Essay: Taxation System Of Maldives And Its Impact On Economy.

Tax system in Maldives

Discuss about the Taxation System of Maldives and its Impact on Maldives Economy.

Maldives effective tax administration is backed by a strong and efficient tax system which was introduced in Maldives through the establishment of Maldives Inland Revenue Authority (MIRA) under Tax Administration Act (law no: 3/2010).  The modern tax system which was introduced in 2011 in Maldives is administered solely by MIRA with the purpose of implementing sound taxation policies, giving advice to government in ascertaining policies related to tax, executing tax laws, planning a systematic cost reduction in tax administration. The taxation policies implemented by MIRA brought swift growth in economic and social development of country (Maldives Inland Revenue Authority, 2013). As provided in data about total revenue collection (2010-2017) of MIRA in 2016, the total revenue collection by MIRA was 14.53 billion.

Taxation system in Maldives is quite simple with broad based taxes in small numbers. Business profit tax and goods and service tax are the important source of taxation here. Business Profit Tax is charged on the profits of business operating in Maldives. It is charged if taxable profit exceeds MVR 5,000,000 in a year. Business Profit Tax also comprises Withholding Tax which is paid at the rate of 10% on the specified payments made to non-residents. Goods and Service Tax was introduces to be imposed on the transaction of goods and services in Maldives under Goods and Service Tax Act (Law No.: 10/2011). This Act comprises tax on tourism goods and services at the rate of 12% and general goods and services at the rate of 6%. Mandatory registration is required if the taxable turnover of a business exceed MVR 1,000,000 in a year. In case of supply of tourism goods and services or imports of goods compulsory registration is requires even if turnover does not exceeds the limit (Ministry of Economic Development, 2015).

Along with the above two there are few other important taxes and fee like Zakat-al-mal, Green Tax, Bank Profit Tax, Remittance Tax, airport service charges and development fee, tourism land rent, duty free loyalty, re-export loyalty. Zakat is a special type of religious tax or obligation on wealthy or rich Muslims for the wellbeing of poor people (Muneeza, 2017). Zakat-al-mal can be paid to MIRA through form MIRA-510 (Maldives Inland Revenue Authority, 2013). Green Tax was introduced as a support to government for environmental protection programmes (Maldives insider, 2014). It is payable by foreigners of Maldives on their stay in any tourist hotels, resorts, vessels or guesthouses. It is charged at a rate of 6 US Dollars per day (Ministry of Economic Development, 2015). Bank Profit Tax is imposed on the net profit of banks at the rate of 25%. It is required to be paid by all the banks operating in Maldives including the branches of banks of foreign countries (Maldives Inland Revenue Authority, 2013). A detail discussion on the features of Business Profit Tax is provided in this report.

Various Taxes

Business Profit Tax is levied on the profits earned by all the businesses conducted in Maldives under Business Profit Tax Act (Act no: 5/2011). It is imposed if the taxable profit from business exceeds MVR 500,000 in a year. Banks, foreign investment, charities, shipping or aircraft businesses are exempt from BPT (Business Profit Tax Act, 2011).

For the purpose of BPT,  registration is required for every person who carries out any business related to any trade, commerce, manufacture, profession or any kind of adventure with characteristics of trade, agriculture, forestry, fishing, horticulture, poultry farming, renting of an apartment, aqua- culture or any other activity carried with a purpose of earning profit in Maldives. Person includes resident or non- resident companies, partnership firm, cooperative society and individuals. Business Registration Form (MIRA 101) is used for registration of business which is available on website of Maldives Revenue Authority (MIRA, 2013).

A tax at the rate 5% is charged on the resident companies of Maldives which are registered in Maldives Companies Act (law no.: 10/96) if its income is earned from:

• Business conducted wholly from outside Maldives;
• Financial instruments like bonds, debenture, share etc. which were received from any person who is non-resident of Maldives or is a resident subject to an intention of carrying a project of capital nature outside the Maldives;
• Loans of any kind;
• Royalties receivable from a person who is non-resident of Maldives;
• Any kind of property located outside Maldives
• Do not have any income from other source or any other business.

Tax rate of 15% is applicable to partnership firm, companies and other person on business profits derived as:

• Rent received from leasing any land and building situated in Maldives;
• Profit occurred from any business by means of permanent establishment in Maldives;
• Management fee or royalties receivable from a resident person or from a non- resident person having a permanent establishment in Maldives.

Further a Withholding Tax of 10% is levied on a person who makes any payment mentioned in section 6 of the Act to a non-resident which are:

• Royalty, rent or any such other payment in consideration of any machinery, plant, equipment or any other asset used for business purpose;
• Payment made for computer software usage;
• Payment in respect of research and development;
• Any payment made for performance of public entertainers;
• Management fee, technical or personal service charges or any commission;
• Rent for cinematographic films in Maldives (Business Profit Tax Act, 2011).

As mentioned in tax- guide of Maldives Inland Revenue Authority, (2016) the calendar year (1^st January to 31^st December) is required to be adopted as accounting year in accordance with the amendment made in TR-2015/B46. Branches and subsidiaries of overseas companies operating in Maldives must also follow calendar year for preparation of their business accounts.

For the purpose of Business Profit Tax those business whose annual turnover does not exceeds MVR 5,000,000 can opt cash basis for the preparation of business accounts while businesses with turnover exceeding MVR 5,000,000 must follow accrual basis of accounting.

In accrual basis the preparation of accounts should be in compliance of:

1. International Financial reporting standards (IFRS); or
2. Standards of accounting as issued by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)

A person who is liable for registration under Tax Administration Act, 2010 (Act), not being a company, partnership firm, person who has to prepare accounts mandatorily as per law is excused from tax return submission if gross income of that person is within the ceiling limit prescribed by MIRA. Every person who is required to file tax return of a particular tax year should include a computation of taxable profit of or loss incurred for that particular year and a tax assessment on that year in accordance with the Act. The tax return should be filed on or before 30^th April of next year by any person not mentioned in section 17(d) of BPT Act, 2011.

Business Profit Tax

Business Profit Tax is required to be paid in three instalments i.e. first and second interim payment along with Statement of Interim Payment MIRA (303) and Final payment along with BPT Return MIRA (304). Financial statement should also be attached while submitting BPT Return. According to section 23 of BPT Act, the first interim payment must be paid by 31^st July of the current tax year and second payment by 31^st January of the next year. The amount of first and second payment each should be calculated on the basis of assessed tax of previous year or in case where person was not chargeable to tax previous year that it should be on the basis of reasonable estimation of tax of following year and such amount of payment would be half of the assessed or estimated tax. In case, if the assessed or estimated tax is less than or equal to MVR 2,000 than this section would not be applicable.

As per section 24 of BPT Act, 2011, the balance amount of current year’s tax should be paid by the due date of filing tax return of that year. In case of failure in payment of tax by due date an interest at the rate of 5% per annum is charged from one month after the due date till the date of payment of tax. 

Withholding Tax is to be paid along with WHT return (MIRA 301), on or before the 15^th day of the month which is next to the month in which payment entitled to WHT to the non-resident was made or adjustment in accounts was done, whichever falls earlier (Business Profit Tax Act, 2011).

On non-payment of Business Profit Tax:

• Penalty of 0.05% of the amount of tax which is not paid is charged per day, up to a limit of twice the amount of tax which is not paid or MVR 250,000, whichever is greater.
• Interest at the rate of 5% p.a. on the unpaid amount of tax from one month after the due date till the date of payment of tax is also charged.

On non- submission of BPT Return:

• In case the tax liability is nil, penalty of MVR 50 per day, up to a maximum limit of MVR 125,000.
• If there is a tax liability then penalty would be MVR 50 per day, up to a limit of double of amount of tax.

On non- payment of Withholding Tax:

• Penalty of 0.05% of the amount of tax which is not paid is charged per day, up to a limit of twice the amount of tax which is not paid or MVR 250,000, whichever is greater.
• Interest at the rate of 1% is charged on the unpaid amount of tax.

On non- submission of WHT Return:

• Penalty of MVR 50 per day, up to a limit of double of amount of tax (Maldives Inland Revenue Authority, 2016).

Apart from incentives from various taxes, tax concession is allowed in Business Profit Tax in respect of various investments made and business conducted in Special Economic Zone (Special Economic Zone Act, 2014).

• Full exemption from BPT for providing necessary services and setting up infrastructure in a SEZ.
• Exemption from BPT for investing or setting up business in different industry in SEZ are:

1. For hotels, tourism, real estates, BPT is exempted for first 2 years.
2. For manufacturing, logistic, transportation, building ports, communication, it is exempted for first 20 years (first 15 year in shareholder’s dividend).
3. Education, housing, health, research and development, operating and building of airports, it is exempted for first 10 years.
4. In case of financial services, exemption is for first 10 years and 5 years on shareholder’s dividend.
5. Sports and other businesses, exemption is provided for first 5 years.

Gross Domestic Product is the main indicator in determining the economic growth of a country. Taxes have a dual effect on the GDP, on one hand saving and investment of people decreases by imposition of taxes which negatively effects the economic growth, but on other hand the revenue earned by government through corporate taxes, goods and service taxes and other taxes have an important role in increasing the Gross Domestic and National Product of a country and ultimately the economic growth. In 2016 there has been an estimated rise of 3.9% in GDP from 2015 in Maldives. Constriction and tourism sectors are the main contributors in economic growth of Maldives (Maldives Monitory Authority, 2016).  

Registration for BPT

Earlier Maldives was ideally a tax free economy and treated as tax heaven country by the foreign investors as it was more profitable and feasible for them to invest in this country as compared to other countries. Maldives economy is largely dependent on tourism and fishing. Foreign investment attraction was an important factor of economic growth in Maldives, but an effective source of government revenue generation was greatly required to enable government to provide basic services and facilities to general public. Passing of Business Profit Tax Act and Tourism Goods and Service Act in 2011 was a way forward in generating revenue for government (Waheed, 2011). The government of Maldives earned total revenue (excluding grants) of MVR 17.67 billion in 2016, an increase of approximately MVR 1.0 billion from previous year. This was mainly because of rise in tax revenue. The tax revenue showed an increase of MVR 868.8 million from the last year with a total of 13.14 billion in 2016. The introduction of Green Tax in November 2015 made a significant impact on the increase in tax revenue. Total Green Tax collected in 2016 was MVR640 million. Rise in tax revenue was also majorly contributed by increase in General Goods and Service Tax. Tourism Goods and Service Tax (MVR 3.98 billion) and Business Profit Tax (MVR 2.71 billion) were the main contributories in the total tax revenue of 2016 followed by General Goods and Service Tax of MVR 2.23 billion (Maldives Monitory Authority, 2016).

Business Profit Tax, being the second major contributories in tax revenue showed an increase of MVR 35.3 million from 2015 and MVR 1.31 billion from 2012. It has contributed 15.3% in total revenue of government in 2016 slightly lower than previous year. The proportion of Business Profit Tax and total tax revenue in GDP is 5% and 23% respectively. The Business Profit Tax was comparatively low than the expected one which shows that growth in domestic economy of Maldives was slower during 2015 (Maldives Monitory Authority, 2016). The contribution of BPT (including withholding tax) in total revenue of Maldives Inland Revenue of Authority was 18.87% in 2016 (Maldives Inland Revenue Authority, 2016). In 2015, revenue collection through Business Profit Tax was MVR 2.64 billion which was 8.1% greater than the BPT collection of 2014. This increase was due to rise in the profits of businesses in 2014. Contribution of Business Profit Tax in total revenue of government in 2015 was 20.5% which is quite a significant proportion (Maldives Inland Revenue Authority, 2015).

Tax Rates

Tax is major source of revenue which ultimately affects the budget of government. With a sufficient amount of revenue a strong budget can be framed aiming to improve the economy of country in all perspective. Tax is charged mainly to raise government revenue which in turn is used for providing basic facilities to public, infrastructure development, providing assistance to poor class of society and reducing the gap between poor and rich people and improving the living standard. Another aim of taxation is to make people avoid the use of certain harmful goods like alcohol, drugs, etc. An important aim of taxation is proper allocation of wealth and removing the inequalities from society by collecting higher amount of tax from rich people and using that for providing benefits to poor people.

For instance, as given in Business Profit Tax Act (2011), Business Profit Tax is charged on those businessmen whose taxable profit exceeds MVR 500,000 per year which means very small businessmen with profit less than MVR 500,000 in a year are exempted from paying tax and burden of tax ultimately falls on large business bringing the equalities to some extent. But the problem is that a same rate of 15% is charged on all kinds of business whether small, medium or large or whether it is a partnership firm or a company or other person which is actually not fair. A better option would be to charge tax on progressive basis i.e. higher tax rates for those business earning high profits lower tax rates for those earning low profits. This would bring an optimum allocation of income and wealth in Maldives.

Conclusion:

Tax system of Maldives is relatively new system which came into force by establishment of Inland Revenue Authority (MIRA) in 2010. The authority manages the various tax systems prevailing in Maldives very systematically and effectively. MIRA has a major contribution in generating total revenue for Maldives government. The two main source of revenue for MIRA is Business Profit Tax and Goods and Service Tax (including Tourism Goods and Service Tax and General Goods and Service Tax).  The newly introduced Green Tax for environmental protection purpose also showed a significant contribution in increase in total tax revenue of 2016. Zakat- al- mal has its own moral importance. It is a kind of social and ethical obligations on the rich Muslim people to contribute in welfare of poor people. Few other important taxes are the Bank Profit Tax, Remittance Tax, airport service charges and some other fees and loyalties.

Accounting period and basis of accounting

Business Profit Tax is a very important part of whole taxation system of Maldives which is imposed on the businesses operating there. Very small business with profit less than MVR 500,000 is exempted from BPT. A tax rate of 15% is levied on partnership firm, companies and other persons and 5% of tax is charges on profits earned from outside source by resident companies. BPT also includes Withholding Tax of 10% charged on the payments mentioned in section 6 of BPT Act made to non- residents. BPT contributes around 15% in total revenue of Maldives government. BPT contributed 5% in economic growth of Maldives measured as percentage of GDP.

Taxes have a dual effect in economic growth of a country. On one side it reduces the income of public, increases the price of goods and services which leads to fall in consumption and negatively affects growth but at the same time the increase in government revenue through taxes leads economic development by making investment in education, health, infrastructure and proper wealth distribution. An efficient tax system helps in systematic wealth distribution, reducing the inequalities existing in society by applying the concept of justice and impartiality in designing the allocation of tax burden. BPT helps in this motive to some extent as it is exempt for very small businesses, for businesses establishing or investing in SEZ.

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