The Maldives government has decided to raise the tourism sector goods and services tax (T-GST) from 12% to 16% next year.
The general goods and services tax – which covers the domestic sector – will also increase from 6% to 8% in 2023. The T-GST covers all goods and services provided by the tourism sector, including resort supplies, travel agency services, and domestic air transport for tourists.
The tax hikes are part of “corrective measures” to improve the country’s fiscal outlook due to challenges posed by unforeseen global conditions, Finance Minister Ibrahim Ameer announced at a press briefing on Tuesday (July 5).
Elevated oil, commodity and food prices as a result of Russia’s invasion of Ukraine as well as persistent supply chain constraints have pushed up government spending beyond budgeted levels, he explained. Subsiding fuel has cost MVR910 million (US$59 million) so far this year, up from a total of MVR546 million in 2021.
The government will not be able to finance a large fiscal deficit in 2023 without cost-cutting and revenue raising measures, Ameer said, citing an unaffordable cost of borrowing in the international finance market with higher interest rates amid an anticipated global economic downturn.
The tax rises will contribute to inflation, the finance minister conceded. But both the World Bank and International Monetary Fund have recommended GST hikes as the Maldives has one of the lowest rates among small island developing states, he noted.
According to the IMF, an increase in the T-GST rate is justified by the relative inelasticity of demand for tourism and its high profitability in the Maldives. “The unique tourist experience in the Maldives likely generates economic rents that suppliers of tourism services will try to capture through higher prices. In theory, taxes can be imposed on these economic rents without impacting the supply of the services, providing an opportunity for governments to increase tourism’s benefits to residents,” the IMF observed.
But the IMF advised delaying the tax increases to 2024 due to global inflationary pressures and uncertainty over the Covid-19 pandemic.
Driven by the strong rebound in tourism, the Maldives economy is expected to recover to pre-pandemic levels by the end of the year with GDP growth projected between 13% to 16% for 2022, Ameer said.