Maldives tourism tax policies

Back in 2011, the Government introduced a comprehensive tax system; whereby a Goods and Service Tax (GST) was introduced generally on all consumer goods and services for the first time in the history of Maldives. That is when so many international donors and development partners have been advising and recommending to introduce such a tax system long long ago, even when I first joined the Ministry of Finance in 1995. There have been many reports and documents by international donors like World Bank, ADB, and IMF on the importance of introducing Business Profit Tax, and GST. Well, I’m not sure exactly the reason, but the fact remains, it was not done!

When the new tax system was formulated, we were embarking on a huge economic reform program. This program was prepared after careful and consistent research of the Maldives economy, and after considering the recent international developments and its impact on the Maldives economy. We did a lot of work in terms of in-depth study of the Maldives exchange rate regime, and the dynamics of the Maldives economy. During my work at Maldives Monetary Authority (MMA) research division, I wrote a paper in 2010 on the real exchange rate of Maldives.

It was obvious from our research and analyses, that we had to increase our fiscal revenue, and that we cannot continue with huge fiscal deficits. Almost everybody working with us, those in MMA and those in Ministry of Finance agreed that monetization is not an option, and relying on printing Rufiya can never be a means of deficit financing. Printing Rufiya can only lead to increased inflation, and thus pressure on the dollar.

I was working as a State Minister at Ministry of Finance, and we worked real hard during those one year, when we actually saw the drafting of the bill, passing of the law, and enforcement of the law by collecting the tax money. We spend days and nights educating and creating awareness on the new tax laws. We did presentations to the MPs first, so that they can pass the bills after having a understanding of what they are actually passing. We educated the Police, MNDF, political party members, school children, and the general public through various presentations, TV and radio interviews.

We met with almost all the major resort owners, and briefed them on the state of the economy, and almost all of them supported us, and were prepared to provide their cooperation in bringing the economic reforms.

We had a lot of support from the MIRA, and we worked very closely with the entire team there. We abolished the import duties of many consumer goods being imported into the country, and we reduced the import duties of various other items. To compensate,  we introduced GST on general goods, with exclusions on very basic food and other consumer goods and services.

We proposed the abolition of the $8 bed tax after a grace period, so that the tourism sector will be taxed at a rate of 8%. We considered the price elasticity and the income elasticity of our tourism product, and worked on the optimal tax rate that cannot harm the competiveness. Hence, the following tax rates were passed for the tourism sector when it actually became law.

From the introduction until 31^st December 2011 – 3.5%

1 January 2012 to 31^st December 2012 – 6%

1 January 2013 onwards – 8%

Resorts, hotels, tour operators and travel agents always had the complaint of too many changes and within such a short period of time. And this complaint will always be there and it’s a valid one too. As holiday bookings are made so many days in advance, and also promotional materials are printed beforehand, any changes to the tax regime or the tax rate has to be known at least one year in advance. The 3.5% in 2011 made sense, as many businesses actually absorbed it and paid from their profits, in order to not to burden the agents or the customers. The rates in 2012 and from 2013 onwards were being given enough notice, and we all had certainty that it won’t change. Our understanding when we were working on the new tax policies was that tax rates will not and should not be going up after this, and it actually should be going down year by year, as we move on to fiscal surpluses.

We believe that even without increasing the tax rates, we can still have high tax revenues as we expand our production, and as we make new investments. As we cannot continue increasing the tax rates on tourism every time a new government comes into power and every time a new government project or pledge has to be fulfilled. Any changes to the tax rates has to be brought after careful analysis of its impacts on the tourism competitiveness, and the impact on the overall tax revenue in the medium to longer term. Rather we need to focus our attention in increasing more businesses, investing on tourism infrastructure so that we can increase the arrival numbers so that tax revenue can increase.