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.