TAX AND LEGAL

Finding a Balance, Part 1: Tax Cuts and Increased Government Spending

Tanva Mahitivanichcha Tanva Mahitivanichcha

As the world’s economic engine slows, countries are moving to stimulate their economies by increasing government spending and cutting taxes to inject cash into the domestic economy. Such actions are intended to boost the economy, and prevent it from stalling.

India recently announced a surprise corporate income tax cut from 30% to 22%, a move that is estimated to cost the government 20 billion USD in revenue. The government is preparing for these cuts even as spending is going up. Indian government spending reached a new high of 4,218 billion Rupees during the second quarter of 2019, up from 3,686 billion Rupees in the first quarter.

China has already made moves along similar lines, leading the way by reducing its value added taxes for sectors such as manufacturing, transportation, and construction in 2018 – with further VAT reductions made in April 2019. These moves represent large bets on the efficacy of tax reduction as a stimulus; it has been estimated that the Chinese government has foregone about 129 billion USD in tax revenue in the first 5 months of 2019 alone.

ASEAN countries such as Indonesia are also cutting taxes in an effort to stimulate their economies and attract more investment. Indonesia plans to reduce its corporate income tax from 25% to 20% in 2021, while offering listed companies further tax reductions that will push their rate down to 17%.

On the home front, Thailand is also following a similar economic roadmap. The government promised during its election campaign to stimulate the economy through personal income tax cuts. The government has since unveiled a 10 billion USD stimulus package aimed at boosting tourism through providing tax rebates for domestic tourists, grants for low-income earners, and debt relief for the farming sector.

In addition, Thailand is also committed to developing the Eastern Economic Corridor (EEC), a project that already saw the government approving a development budget of 45 billion USD in February 2019.

Any or all of these efforts may generate their intended effect of boosting investment and future economic growth, but they still must be paid for. In Part 2 of this article, we examine how Thailand aims to balance its books, given its commitment to creating a better business environment.