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economic stimuli needed for previously high-growth Asian economies

Kitty Miv, Editor
16 November, 2015

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

The Indian Government loves a committee. It seems there's no problem that can't be solved by a panel of distinguished former judges, lawyers, academics, and senior bureaucrats, especially in the area of taxation. Except that, have any of them really solved anything? Not that I can see. Committees were a favorite tool of the former Congress administration when a particularly complicated knot in tax law needed unravelling, and given that India's reputation in the eyes of foreign investors plunged, we could justifiably conclude that they achieved diddly squat. While I admire the direction that the current Government is taking on tax and the economy, it seems to be falling into a similar trap. Since the BJP won office last year, we've had committees on the proposed goods and services tax, on India's conversion to IFRS, and on resolving retrospective tax disputes, among others. Indeed, there is a danger that the bewildering array of special tax committees just adds to the overall confusion that seems to accompany Indian tax legislation at every step.

At the end of October, the Ministry of Finance constituted a committee tasked with recommending ways to reduce tax disputes between the Government and large businesses. Sounds like a good idea doesn't it? I suppose so. But then what's the grandly titled High-Level Committee on tax, announced as part of the 2014 Budget, for then? And why has it just had its remit extended by a year? Aren't both committees basically trying to do the same thing? You'll have to ask the Government about that. But be warned. It might take a year or two to get the answer, probably from a specially constituted committee set up to examine what each committee is doing, likely staffed by distinguished former members of former committees. On a serious note though, perhaps government by committee is a subconscious acknowledgment by the Government itself that it doesn't have all the answers to India's problems.

Indonesia has featured quite heavily in the news recently on the tax front, and largely for good reasons; that is to say it has been cutting taxes with much vigor over the past few weeks. Indeed, it's been quite hard to keep up with it all. Since the end of August, the Government has: expanded the scope of the so-called "pioneer" tax holiday scheme; provided tax relief on the interest earned from deposits in local bank accounts for exporters; exempted imported transportation equipment from goods and services tax; exempted certain items to be used in industry from import duties for a period of two years; cut tax for companies revaluing their fixed assets; and, most recently, announced that the range of tax incentives on offer to foreign investors will be expanded again. The Government is also lining up what could be a fairly substantial cut in corporate tax, although it has been rather coy about the scale and the timing of the measure.

While all this is probably enough to earn Indonesia an encomium, it does hint that all is not well with the Indonesian economy. Indeed, it is a pattern that is being repeated in other emerging economies in the region, including Thailand, Malaysia, and Vietnam, which have also cut taxes in staccato fashion in recent weeks as they attempt to stimulate their economies. Indeed, the phrase "economic stimulus" is now being used on a regular basis in previously high-growth Asian economies, which have been the backbone of recent global growth, whereas it is more normally associated with the low-growth developed economies of the G8. This doesn't bode well for the world economy.

Expanding on this theme, economic growth, or the relative lack of it, isn't the only thing that emerging market economies in the Asia-Pacific region are worrying about. The knock-on effect that lower growth is having on tax revenues is also causing revenue ministers sleepless nights. Indonesia's recent confirmation that a tax amnesty will be staged in 2016 betrays a certain level of desperation on the part of the Government, with tax revenues widely expected to substantially undershoot targets this year; amnesties might provide a short-term boost to tax revenue, but studies suggest they erode tax compliance over the long-term. Malaysia is in a similar position, and has recently sought to shore up its revenue base by introducing a goods and services tax and hiking tax for those on high incomes in the recent budget (remember the so-called "competitive" tax hike?).

Tax revenue also seems to be preoccupying the Government of the Philippines too. President Aquino is steadfastly refusing to give in to the demands of certain legislators and cut the country's uncompetitive taxes. The fear is that such a course will deplete the coffers and cause a loss of confidence in the country's ability to manage its finances. And it is in such situations that Government's start to get greedy. And appropriately enough, the country's proposed tax on sugary drinks, designed to tackle obesity and other health problems, is just such an example. I'm not sure whether taxing sugar or fat or other stuff that makes certain foods so unhealthy works. A lot of countries seem to think that it's the way to go, but there is not much evidence to suggest that sugar taxes influence consumers, pushing them towards healthier dietary choices. Perhaps if "fat tax" revenues were 100 percent ploughed back into health initiatives directed towards prevention of diseases related to poor diet, things might change. But in most cases, they are probably not. In the Philippines, only 20 percent of the expected USD730m in revenue from the sugar tax will be allocated to health schemes. Half of it will disappear into the Government's bank account, to be spent on who knows what. The tax might do some good, but ultimately it's more a revenue raiser than a life-saver.

Finally, as we approach the season of goodwill, here's a little heart-warming story from the sun-kissed shores of the Caribbean. Not so long ago, the twin-island federation of St Kitts and Nevis was on its uppers after its public debt soared to the third highest in the world as a percentage of gross domestic product. After going through a painful fiscal restructuring program backed by the IMF, the territory appears to be back on its feet, although somewhat fragile. Yet, it has still managed to provide the populace with a temporary cut in value-added tax in the run up to Christmas. Admittedly, this year's VAT gift will only be for one day as opposed to the usual two. But can you imagine any of the big countries offering such a gesture to their overtaxed citizens? Neither can I.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

Indonesia cutting tax

St Kitts and Nevis warm

Kitty's Execrations

India committee land

Philippines saccharine



Tags: Government | Asia | Law

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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