having bill books and accounting? By the way where is Kanmathee fihaara dharani now? All cleared?

Anonymous said...

To Anonynous 7'57 am, If we are not ready to give up custom duty why did maumoon sign SAFTA? He sure screwed up the Maldives.

Anonymous said...

corruption will increase 100 times with income tax. in abrod countries too maximum corruption is in the income tax. how we can control corruption.

Anonymous said...

Being the country with the highest per capita GDP as well as the highest income disparity with in South Asia I fully agree with you on the regressive nature of import tariffs and their disproportionate impact on the poor. Having said that let me relate you two stories.
The first is of a strongman in a village squeezing the last drop of water from a cloth and daring the crowd to squeeze one more drop. A man gets on the stage and sure enough to everyone’s amazement squeeze out the last few drops. “He is the tax collector!” Somebody shouts.
The second is a lesson told to me by my late chemistry teacher that there is more gold in the ocean than in all gold mines known. Of course in dissolved form. The cost of extraction of this gold using extraction technology is far exceeds the value of the gold. So in economic terms the transaction costs of taxation system may far outweigh the gains for our small country. But this is what international bodies has been demanding from us for years as an ‘essential prerequisite’ for further investment along with more transparent commercial practices. Whether we like it or not our custom tariffs are going to come down as part of preferential treatment we afford to our trading partners be it SAFTA members or EU. So given the declining revenues from custom tariffs, taxation will start even with all its attendant problems.
Interestingly some countries and territories in Caribbean similar to ours have structured their economies as tax havens. Why can’t we be like that?
Ubaid T

hashi said...

this is wat surprises me...everything they'd collect duty including freight and local production that may come from abroad...but they can't stop narcotics or fine them. instead more corruption cases evolved. one time custom officers were rich. duty is a'cheerly a collection on deal undone, it's ripping off. tax must be introduced and duties must go down only to ban or limit hazardeous goods to the country.

Anonymous said...

Ubaid, it may be interesting to find out how those tax haven countries manage to raise revenue for services. Maldives was also a tax haven in the 70s. We introduced taxes to provide services.

Anonymous said...

Customs duty is efficient. Despite some corruption it yields good revenue.Business people don't like it. Because they know they can cheat income/sales/profit taxes far better than customs duty.