Wednesday, February 2, 2011

Business Profit Tax - Does it make us better off?

Recently the Majlis has passed the Business Profit Tax Act, and it has come into effect on 18th January 2011. According to the Article 41 of this Act, the law has to be implemented within six months, (by July 18th 2011). This means, businesses in Maldives have to pay tax on business activities carried out after that date. I wonder how many firms or businesses actually are aware of this., and I wonder whether the relevant authorities are doing enough to make the public aware of this. Anyway, that is not the issue that I intend to cover here. I guess what's more interesting would be; how much does this Act reduce the gap between the rich and the poor (ie, make the distribution of income and wealth more even); and by how much does this Act raise the government's tax revenue. There are many other issues relating to taxation that we need to talk about, and I may talk about such issues in a later post. Issues like the efficiency of a tax; compared to the amount of tax revenue raised, the cost of raising such revenue must be minimized in order to make it more efficient.

First of all, let me raise the question; why do we need taxes? Yes, to raise government revenue. Last year (2010), an estimated Rf3.0 billion was raised through taxation by the Government; mainly consisting of import tax, tourism bed tax, and bank profit tax. Through tax revenue, government is able to provide public goods, and provide benefits to the poor, hence, help in reducing the gap between the rich and the poor.

The existing tax system, however has done little in terms of addressing the issue of income distribution in the country. As import tax is paid on all goods imported and consumed, both the rich and the poor pay the same amount of tax. Making this a very regressive form of tax, as considering the income of the rich, the tax burden on them will be very small, compared to the poor. Even the bed tax from tourism industry is very regressive, as the same amount, $8 is paid by all resorts/hotels, irrespective of the room charge. In order to narrow the gap between the rich and the poor, taxes need to be more progressive in nature; meaning to collect a higher percentage of the rich people's income, and a smaller percentage from the poor.

Another objective of taxation is to discourage consumption of certain goods or services. For instance, import tax of certain goods like cigarettes can be increased, in order to discourage consumption.

So, how does the Business Profit Tax (BPT), reduce the income gap in Maldives? There are certain categories of businesses specified in the Act, and taxable incomes are specified. For example, Article 3 highlights on registered companies that are not partnerships, and Article 4 specifies businesses other than companies and partnerships. According to Article 7, all companies, partnerships and other businesses are required to pay 15% of the profits, provided that total profits exceed Rf500,000. If the profits do not reach Rf500,000, no tax has to be paid.
According the 2011 budget, an estimated Rf612 million is to be raised through BPT. This is highly unlikely, as the taxable period only starts from July of this year.

How does BPT help in narrowing the gap between the rich and the poor? Unlike the $8 bed tax, at least its not the same absolute amount that larger businesses and smaller businesses will be paying. A proportional tax rate of 15%, from all types and sizes of businesses in the Maldives may not be the ideal solution for evenly distribution of income.

Larger businesses if required to pay a higher percentage of tax, would make the tax system much progressive in nature. However, will it encourage further investments in Maldives? Will it attract more foreign investments in the country? One of the ways we can encourage businesses to innovate, and increase investments would be to reduce the direct tax on the income or proft, and move towards more indirect forms of taxation.

14 comments:

  1. taxation laws are passed by the parliamentarians, who are also among the biggest businessmen in the country!

    ReplyDelete
  2. So, what's your point? Increase the present rate of 15%?
    How about introducing personal income tax?

    ReplyDelete
  3. conflict of interest would be a hard thing to avoid in any case. as this is new in the maldives the best thing to do, in my opinion, would be to just wait and see how it effects our economy. then learn from the mistakes if you make any.

    ReplyDelete
  4. Can you tell us more about this? I'd care to find out more details.

    Check out my weblog http://leadinghomeprofitnetwork.net

    ReplyDelete
  5. Hey! Someone in my Myspace group shared this website with us
    so I came to give it a look. I'm definitely enjoying the information. I'm book-marking and
    will be tweeting this to my followers! Superb blog and fantastic style and design.


    my weblog; African Mango

    ReplyDelete
  6. Excellent article. I'm dealing with a few of these issues as well..

    testostrong

    ReplyDelete
  7. Wonderful beat ! I would like to apprentice whilst you amend your website,
    how can i subscribe for a blog site? The account helped me
    a appropriate deal. I have been tiny bit acquainted of this your broadcast offered vivid
    clear idea

    my web blog ... money making opportunities *leadinghomeprofitnetwork.net*

    ReplyDelete
  8. Superb blog! Do you have any hints for aspiring
    writers? I'm hoping to start my own website soon but I'm
    a little lost on everything. Would you propose starting with a free platform like
    Wordpress or go for a paid option? There are so many choices out there that I'm completely confused .. Any ideas? Many thanks!

    My homepage; Blast Male

    ReplyDelete
  9. For newest information you have to pay a quick visit world wide web and on the web
    I found this web page as a best web site for latest updates.



    buy e-cig

    ReplyDelete
  10. Hi, I think your website may be having browser compatibility problems.
    Whenever I look at your web site in Safari, it looks fine but when opening in Internet Explorer, it's got some overlapping issues. I simply wanted to provide you with a quick heads up! Other than that, excellent site!

    Feel free to visit my website; 100 Day Loan Online Review

    ReplyDelete
  11. Woah! I'm really digging the template/theme of this blog. It's simple, yet
    effective. A lot of times it's very difficult to get that "perfect balance" between usability and visual appearance. I must say you have done a awesome job with this. Also, the blog loads extremely quick for me on Opera. Outstanding Blog!

    My website; Vimax Reviews

    ReplyDelete
  12. Hi! I could have sworn I've been to this blog before but after looking at some of the articles I realized it's new
    to me. Anyways, I'm definitely happy I discovered it and I'll be bookmarking it and checking back regularly!


    Visit my web site ... Ultra Slim patch

    ReplyDelete
  13. Highly descriptive article, I enjoyed that a lot.
    Will there be a part 2?

    Max Thermo Burn Muscle

    ReplyDelete
  14. I couldn't refrain from commenting. Exceptionally well written!

    Feel free to visit my webpage ... home jobs

    ReplyDelete