On 22^nd November 2022, the Maldivian Parliament voted for the sixth amendment of the Goods and Services Tax Act (no. 10/2011); which increases the General Sector Goods and Services Tax from 6% to 8% and the Tourism Sector Goods and Services Tax from 12% to 16% (both of which will be referred to as GST collectively from hereon). The Maldives adopts two rates to cater to the stark differences between both industries. The new GST rates will become effective from 1^st January 2023 onwards. This GST rate increase brings the Maldivian rate closer to the OECD average of 19.2%.

Purpose
The purpose behind the increase in rates is to increase government revenue. The country’s national debt is rising rapidly, and the government is desperate to increase revenue. The GST is the strongest revenue raising tool available at the behest of the government.

The amendment focuses on the increase in rates but fails to take any steps to modernise the existing GST system.

Regressive Nature
The GST is a regressive tax. This means that it impacts the poor more than the rich as a larger percentage is taken from the poor in contrast to the middle income or wealthy. The tax is indirect in nature where tax is collected from consumption. Therefore, consumers will pay GST every time they purchase a GST applicable good or service.

Consequences

1. Firstly, as mentioned above, it places an undue burden on the poor, which in itself is unfair. This is mitigated using zero-rated and exempted goods and services. However, zero-rating and exempting goods present various other issues and it is not the optimal solution for solving the problem of regression.
   
2. Similarly, small businesses are also disproportionately affected. Small businesses incur tax administrative burdens as a much larger percentage of their revenue in contrast to large businesses. Any abrupt and rapid changes in taxes leave small businesses in a precarious position.
   
3. The GST amendment leaves all businesses less than a month to prepare and comply with the changes. Giving reasonable notice is vital so that small businesses can plan their cash-flows to prepare for the upcoming tax hike. This change will surely be a fatal blow to Maldivian SMEs.
   
4. Another direct consequence is that at a minimum, the price levels in the economy will rise pursuant to the increase in GST rates. Moreover, the increase in cost push inflation often creates further negative multipliers such as the wage price spiral which inevitably leads to a compounded increase in price levels.

The Solution
While the GST may be the strongest tool we have, it has become extremely blunt. Although increasing the rates is important, this change in isolation can be described as poor policy making. Instead, the policy must be calibrated to meet the requirements of the economy. I have highlighted the problems that require urgent solutions within the GST regime in my recent publication by the IBFD. If I were to summarise these required updates, it includes;

1. Modernising the GST system;
   
2. Changing the registration threshold to meet the changes in the value of money i.e. inflation;
   
3. Preventing the leaks in the current system caused by the violation of the destination principle.  
   

It is important to consider the wider implications of the GST changes to the economy without simply increasing the rates. The strongest fiscal weapon must be weld with the utmost duty and responsibility. Understanding the complicated nature of the GST is imperative in making holistic policy decisions.