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THIRD ASIA TAX FORUM

Tuesday, 27 June 2006

Overview and Updates on Excise Taxation. The role of indirect taxes has increasingly been significant. Internal revenue taxes have been restructured in the light of trade liberalization and reduction in tariff rates. They now account for a growing percentage of total revenues of governments in Asia. Indirect taxes are used for important policy goals such as the internalization of negative externalities. Participants to the forum shared recent directions and changes in their indirect tax systems. Excise taxes are commonly levied on alcoholic beverages, tobacco, and petroleum products. They are levied not only to raise revenues, but to discourage consumption of certain goods and services, and encourage the use of goods that promote sustainable development.

Reforms on excise taxation center on broadening tax bases and strengthening administration. Tax exemptions are being reviewed to make them more focused. Non-declaration and under-declaration of taxes are checked using secondary sources of data and third-party information. These thrusts underscore the need for organizing a data base, computerizing data, and installing systems and training programs to enable tax officers to use data efficiently in tax assessments and audits. In countries where excise taxes are collected by several agencies, the challenge of data sharing and coordination of tax programs remain. The other priorities are improving tax compliance of taxpayers so that requiring an invoice becomes a habit, enabling tax officers to competently deal with transfer pricing schemes, and minimizing abuses in the claim of tax refunds.

With respect to changes in the tax structure, the application of VAT on financial institutions and services is a common concern. The participant from India took up the issue of harmonization of excise and sales taxes at the state level. With the increasing importance of the service sector, he said it is important to explore the imposition of excise taxes on services. He also added that in order to improve efficiency, there should be coordination among tax collection agencies through the use of a common taxpayer ID and establishing a network with financial institutions.

Malaysian participants reported on the preparation that is being undertaken by government to replace the current Sales and Service Tax with a GST (VAT).

The participant from Taiwan reported that the Health and Welfare surcharge on tobacco products was doubled from NT$250 to NT$500 to discourage consumption of products that are detrimental to health. The excise tax on petroleum products was reduced for three months as a mitigating measure against the increase in oil prices.

Indirect Taxes in the WTO Era. Mr Hafiz Choudhury revisited taxation of international trade due to the broadening of the scope of WTO agreements after the Uruguay Round. These include a uniform regime on indirect taxes for imported and domestically-produced goods. The use of tax subsidies as a form of protection is not allowed. The WTO encourages transparency in tax administration and has provided a set of principles for settlement of disputes.

Optimal Excise Taxation. Dr Kontee from the Ministry of Finance of Thailand used the Ahmad and Stern model in explaining how to design tax reforms that are optimal at the margin. The model suggests that the optimality of an indirect tax structure may be evaluated by comparing the marginal social welfare costs of raising revenues through an increase in the excise tax rates. The tax on goods with lower marginal costs should be increased and should be reduced on goods with higher marginal costs. Dr. Kontee bats for simple tax structure. For example, he recommends the use of specific tax rates for alcohol products that vary with alcohol content to support the health objectives of government. He admits the difficulties in estimating the costs of externalities but it is a challenge that fiscal economists should continuously address.

Earmarking and Special Levies. Professor Joosung cited that earmarked taxes in Korea accounted for 17.2 percent up to 35 percent of total tax revenues. His studies showed that the link between specific sources of revenues and expenditures does not appear tight. He surmised that that earmarking of taxes is prompted by other rationale such as revenue generation. His recommendation is to keep earmarking to a minimum, except for cases where there is a direct link between expenditures and revenue sources.

VAT and Financial Services. Mr. Foster highlighted the effects of VAT exemption on financial services . Private savings are indirectly taxed due to the increase in bank fees. The VAT is embedded in the prices of financial services and cascades through the economy. Exemption increases costs of compliance due to the difficulties of the taxpayers in allocating input taxes between taxed and exempt goods and services. Mr. Foster advocates for a wide application of zero-rating for financial transactions.

Fourth Asia Tax Forum. The participants enthusiastically endorsed the conduct of the Fourth Asia Tax Forum. The Vietnamese delegation graciously accepted the responsibility of hosting the forum. Madam Nguyen Thi Cuc, head of the Vietnamese delegation and Deputy Director General of Taxation flashed a heartwarming smile as she said “You are all welcome to Vietnam.”

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