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Fifth Asia Tax Forum

Wednesday, 13 August 2008

11-13, 2008
The Taj Mahal Hotel
Mansingh Road, New Delhi

The Asia Tax Forum raises the bar every year. The forum in Delhi was attended by senior officials from 12 countries. Participants from New Zealand, Australia, Sri Lanka and Pakistan attended the ATF for the first time. There was healthy participation from the private sector especially from financial institutions, and manufacturers of products subject to the VAT and excise tax. Faculty members from academic institutions added depth to the discussions. The National Institute of Public Finance and Policy of India was a most efficient host and went out of its way from the very first day of the ATF. The staff members met the participants individually at the airport and served as gracious hosts during the inaugural dinner that was hosted by the Ministry of Finance (MOF). The panel discussions were chaired by senior officials from the MOF.

In his opening speech, the Honourable C Ranjagaran, Chairman, Economic Advisory Council to the Prime Minister, welcomed an ATF where government officials can interact and share ideas with members of the academe and industry. Discussions at the ATF can be sources of best practices that can be used as benchmarks in tax administration and compliance. He stressed the importance of minimizing uncertainties in tax policies and developing tax systems that are simple, clear and transparent. Although the primary purpose of taxes is to raise revenues, governments should not lose sight of the economic distortions that taxes can introduce. Dr. Govinda Rao, Executive Director of the NIFP, could not agree more and emphasized the importance of getting the architecture and management of a tax reform correctly. He welcomed the holding of the ATF at a time when the VAT is being introduced in India.

Dr. Kavita Rao, Deputy Director of the NIFP presented an emerging landscape for the Goods and Services Tax for India. A dual VAT, with both the union and state government imposing a GST, is being considered favourably. Exemptions from the tax will be designed towards a broad-based tax and will be limited to unprocessed agricultural foods, education, health care, and financial services. Although a 20 percent VAT rate is in accord with the revenue-neutrality criterion, government is exploring other modalities including a tax on luxury items. The other issues that remain unresolved are the treatment of inter-state transactions and an infrastructure that can promote efficient administration and compliance.

The completion of the ATF’s regional tax studies is a milestone of the Delhi forum. The first of these studies is the “Indirect Taxation of Supplies of Financial Services in Asia” which was conducted by Prof. Lee Burns of the University of Sydney and Prof. Joosung Jun of Ehwa University, Korea, in coordination with senior finance officials from the region. The study reviewed how financial services are taxed in Asia. In countries like the Philippines and Thailand, financial services are subject to a tax on gross receipts while exemption is provided in Singapore, Indonesia, and Korea. China, on the other hand, taxes financial services at the margin, i.e. interest received less interest paid. In these cases, Prof. Burns cites over-taxation (since input taxes cannot be claimed as tax credit) and under-taxation of consumers of financial services at the retail level. He highlighted the zero-rating of business-to-business supplies in New Zealand as an attempt to address these problems.

The second regional study is on “Excise Tax Expenditures in the Asia Pacific Region” which was presented by Prof. Adrian Cooper of Oxford Economics. The paper estimated a benchmark tax rate on certain goods that are subject to excise in Asia. Their volume of production, sales value, tax revenue, and prices were used to estimate a “benchmark” tax rate. The benchmarks were compared with the actual tax rates and volume of consumption to estimate how much revenues were foregone with the use of lower tax rates. The study noted that significant tax expenditures exist in Asian tax systems even if they are without any clear economic rationale. The study noted that benchmarking can be useful in designing tax policies that can improve the equity and efficiency of tax systems.

Two other areas received significant focus in the Delhi ATF. These are the VAT and Environmental Tax Policy. The experiences of Australia and New Zealand were presented by Second Commissioner Bruce Quigley of the Australian Tax Office, and Mr. Graham Tubb, Group Tax Counsel of the Inland Revenue Department, New Zealand.

In his paper entitled “Challenges in Introducing a VAT/GST: the Australian Experience”, Second Commissioner of Taxation Bruce Quigley emphasized that any tax reform should be accompanied by programs that enhance taxpayers’ confidence, and which prepare the tax machinery at least a year in advance. A capable staff should be recruited, and trained. A marketing and education program should be in place. He gave primary importance to the development of partnership with industry through various and intensive consultations which can result to a “co-design” of a tax reform. He cited that New Zealand employed a multi-faceted marketing program to keep everyone on board. These involved advertising, community education campaign, and practical assistance through the web, call centres, and, visits by the staff. Success in implementing a new reform is highly dependent on engaging the taxpayers, provision of incentives for honest compliance, and implementation of programs that identify and discourage non-compliers. Equal concern is needed in transitioning the old system into the new system in a seamless way.

Mr. Tubb focused on similar priorities in getting a tax reform right. His key words are:

• Consult, consult, consult
• Invest in education
• Form alliances with the private sector
• Focus on getting the administration right
• Leave enough time
• Keep talking to business
• Keep it simple.

Prof. Hope Ashiabor from Macquarie University gently ushered the ATF’s discussion on green tax reforms. Fuel taxes are important in this regard considering that they account for about 40 percent of environmental tax revenues in OECD member-countries. The challenge is to design them in such a way that subsidies for environmentally harmful fuel is phased out and that incentives are provided for the development of alternative transport fuels and bio fuels. In the process however, governments must be aware of the dangers in picking winners. Incentives must also be gradually phased out to prevent their effects from becoming perverse.

The discussions that were interspersed with the paper presentations were lively and colourful (which is perhaps an understatement, considering the fervour with which the issues were raised.) Government representatives looked at benchmarking with some reservations considering that tax structures result from an interplay of culture, traditions, and politics. A representative from the banking sector clarified that the spread between lending and borrowing rates is not as wide as assumed. Mr. Sunley, former Assistant Director of the IMF, put on his cap as a fiscal expert many times. He advised Prof. K. Rao, for example, that VAT systems all over the world do not give exemption to purchases of government. The participants shared country experiences and raised the importance of having business plans prior to computerization of tax administration.

The afternoon of the third day was devoted to developing the agenda for the next meeting. Mr. Dan Witt, President of International Tax and Investment Center (ITIC) read a letter from Mr. Michael D’Ascenzo, Commissioner of Taxation of the Australian Tax Office that the ATO is “looking forward to hosting the Sixth Asian Tax Forum in Canberra in 2009.” Based on the suggestions of the participants, the ATF will have a rich agenda:

• Energy and environmental taxes
• Improvement of tax administration: addressing corruption, design of incentives for compliance and efficiency, benchmarking, change management
• Incidence of indirect taxes
• Tax incentives with a focus on simplicity on administering current systems of incentives (Dr. Rao said that if you cannot fight them, the least that can be done is to administer the current system efficiently)
• Tax assignments between national and local governments
• Property taxation
• Planning for tax reforms
• Taxation of electronic commerce and cross border transactions
• Natural resource Taxation

The Malaysian delegation raised a special interest on learning more about taxing Islamic banks.

Mr. Witt thanked the Ministry of Finance of the Government of India, the National Institute of Public Finance and Policy, and all the participants for helping make the ATF a useful, relevant and interesting venue for “learning, fellowship and friendship.”

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