Finance Minister Uttama Savanayana talked about a ‘widening’ of the tax base in August. In reality, it appears to amount to a raid on the internet economy to make it pay its fair share of the tax burden. On Wednesday, at Chulalongkorn Business School, it was announced that Thailand had fallen in the global competitive rankings from 38th to 40th place. The problem for this government is it must plug a gap as traditional tax revenue has now begun to fall off due to the economic downturn. However, taxing the internet presents a minefield for revenue and government officials to navigate.

Thailand’s Revenue officials are grappling with the challenge of how to widen the kingdom’s current tax base to meet ambitious government programmes as the downturn in the Thai economy has now impacted tax receipts which were buoyant to the end of June, the end of the 2018/2019 fiscal year. The answer appears to be the internet with officials signalling an e-commerce tax bill now by the end of the year. They face a dilemma as some economists warn that taxing the internet could stifle the economy further and produce unforeseen consequences.

In August, the Thai Finance Minister Uttama Savanayana (centre) spoke about widening the Thai tax base. It now appears that this means bringing the internet into the tax net. This week, Revenue Department spokesman Pinsai Suraswadi (inset bottom left) gave an insight into the quandary Thai tax officials are in as they try to strike a balance between promoting the internet economy and taxing it. It is expected that some provision will be enacted and be in place during 2020.

A spokesman for Thailand’s Revenue Department on Tuesday indicated that the government was looking at a variety of options to shore up tax revenues as the slowdown in the economy is now impacting tax receipts.

Revenue admit they may have to lower tax-take estimate for 2019/2020 after a falloff since July

Pinsai Suraswadi is a key adviser at the Revenue Department and regular spokesman. He indicated that the government agency may have to cut its revenue projection for the current fiscal year which runs up to the end of June from its current estimate of ฿2.1 trillion.

Widening of the tax base means taxing the internet

In August, Thai Finance Minister Uttama Savanayana indicated that one of the key priorities of his department and the new government was to widen Thailand’s tax base. 

At that time, the Director-general of the Revenue Department, Ekniti Nitithanprapas, while confirming a buoyant rise of 8.1% for the 2018/2019 year, did indicate that tax collection officials had seen a remarkable slowdown in tax collections from the 1st of July and outlined a growing list of factors that have impeded Thailand’s economy in 2019 such as curbs in lending and the devastating effect of the US-China trade war.

Revenue Department wants new law for 2020

A source at the Revenue Department at the time explained that the wider base announcement meant, in reality, new taxes to generate income from internet-based business and trade activity. At the time, the director-general said he would like to see e-commerce tax legislation looked at by the House of Representatives and have the new law in effect for 2020.

New internet tax bill now likely to be presented to House of Representatives at the end of the year

It now appears that it will be the end of the year before the government presents legalisation, as authorities weigh up the best approach not only to generate more tax revenue but also in an effort not to stifle the growing online economy which is key to the Thai government’s Thailand 4.0 agenda which sets out to embrace technology.

Tax collection agency faces a difficult challenge

It is a difficult challenge driven by the ingenuity of Thais at grassroots levels who through the smartphone revolution, have taken to the internet not only as buyers but also sellers. ‘Our laws just can’t catch up with market trends,’ admitted Mr Pinsai on Tuesday. ‘Current rules put the responsibility on the customer to come to us to pay the value-added tax. But in reality, it’s difficult to collect.’

Thailand like other countries facing a decision one that also extends to economic ideology

Thailand finds itself in a similar situation to other economies around the world including France which has recently sparked controversy with US authorities over its plans to tax the internet giants.

There is also debate within the United States about the current untrammelled nature of the internet which many economic theorists on one side of the ideological divide, consider essential for its success.

Ultimate solution would be a blockchain future but for now, that is more fiction than fact

Ultimately, the solution may be further off through the use of blockchain financial transactions and automatic tax collection but that day right now appears to be more fiction than fact. Currently, many governments even in Asia such as Malaysia and Indonesia, are grappling with the conundrum. Malaysia is to impose a 6% tax on internet services from the beginning of 2020.

Move the 7% sales tax online to be charged by tech giants or a direct levy on the big boys

One proposal being considered by Thai authorities is to impose a 7% sales tax on all transactions through social media sites such as Facebook and online sales platforms within Thailand. An alternative might be a distinct internet sales activity tax levied on the sites themselves payable in relation to their income within the kingdom.

Recent bill draft focused on trading concerns in Thailand with over ฿2 million in income 

In August, the bill being considered would have imposed a duty on banks to report any accounts with over 3,000 remittances and over ฿2 million in receipts from a minimum threshold of 400 remittances. This would have provided the basis of the Revenue Department tracks down smaller to medium-sized internet business while also engaging with the internet giants on a direct sales levy.

Thailand’s 7% sales tax is a key component of current government revenue

A large proportion of the Thai government’s tax receipts come from the sales tax at 7% which generated ฿806 million 2018 before the economic slowdown kicked in. 

It is estimated from research conducted by Google and Boston based management consultants Bain and Co. that Thailand’s e-commerce sales sector alone is worth ฿545 million in five years and the wider internet market has been estimated at ฿1.5 trillion.

Internet trading has been embraced by Thailand’s massive black economy. hard to quantify

The figures do not include Thailand’s pier to pier internet economy which has exploded in the last five years with small Thai traders, in particular, Thai women, trading goods and services through online media and apps such as LINE.

LINE is particularly popular in Thailand as it has a convenient payment system and users can exchange photos of products and environment quickly with rapid turnaround times as well as voice and video connections.

LINE and Facebook are part of the Thai small business environment and are still expanding

Most small businesses that make up the immense black economy in Thailand which some researchers have estimated to be as much 45% of total GDP, now have a social media trading income stream using apps such as LINE and Facebook. Online payments are also making up a larger proportion of the income for even the smallest business concerns.

Fears of stifling future momentum

The problem for the Thai government is that it lacks information and data on this activity. Authorities are rightly mindful of the potential danger in throttling with could be a future part of Thailand’s vaunted aim of becoming a technologically advanced economy not just from inward investment from large foreign firms and the arrivals of global tech firms but also from the bottom up.

This is the danger in the long term says Bank of Ayudhya chief economist – lost opportunities 

This week, speaking to Thailand’s Bangkok Post newspaper, the Chief Economist at the research unit for the Bank of Ayudhya warned that Thai authorities must consider very carefully the impact of both taxes and regulation on the emerging e-commerce sector. ‘If the government is only looking to add more revenue by imposing this tax without contemplating foregone opportunities, it won’t be good in the long-term.’

Observers fear that the wrong approach may simply choke off Thailand’s future growth prospects online or have other unforeseen consequences. 

One of these may the loss of future investment in the sector to the kingdom or the killing off of some encouraging and exciting trends as Thai people have embraced the new online world of trade.

A low tax, less regulated economy could be a unique selling point for the kingdom in the future.

Ire of the current US administration

It may also draw the ire of the US administration which is, for one thing, now known for its unpredictability and capacity to retaliate.

The introduction of the French internet tax went ahead at the end of August as the US President appeared to back down on the threat to tax French wines but it would be premature to assume that the matter is settled.

New world divide on the freedom of the internet

Many of the giants in the tech sector are US firms and already there are signs of deepening divisions between the US and the European Union over government regulation of the internet.

This is also something that Thailand must also be cautious about. It will be essentially choosing sides as, just as in trade policy, the US moves away from the concept of global consensus. China and the European Union are now adopting a heavier hand with the internet which is increasingly different from the US approach and moving ever closer to confrontation.

Taxing small imports that are now exempt

In the meantime, Mr Pinsai from the Thai Revenue Department has also highlighted another approach which tax officials in Thailand are currently deliberating on.

This would be the imposition of customs duties on the huge range of imports which are currently not subject to duties. The value of such items is under ฿1,500.

In effect, this would a protectionist move but one that could generate government income and give an advantage to Thai based e-commerce sellers, bases and logistics firms.

Government must decide this year and find the right balance that does not impede future growth

The debate about how Thailand going is to plug the gap between its current falloff in taxation and its plans for higher government expenditure to fund its more ambitious plans to support key economic sectors such as farming cannot go on too long.

The answer that is now being considered, of course, is the internet and the achievement of the right balance that generates sufficient income but also does not unduly impede growth in the sector.

Whether any tax at all is a good idea is debatable as Thailand seeks to position itself as an attractive place for high tech firms and internet startups to do business.

Thailand drops in global competitive rankings

On Wednesday night at Chulalongkorn Business School, they held their annual World Economic Forum competitive rankings analysis.

Thailand, despite its commitment to becoming high tech, a high-income country under the Thailand 4.0 plan whose underlying idea is a more competitive economy, dropped two places from 38th in 2081 to 40th place in 2019 when compared with 140 world economies. Singapore moved to Number 1 while the US was in second place followed by Hong Kong. 

Both Singapore and Hong Kong have relaxed internet tax policies limited and applicable to their small populations. In the US, some state governments have applied sales tax regimes but it has yet to be seen if these will be successful as many US firms and indeed citizens avoid states with more burdensome tax regimes.

Other countries are making progress faster

However, there was some good news from the Chulalongkorn survey. Thailand’s overall competitive index score rose from 67.5 to 68.1. The result means that while the country might be heading slowly in the right direction, it runs the risk of being overtaken by other economies getting there faster.

An internet sales tax or levy despite the Thai government’s efforts to put a PR spin on the new measures will not be a step in the right direction.

Further reading:

Thai economy remains sound says Fitch the ratings agency as the baht’s surge may be over for now

Finance minister ready to take further action to prevent the Thai economy falling into recession

Thai economy still growing, country in robust shape to navigate any choppy waters ahead: IMF