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World Bank also suggests tax surge to increase state revenue

Mohamed Rehan
09 August 2022, MVT 12:46
World Bank on glass building. Mirrored sky and city modern facade. Global capital, business, finance, economy, banking and money concept 3D rendering illustration.
Mohamed Rehan
09 August 2022, MVT 12:46

World Bank suggests Maldivian government to raise revenue, especially from domestic sources, in its most recent Maldives Public Expenditure Review (MPER).

According to the global financial institution, the island nation requires to raise revenues to finance the spending needs. The institution suggests raising taxes "not only from tourism, but also from local households and firms."

Among the various suggestions made by the institution towards Maldives achieving stronger state revenues include;

1. Reducing the Personal Income Tax threshold.

2. Introduction of a presumptive tax regime at a rate of two to three percent of turnover for businesses below the GST threshold.

3. Rationalizing Goods and Services Tax (GST) exemptions and zero-ratings.

5. Extend GST to digital services and offshore booking accounts.

World Bank estimates said changes may yield an additional 2.7 percent of the island nation's Gross Domestic Product (GDP) in revenues in the short-term, and a further two to three percent of GDP by raising both the General and Tourism GST rates in the medium term.

Apart from making suggestions towards possible approaches to increase revenue to the state, World Bank also recommends the Maldivian government to enhance transparency, communication and accountability on "why taxes are being raised and what revenues are being used for."

World Bank understands that the island nation's government has improved in its debt management, with the most recent measure being centralization of issuance of domestic securities within the Ministry of Finance.

The institution further made recommendations for the Maldivian state to contain the growth of sovereign debt and guarantees.

These include, revision of draft Public Debt law and guarantee policy to include risk-based fees, and establishing a limit on the guarantee amount, as well as establishing a guarantee fund, mandating the inclusion of government guarantees in the medium-term debt and fiscal strategies - World Bank suggests to achieve this by revamping the Fiscal Responsibility Act (FRA) and other necessary legislation.

To increase state transparency on utilization of public funds, World Bank also recommends publishing borrowing plans to improve cash management and domestic market development.

According to the bank, Maldives government requires strengthening the institutional arrangement for State-Owned Enterprises (SOEs) fiscal risk oversight to better manage and mitigate risks, as well as rationalizing government support to SOEs as well as enhancing transparency in monitoring and reporting.

Other recommendations by World Bank include making state expenditure more efficient and targeted. To contain the spending growth in areas such as housing, wages and pensions, the bank suggests implementing income-based targeting for Rent-to-Own program in the housing sector. This, according to the bank, will improve financial viability of the scheme and promote more sustainable home ownership.

As for the public sector wages, the Maldives National Pay Commission (NPC) can consolidate or eliminate most of the allowances that drive inequity, and cap or standardize the overtime allowance.

World Bank also suggests implementing legal and institutional frameworks to improve fiscal outcomes and enable more private sector participation. The bank suggests Maldives state to amend the FRA to include "realistic and achievable targets" that would improve Maldives' market credibility, potentially reducing the costs of borrowing over the medium to long-term.

The institution suggests consolidating institutional responsibilities of wage bill management under one body, which may ensure pay policies remain consistent.

World Bank identified the need for the Maldivian government to implement a robust legal and regulatory framework for public-private partnerships (PPPs), which have potential to deliver better mixed-use, mixed-income housing. However, this could result in large fiscal risks if the regulations are not well-designed and implemented.

The bank also suggests Maldives to adopt the Land Law, Building Code, Tenancy Act and other regulations to improve the transparency and predictability of the legal and regulatory framework for housing.

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