The Maldives tourism sector goods and services tax (T-GST) will rise from 12% to 16% with effect on 1 January 2023.
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 general goods and services tax – which covers the domestic sector – will also increase from 6% to 8% next year.
The president ratified the tax bill on Tuesday. The amendment approved by parliament last week “seeks to increase state revenue, following fiscal strategy forecasts that indicate the requirement for measures to accommodate recurring expenditures amidst volatile changes to the global economy,” according to the president’s office.
Elevated oil, commodity and food prices have pushed up government spending beyond budgeted levels, Finance Minister Ibrahim Ameer explained in July. Subsiding fuel has cost MVR910 million (US$59 million) so far this year, up from a total of MVR546 million in 2021, he said at the time.
The government will not be able to plug the fiscal deficit without cost-cutting and revenue raising measures, Ameer said, citing an unaffordable cost of borrowing in international financial markets.
The tax rises will contribute to inflation, the finance minister conceded. But both the World Bank and International Monetary Fund have recommended tax increases 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.
The World Bank also welcomed the proposed tax hikes and recommended other revenue-raising measures to avoid a looming debt crisis.
But as parliament took up the government-sponsored legislation in October, the Maldives Association of Tourism Industry (MATI) appealed for a minimum 12-month notice for the tax increase. A quarter of bookings could be cancelled, the Guesthouse Association of Maldives warned, noting the mid-market sector’s 40% occupancy rate and low profit margin as well as the impact of the war in Ukraine.
The Maldives Association of Travel Agents and Tour Operators (MATATO) estimated a 10% drop in tourist arrivals with a disproportionate effect on smaller tourism businesses. A survey of more than 300 tour operator partners, who collectively represent more than half of tourist arrivals, indicated “an unfavourable impact on demand” compared to reopened competitors such as Phuket and Bali.
“It’s difficult to pass on this cost to tour operators with whom we have signed one- or two-year agreements in advance,” Mohamed Khaleel, CEO of Pulse Resorts and Manta Air, told TTG Asia.