WORKING PAPER

No 399
Gennaio 2005

TAX SYSTEMS AND TAX REFORMS IN SOUTH AND EAST

ASIA: THAILAND
MARCO BARTOLICH
University of Trieste - Italy

JEL CLASSIFICATION: H20, H24, H25

KEYWORDS: Taxation, Tax Reforms, Thailand

societ italiana di economia pubblica

dipartimento di economia pubblica e territoriale universit di Pavia

TAX SYSTEMS AND TAX REFORMS IN SOUTH AND EAST

ASIA: THAILAND

by
Marco Bartolich

University of Trieste - Italy

Abstract
This paper is part of a wider research on South and East Asia countries taxation,
carried on at this Department, under the direction of L. Bernardi, A. Fraschini and P.
Shome, and the supervision of. V. Tanzi. The aim of the paper is to describe and
discuss the main features of Thailands fiscal system and its recent and underway
reforms. Firstly, the current structure of the system and its development from 1992 to
2002 is considered. The total fiscal pressure is relatively low (almost 17 percent) and
is mainly constituted by tax revenue (social contributions are a marginal component).
Indirect taxes are the main source of receipts (about 66 percent of the total), while
direct taxation is still lowly developed, especially as to personal income tax. Then,
the basic features of the main national and local taxes are depicted. The following
section considers the distribution of the taxation charge among the main economic
factors and its evolution during the last decade as to economic function and implicit
tax rates. Consumption suffers from the highest fiscal burden, a common feature of
developing countries. Finally, the paper examines the recent fiscal reforms enacted
after the 1997 financial crisis, which was mainly faced with temporary fiscal
stimulus measures. However further reforms are still necessary, not only in the
financial and fiscal sectors, to give more stability to Thailands economy.

JEL Classification: H20 - H24 - H25

Keywords: Taxation, Tax reforms, Thailand
E-mail address: [email protected]

Department of Public and Environmental Economics

University of Pavia Italy
January 2005

1. Introduction, contents and main conclusions

The aim of this chapter is the discussion of the main features of Thai fiscal system, its
development during the 1990s and the recent and underway reforms.
Paragraph 2 describes the structure of the tax system and its development during
the last decade. Fiscal pressure is low if compared with industrialized countries and also
with some less developed ones: it had an increasing trend until the financial crisis of
1997, when it fall by 2.2 percentage points on GDP. After the economic recovery, it
started again to increase, but until now it has not reached the pre-crisis level yet.
Indirect taxation is the main source of receipts: it amounts to more than 60 percent
of tax revenue, although recently the spread between direct and indirect taxes has
somewhat decreased.
Personal income tax has a limited room as source of receipts, because of some
structural weaknesses, while capital taxation does not go over a low value, which can
explain the inflows of foreign investments during the last decades (together with the low
cost of labor).
In paragraph three we examine the main taxes levied at central and local levels.
Among direct taxes, personal income tax has many allowances and deductions which
reduce the tax base. The brackets of income are eight, while the minimum and
maximum rates are five and 37 percent respectively, and the first Baht 80,000 are
exempt. Corporate income taxation is about at the same level as in the more developed
countries. VAT is just the second main indirect taxes after the excises, also because its
relatively low rate (7 percent).
Thailand has a highly centralized fiscal system: tax receipts of local governments
are very low, despite the recent reforms, which are leading to a major fiscal
decentralization. Hence central governments grants are the main financial resource for
local authorities.
Paragraph 4 focuses the distribution of tax charge by analyzing the evolution of
fiscal burden on the main components of national income (consumption, labor and
capital & business) by economic function and implicit tax rates during the last decade.
Consumption is the most heavily hit (at an average of 10.4 percent of GDP), while the

taxation of labor and capital is comparatively low. This is usually considered as one of
the explaining factors of the rapid economic growth of the last decades.
In the last paragraph we describe the fiscal measures taken as response to the
financial crisis of 1997 and the main features of the 1999 Public Sector Management
Reform Program, which had, among its objectives, the improvement of revenue
collection and of tax burdens distribution as well as a progressive increase of fiscal
decentralization. In the first phase of the crisis budget cuts were prevailing together with
an increase of taxation, especially through indirect taxes, while in a second phase tax
policy became more expansionary in order to reduce the social impact of the economic
fall.
Among the aims of the Public Sector Management Reform Program there were
the enforcement of tax collection, an increase in taxpayers compliance, the
improvement of information technology, a devolution of expenditure functions and a
greater degree of tax autonomy at the benefit of local governments.
Many improvements should be taken, especially for the main taxes. VAT refunds
should be redefined in order to reduce their costs, PITs allowances and deductions
must be simplified, while for corporate income tax the IMF suggests to avoid fiscal
competition with other developing countries by lowering the tax rate and to reinforce
the controls over corporations with international businesses, which try very often to
repatriate dividends without paying taxes. Finally, some further improvements in fiscal
decentralization should be taken in order to take advantage of all its benefits.

2. A broad view of tax system and its developments from the early
1990s
2.1 A short reminder of Thailands economy and public sector outline
In 2002 general governments expenditure was 25.3 percent of GDP (without
considering intergovernmental transfers), with an increase of 4.5 percentage points with
respect to 2001. Central governments expenditure represents 90.3 percent of the total:
this value indicates that Thai fiscal system is still highly centralized. Local

governments expenditure concerns mainly transport, housing and community amenities

and general public services.
Central governments expenditure reflects Thailands development priorities:
public expense focuses on the sectors that are fundamental for countrys development
and growth. These sectors are agriculture, forestry, fishing and hunting (1.7 percent of
GDP), transport (1.4 percent), health (1.8 percent, mainly for hospital services),
education (4.2 percent, of which 2.8 for pre-primary and primary education), social
protection (1.6 percent); less money is spent for social security and welfare and defense.
Public debt transactions represent 1.3 percent of GDP.
These results can be explained by considering that after the 1997 crisis structural
reforms became the priorities in order to create a solid ground for the economic
recovery: education, health care and regional development have been considered the key
sectors that would have led to an improvement of competitiveness, employment and
economic growth. Current spending represents 60 percent and capital expenses 40
percent. Among the former, wages and salaries constitute 24.3 percent, a relative high
value in international comparison, while in the second category capital transfers to
public enterprises and households have strongly increased during last year and have
caused the increase of expenditure and the deterioration of the general government
overall balance.
In 2002 per capita GDP was 1,983 U.S. $ (not PPP corrected), while labor force
was 54 percent of total population (IMF 2003). In the UNs 2004 Human Development
Report, Thailand occupies the 76th place in the High Human Development rank, with a
life expectancy at birth of 69.1 years, an adult literacy rate of 92.6 percent and a total
fertility rate of 1.9 births for woman in the period 2000-2005. Infant mortality is still
high (24 per 1,000 live births), despite a sharply decrease from 1970. For the period
2002-2015 the estimated annual population growth rate is 0.9 percent (it was 1.5 percent
from 1975 to 2002). Aids is a serious problem in Thailand: the HIV prevalence is 1.5
percent of population between 15-49 years old.

2.2 The tax system

2.2.1 The current structure and its developments

In 2002 general governments revenues stay at 19.2 percent of GDP. Among them,
direct taxes amount to 28.9 percent of total receipts, indirect taxes to 54.3 percent, other
taxes to 0.4 percent, social contributions to 2.9 percent, non-tax revenues to 13.5
percent. In 2002, the fiscal pressure (i.e. tax revenues plus social contributions) was
16.6 percent of GDP: tax revenues were 16 percent, social contributions 0.6 percent.
Direct taxes represent a lower fraction of tax revenues, 34.6 percent, while indirect taxes
reach 65 percent.
Table 1 presents the fiscal pressures evolution from 1992 to 2002 as percentage
of GDP. During the past few years the quantitative spread between direct and indirect
taxes has decreased, and the composition of the general revenues has slightly moved
towards direct taxes, as the economy has passed from the early stages of modernization
to a more sophisticated structure. Among direct taxes, corporation income tax
constitutes 18.3 percent of tax revenues, while personal income tax represents only 12
percent, a low value in international comparison. This is mainly due to some structural
weaknesses, like a narrow tax base (due to extensive exemptions, income deductions,
allowances and tax relieves) and, more generally, to a non-transparent and unfair tax
system (IMF 1998).
Social contributions amount to 0.6 percent of GDP: employees pay 46.2 percent
of them, employers 52.6 percent, while self employed or non-employed contributions
represent 1.2 percent.
Among indirect taxes, VAT plays an important role: it constitutes 18.5 percent of
total tax revenue, despite the low VAT standard rate (7 percent). Excises are another
important item of indirect taxes: in 2002 they totaled 27.2 percent of tax revenue. The
most important were on petrol products, motor cars, tobacco and spirits. Finally, the
third main category of indirect taxes is import duties (11.1 percent of tax revenues).
Thailands fiscal system is highly centralized, despite recent reforms aimed to
increase fiscal decentralization: central government collects 92 percent of tax revenues
and pays 90.6 percent of general expenditure (including grants from central to local
government units). Among central governments expenses, grants to local governments

represent 7.4 percent (1.6 percent of GDP). These grants constitute 53.1 percent of local
governments total receipts; this high value emphasizes the important role of central
government in the intergovernmental fiscal system.

2.2.2 The development of the system from 1992 to 2002

During the last decade, fiscal pressure shows an increasing path until 1996, the year
before the financial crisis, when tax revenues and social contributions were 18.5 percent
of GDP, and a deep fall until 1999 (15 percent). During the last three years fiscal
pressure has grown again, but the 2002 level is lower then the average of the pre-crisis
period.
Social contributions are increasing over all the period, while tax revenues, which
have been strongly hit by the financial crisis, show the same path of the total fiscal
pressure. Social contributions weight in the fiscal pressure has constantly increased
over this period: in 1992 it was 1.1 percent, in 2002 3.4 percent.
Among tax revenues, indirect taxes have always played the main role: they have
totaled in the average the 66 percent of tax receipts, even during the crisis, albeit import
duties decreased sharply because of the devaluation of the Baht and the consumptions
shift from imports towards domestic goods. In fact, first fiscal measures of the central
government during the financial crisis concerned indirect taxes (especially VAT) and
caused a tax revenues slight increase at the end of 1997 because of the growth of the
indirect taxations pressure, while direct taxation havent been modified at that time.
VAT had an increasing weight during the last decade: despite the low rate (actually 7
percent), its receipts amounted to an average of 20.7 percent of tax revenues during the
1990s, with a peak of 25.6 percent in 1998, after the 1997 VAT rates increase from 7 to
10 percent, a fiscal measure which was introduced to accommodate the expected
revenues shortfall. Finally, excises are increasing during the decade (receipts have
duplicated in ten years). They had a negative peak in 1998, when the central
government implemented an expansionary policy (one of the measures was the
reduction of some important excise duties).
Corporate income tax constitutes the main direct tax, with an average value of
18.7 percent of tax revenue, despite the sharp fall in 1998 (only 12.9 percent), when
receipts decreased because of the high buoyancy of corporate income tax with respect to

GDP (on average 1.5 from 1965 to 1996) and the devaluation of the Baht (many
corporations had net, short foreign positions). In the 1997-98 period, GDP decreased by
12 percent, which had highly negative consequences on corporate income tax receipts.
Personal income tax always had a secondary weight in the mix of total tax revenue
(about 12.6 percent as average value) because of the already mentioned structural
weaknesses. This tax hasnt been hit by 1997 crisis as much as corporate income tax,
because of its low buoyancy with respect to GDP: in 1998, personal income tax receipts
were 0.6 percentage points higher than corporate income tax revenues as fraction of
GDP. After the fiscal stimulus packages measures, its weight relative to total revenues
has decreased.
In the last decade Thailands fiscal system has presented few changes in its taxes
mix. Tax receipts were always dominated by indirect taxation. The economic growth
has slightly shifted the composition of fiscal receipts away from indirect towards direct
taxes, but direct taxation, especially personal income tax, still represents a low fraction
of tax revenues.
Finally, as to fiscal decentralization, central governments share of total tax
receipts has been high in the 1990s (an average 93.3 percent), despite a slight but
constant decrease (94.7 percent in 1992, 92 percent in 2002). We can see the same
evolution on expenditure side, where central governments share of total expenses
(including grants from central to local government units) has moved from 91.4 percent
in 1992 (but 92.6 percent in 1993 and 92.7 percent in 1994) to 90.6 percent in 2002 (an
average 91.5 percent).

2.2.3 An international comparison

In this paragraph we compare Thai distribution of fiscal revenues (as percentage on
GDP) with that of some selected countries: Vietnam, Japan, Hungary, Germany,

Table 1 Structure and development of fiscal revenue in Thailand as % of GDP, 1992-2002

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Direct taxes, of which

5.6

5.8

6.3

6.6

6.6

6.2

4.9

4.9

5.2

5.4

5.5

Personal income
Corporation income
On property

1.8
2.9
0.3

1.8
3.4
0.6

1.8
3.8
0.6

2.1
3.8
0.6

2.3
3.8
0.5

2.3
3.3
0.4

2.5
1.9
0.3

2.2
2.2
0.3

1.8
2.8
0.3

1.9
2.8
0.3

1.9
2.9
0.3

11.2

11.4

11.4

11.4

11.5

10.7

10.2

9.6

9.5

9.8

10.4

3.9
3.9
3.0
0.1

3.3
4.2
3.3
0.1

3.6
4.2
3.2
0.1

3.1
4.1
3.1
0.1

3.7
4.0
2.8
0.1

3.2
4.1
2.2
0.1

3.9
3.6
1.4
0.1

3.2
3.9
1.4
0.1

3.2
3.7
1.8
0.1

3.2
4.0
1.8
0.1

3.0
4.4
1.8
0.1

TOTAL TAX REVENUE

17.0

17.3

17.8

18.1

18.2

17.2

15.1

14.6

14.8

15.2

16.0

Social contributions

0.2

0.2

0.2

0.2

0.3

0.3

0.2

0.4

0.6

0.6

0.6

Employees
Employers

0.1
0.1

0.1
0.1

0.1
0.1

0.1
0.1

0.1
0.2

0.1
0.2

0.1
0.1

0.2
0.2

0.3
0.3

0.3
0.3

0.3
0.3

17.2

17.5

18.0

18.3

18.5

17.5

15.3

15.0

15.4

15.8

16.6

16.5
1.3

16.8
1.3

16.9
1.3

15.5
1.7

13.5
1.6

13.0
1.6

12.9
1.9

13.1
2.1

13.9
2.1

0.2

0.2

0.3

0.3

0.2

0.4

0.6

0.6

0.6

Indirect taxes, of which

VAT
Excises
Import duties
Other taxes

TOTAL FISCAL REVENUE

Administrative level
Central government
15.9
16.1
Local government
1.1
1.2
Social Security
0.2
0.2
Source: own elaboration on Thailand Ministry of Finance data

Mexico, United States (Table 2). These countries have been chosen in order to see if,
and how, Thailands fiscal system is similar to other economic realities with different
levels of development: Vietnam, Mexico and Hungary can be considered as still
developing countries and hence they can present an analogous situation with Thailand
(although Hungary has an higher level of economic growth and a more consolidated
fiscal structure also because of its recent entering UE), while, by analyzing the cases of
Japan, Germany and United States, we can compare Thai fiscal system with those of
some industrialized countries.
Fiscal revenues as percentage on GDP in Thailand are similar to Vietnams and
Mexicos ones, but very lower than in Hungary, besides than industrialized countries.
These differences are due to both tax revenue and social contributions.
By considering tax revenue, developing countries have a similar situation: indirect
taxation is the main source of receipts, at an average of two thirds of the total, although
Hungary is moving towards an imposition mainly based on direct taxes.
Among direct taxes, individual taxation is very lower in Thailand than in
industrialized realities: because its structural weaknesses Thai personal income tax is a
marginal fiscal revenue, while it is the first source of receipts in Japan and United States
and the second in Germany. Indeed, social contributions percentage on GDP indicate
that security system in developing countries is still underdeveloped (Hungary excepted,
where social contributions have a relevant weight). These two features lead to the low
fiscal burden on labor in Thailand.
Finally, the value of the capital incomes taxation can be considered as one the
main causes of the considerable foreign investments which have come to Thailand
during the last decades (together with the low cost of labor) and have promoted one of
the fastest economic growth among developing countries, especially in East Asia.

Table 2 Structure of fiscal revenues in selected countries as % on GDP in 2001

Thailand

Vietnam

Japan

Hungary

Germany

Mexico

United States

Fiscal revenue

15.8

n.a.

27.3

39.0

36.8

18.9

28.9

Tax revenue

15.2

16.6

17.0

27.5

22.2

15.7

21.8

Social contributions

0.6

n.a.

10.3

11.6

14.6

3.2

7.1

Personal income

1.9

0.4

5.5

7.6

10.0

n.a.

12.2

Corporation income

2.8

5.6

3.5

2.4

0.6

n.a.

1.9

Tax on property

0.3

0.9

2.8

0.7

0.8

0.3

3.1

Tax on goods and services

9.8

9.7

5.2

15.1

10.6

9.7

4.6

Sources: own elaboration on Thailand Ministry of Finance data for Thailand, IMF 2003 for Vietnam, OECD 2001 for OECD Members.

3. Some quantitative and institutional features of the main taxes

3.1 Direct taxes

3.1.1 Personal Income Tax (PIT)

Personal income tax (PIT) is payable by resident and non-resident individuals. An
individual is resident if s/he stays in Thailand for more than 180 days during the
calendar year. Tax is levied on income from Thai sources and, for income from foreign
sources, only on the portion that is brought in Thailand. A non-resident is subject to tax
only on income from sources inside Thailand.
Taxable income (called assessable income) is divided into the following eight
categories: wages and salaries, income from jobs, positions or services rendered, income
from liberal professions, income from construction and other contracts of work,
dividends, interests, shares of profits, capital gains, income from leasing property,
income from goodwill, copyright, franchise and other rights, other income from
business, commerce, agriculture, industry, transport and other activities.
The main exemptions are: insurance policies, gifts and bequests, workers
compensation, insurance claims, medical benefits, proceeds from sales of immovable
property acquired by bequest (these proceeds are included only if the sale is made for a
commercial purpose).
For the income from employment is allowed a 40 percent deduction (but not
exceeding Baht 60,000). Other deductions are applied for the different kinds of income.
The main tax allowances are: personal and spouse allowance (Baht 30,000), child
allowance (Baht 15,000, a maximum of Baht 45,000 for family), education, life
insurance premium, provident funds, estate, social insurance and charitable
contributions.
Interest income and dividends can be excluded from the assessable income: in the
first case, the taxpayer can choose for the withholding tax at a rate of 15 percent (certain
forms of interest income are exempted from this tax, such as interest on bonds or
debentures issued by a government organization). Dividends can be subject to a
withholding tax at a rate of 10 percent; alternatively, the taxpayer can include them in

10

her/his assessable income and claim for a tax credit, which is calculated according to the
formula:
(Dividends)*(corporate income tax rate)/(1 corporate income tax rate)
After the deductions and allowances, the income is subject to a progressive tax
rate scale (the first Baht 80,000 are exempted) (Table 3).
For certain categories of income, the payer of income has to withhold tax at
source, file tax return and submit the amount of tax withheld to the District Revenue
Office. The tax withheld shall then be credited against tax liability of a taxpayer at the
time of filing PIT return.

Table 3: Thailand PIT

Taxable income (Baht)

Rate (%)

0 to 80,000

from 80,000 to 100,000

from 100,000 to 500,000

10

from 500,000 to 1,000,000

20

from 1,000,000 to 4,000,000

30

over 4,000,001

37

Source: Thailand Ministry of Finance, Revenue Department

3.1.3 Corporate Income Tax (CIT)

Corporate income tax (CIT) is levied on Thai and foreign companies. In the first case, a
company is incorporated under the law of Thailand and its net worldwide profits are
subject to tax at the end of each accounting period. In the second case, a company is
considered foreign if it is incorporated under foreign law and only its net profits arising
from Thai source, or in consequence of business carried on in Thailand, are subject to
CIT. A foreign company engaged in international transport is subject to tax on its gross
receipts. Incomes received by foreign companies, such as service fees, interests,

11

dividends, rents, professional fees, are subject to CIT on the gross amount received; the
payer of the income pays a withholding tax which depends on the type of income and
the status of the recipient. The withheld tax is credited against final tax liability of the
taxpayer.
In the calculus of CIT, 50 percent of inter-corporate dividends is exempted; a fully
exemption is applied if the recipient company is listed in the Stock Exchange of
Thailand, but only if the shares are held three months prior to and after the receipts of
dividends. The main deductions concern ordinary and necessary expenses (for
Research&Development, job training and equipment for the disabled are allowed
special deductions, 200 percent, 150 percent and 200 percent respectively), interests,
taxes (except for CIT and Thai VAT), provident fund contributions, donations and
depreciation (rates depend on the kind of assets). An initial depreciation of 40 percent is
allowed for the purpose of encouraging investment. Net losses can be carried forward to
five consecutive years.
The ordinary tax rate is 30 percent, but for small companies, with paid-up capital
to less than Baht 5 million, a progressive tax rate scale is applied (Table 4).
For foreign companies many proportional tax rates are applied, which depend on
the kind of business.

Table 4: Thailand CIT

Net profits (Baht)

Rate (%)

0 to 1,000,000

20

from 1,000,000 to 3,000,000

25

over 3,000,000

30

Source: Thailand Ministry of Finance, Revenue Department

12

3.2 Indirect taxes

3.2.1 The Value Added Tax (VAT)

Valued Added Tax (VAT) has been introduced since 1992 replacing Business Tax. It is
charged on any person or entity that regularly supplies goods or services in Thailand
and has an annual turnover exceeding Baht 1.2 million. Service has to be provided in
Thailand if it is performed in Thailand regardless where it is utilized or, if it is
performed in a foreign country, it is demanded to be utilized in Thailand.
VAT is imposed on the value added at each stage of the production and
distribution: the tax liability is the difference between the output tax (i.e. the tax
collected when goods or services are supplied) and the input tax (the tax collected on
any purchase of goods or services; it includes any tax charged on imported goods).
The main exemptions are: unprocessed agricultural products and related goods,
base services, such as transportation, healthcare, educational and professional services,
renting of immovable properties, services in the nature of employment of labor, research
and technical services and services of public entertainers, sales and import of
newspapers, magazines and textbooks. Certain businesses are excluded and are subject
to Specific Business Tax.
Tax base includes, for import goods, the C.I.F. price, import duties and any other
taxes, if any, such excise tax and fees; for exported goods, it includes the F.OB. price
and the eventual taxes (excise tax and fees).
Tax rates are:

0 percent rate: export of goods, services rendered in Thailand and utilized in a

foreign country, goods and services supplied under international programs and
agreements;

7 percent: any other goods and services subject to VAT.

Initially the ordinary tax rate was 10 percent; then it has been reduced to 7 percent

to reduce the fiscal burden during the 1997 financial crisis.

Local governments receive 10 percent of total VAT revenues; the VAT receipts
are collected for the Revenue Department by the Customs Department and allocated to
all levels of local government.

13

3.2.2 Excise Taxes

Excise duties are collected by Excise Department: the collection is mainly made by
means of excise stamps. Tax is imposed on specific goods and services: among them,
we can mention liquors, tobacco, petroleum products, playing cards, non-alcoholic
beverages, telephone and other services (entertainment places, golf, horse racing). In
some cases, exemptions are allowed: for example, goods which are exported,
deteriorated or damaged, donated to charitable organizations and services which donates
the receipts to public charities. Tax rates may be: ad valorem (entertainment and
telephone services, motor vehicles), specific (some petroleum products, playing cards)
or whichever is greater (spirits, tobacco, non-alcoholic beverages

3.2.3. Customs Duties

Customs duties are collected by the Customs Department, which collects excise tax for
the Excise Department and the VAT for the Revenue Department too. Tariff duties are
levied on ad valorem or a specific rate base; in some cases, however, the tariff, which
gives the most revenue, is applied.
Tax rates change frequently: the majority of goods imported by businesses is
subject to rates ranging from 0 percent to 80 percent on the C.I.F. price. Specific duties
are levied on certain commodities in the form of ad valorem (on the import duty) or
specific tax rate.
Because of exporting promotion, most exported goods are exempted: only few
items are subject to duty, including rice, rubber, raw hides and wood. Exemption is
granted for goods covered by privileges according to international agreements, laws or
treaties, for goods imported for personal use and for re-export.
The current tariff structure is undergoing to a reform, which includes lower tariff
barriers and a reduced number of tax rates, as follows (Table 5):

14

Table5: Tax rates of the Customs Duties undergoing reform

goods

tax rate (percent)

raw materials

intermediate goods

10

finished goods

10

protected goods

20

input cannot be produced in Thailand

Source: IMF 2003

3.3 Local taxes

Shared taxes are the most important tax receipts for local governments in Thailand.
They include the VAT and selected excises. The surcharge is collected by the Revenue
Department for the VAT and by the Excise Department for the selected excises and
allocated to local governments. The surcharge is 10 percent of the total VAT and of the
excise taxes.
The two most important taxes levied by local governments are the Land and
Building Tax and the Local Development Tax. The central government determines the
rate and the base of these taxes, while the local authorities collect them.
The Land and Building Tax is levied annually on buildings rented or used for
other commercial purposes. Owner-occupied dwellings and buildings used by
government, agencies, public hospitals, religious and educational institutions and
buildings unoccupied for 12 months or longer are exempted. The tax rate is 12.5 percent
of the annual rent received during the previous year. Inadequate databases,
underreporting and evasion cause a low tax collection. Indeed the tax is
disproportionately paid by low income households (unable to buy an own home)
because often the owners of the rented dwellings pass along the tax to their tenants by
increasing the rent or charging an annual payment in addition to the rent. Theres a
horizontal equity violation too, because owner-occupied property is not taxed, while
property occupied by the owners immediate family is taxed.

15

The Local Development Tax is levied annually on the value of unimproved land
not subject to the Land and Building Tax. Land occupied by owner or used for annual
crops or owned by government agencies, public hospitals, schools, public utilities and
religious organizations are exempted. 34 different rates are applied, ranging from Baht
0.50 per rai with an assessed value of under Baht 200 to Baht 70 per rai with an
assessed value of over Baht 30,000 and Baht 25 per rai for each additional Baht 10,000
(one rai is equivalent to 0.16 hectare).
This tax presents some equity problems. First, public enterprises and owneroccupiers receive many local services, but they dont pay for them because they are
exempted from the Local and Development Tax. Second, the tax is regressive because
the rates decrease as the value of the property increases.
Another important local tax is the Real Estate Transfer Tax. Transfer of real estate
(by sale, gift or succession at death) is taxed on the base of the assessed value of the
property at the tax rate of 2 percent (0.5 percent if the transfer is made to parents,
spouses or children). The same tax is applied by the central government (in this case
some exemptions and deductions are allowed).

4. The distribution of taxation charge

The analysis of the distribution of tax charge by economic function can be used in order
to see how the main direct and indirect taxes are levied on productive factors and main
employment of the economic system and, hence, to analyze the impact of taxation on
resources allocation, because the tax burden has to be considered as part of the relative
factor prices. Usually, the study is focused on three main items: consumption, labor and
capital & business. The three indicators are obtained by using, as numerator, indirect
taxes (general and specific), social contributions and direct taxes paid by employees,
taxes on capital (corporation income tax included) respectively, and, as denominator,
GDP. By this way one can understand the weight of taxation on the three main
economic components of national income as percentage of the gross domestic product.
During the last decade, consumptions taxation shows an increasing trend until
1997, when the fall of tax receipts began because of the overall crisis. Indeed,
consumptions taxation has registered a decrease due to the reduction of the VAT rate in
1999 (from 10 to 7 percent), one of the temporary measures taken in order to stimulate

16

the economic recovery. Only in 2001 the weight of consumptions taxation started to
raise again.
Labors taxation is just a small percentage on GDP because of two main factors:
the structural weaknesses of the personal income tax and the poor development of the
social security system, which causes the low weight of social contributions on GDP (on
average 0.35 percent).
Capital & business taxation was strongly hit by the 1997 crisis, which exploded
in the financial sector. Because of its high buoyancy with respect to GDP, corporate
income tax fall from 1997 to 1998 by 43 percent, but taxation on financial and capital
transactions had a deep decrease too (-46 percent).
Another important indicator of the distribution of tax charge is the implicit tax
rates. There are many definitions and methods of computation of these rates, which can
lead to different values. As a rule, the three main indicators (implicit tax rates on
consumption, labor and capital & business) use, as numerator, the same values for the
distribution of tax charge by economic function, and, as denominator, three economic
aggregates taken from the national account statistics: private consumption,
compensation of employees, gross (or net) operating surplus.1 These rates can be
considered as macroeconomic indicators of factor tax loads.
Consumptions tax burden is very high in comparison with that levied on labor,
despite a gradual reduction from 1992 to 2002 (-2.1 percent) due exclusively to the
decrease of tax receipts (private consumption has yearly increased in this period, 199798 biennium excepted). This result indicates that Thai economy is still mainly based on
indirect taxation (a common feature of developing countries).
The implicit tax rate for labor is relatively higher during the crisis then before and
after it. This result is due to the PIT, which reaches a peak in 1998, while social
contributions have a slightly increasing trend. Table 6 shows the two groups of
indicators for the period 1992-2002.

Because of the lack of detailed data, the computed indicators have to be considered as approximated
measures of tax distribution by implicit tax rate. Indeed, due to the lack of data on the operating surplus
the implicit tax rate for capital & business could not be created.

17

Table 6 - Structure and development of taxation by function and by implicit tax rate in Thailand, 1992-2002
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Consumption

10.7

11.1

11

11

11.2

10.8

10.2

9.4

9.3

9.7

10.2

Labor

2.0

1.9

2.0

2.2

2.5

2.6

2.8

2.5

2.3

2.4

2.5

Capital & Business

3.5

3.7

4.1

4.2

4.0

3.7

2.2

2.5

3.2

3.2

3.4

Consumption

20.2

20.3

20.2

20.5

20.8

19.7

18.6

16.7

16.6

17.0

18.1

Labor

5.8

5.4

5.9

6.2

7.1

7.2

7.2

6.7

6.2

6.5

6.7

Economic functions

Implicit tax rate

Source: own elaboration on Thailand Ministry of Finance data

18

5. Tax reforms

5.1 A quick glance at macro economic and budget outlook

In 2002 the GDP growth rate of Thailand was 5.2 percent, the best performance after the 1997
crisis. Private consumption and investment gave the major contribution to this result: thanks to
growing consumers confidence and credits, high increase of farm income, low interest rates and a
supportive government policy, private consumption grew by 4.5 percent, especially in the sectors of
automobiles, mobile phones, telecommunication services, televisions, while private investment rose
by 8.6 percent, with a decreasing inflow of foreign direct investments, although their level was still
high. Residential construction, purchase of commercial vehicles and office equipment registered the
highest inflow of new investments (IMF 2003).
Exports of goods and non-factor services grew by 2.1 percent, with China and ASEAN
(Association of Southeast Asian Nations) countries as main trade partners. Manufactured products
(semi-conductors, radio and television receivers and parts, video recording, automobiles and parts,
steel, plastic and chemical products) have been the first source of the export volumes growth, while
natural rubber was the main agricultural export product (IMF 2003).
Inflation decreased from 1.7 percent in 2001 to 0.6 percent in 2002 and unemployment rate
continued to fall, from 3.3 to 2.4 percent, following the trend begun in 1998. Agricultures share in
GDP was 9.9 percent, while manufacturing (including construction) and services (commerce,
transport and communication, financial and other services) were 39.6 and 50.5 percent of GDP
respectively. In 2002 labor force by occupation presented the following composition: agriculture
41.6 percent, manufacturing 23.1 percent and services 35.3 percent (IMF 2003).
In 2002 Thailands fiscal system registered a general government overall balance in deficit for
an amount equal to 6.6 percent of GDP, a value in line with the negative trend that began in 1997,
the financial crisis year. This negative result is mainly due to the sharp increase of expenditures
(+30.6 percent); the ratio between general revenues and GDP decreased because GDP grew more
than total revenues. In comparison with 2001, the expenditure as a proportion of GDP has increased
by 5.1 percent: while the main expense categories have slightly increased (salaries and wages,
goods and services, interest payment, grants) or have decreased (social benefits), capital transfers to
public enterprises and households have signed a strong increase, which has caused the 5.1 percent
increment of the incidence of expenditure on GDP (Thailand Ministry of Finance).
Public debt was equal to 55.1 percent of GDP, the lowest value after the 1997 crisis; by
comparison with 2001, it has decreased by 2.8 percent (as a proportion of GDP), and this reduction
19

is mainly due to the decrease of non-financial public enterprises debt (-2.2 percent as fraction of
GDP)(IMF 2003).
Thanks to increasing export growth and relatively weak US dollar, Thailand registered a
current account surplus, in line with the post-crisis trend, and the external debt stock continued to
decrease, as consequence of the governments efforts to reduce its multilateral loans (World Bank,
IMF, Asian Development Bank).

5.2 Tax reforms of last years, underway and planned

In order to face the financial crisis, after the Baht devaluation Thai authorities implemented fiscal
measures necessary to reduce the effects of the economic decrease and to promote the recovery.
From July 1997 to February 1998 budget cuts and revenues measures have been taken to
accommodate an expected revenues shortfall, to reduce current account deficit and to produce a
budget surplus of 1 percent of GDP. FY98 budget was cut from Baht 982 to 800 billion, while VAT
rate was raised from 7 to 10 percent and selected excise taxes and import duties were increased,
primarily on luxury consumption goods.
In a second phase, fiscal measures were taken to reduce the social impact of the crisis and to
stimulate the economy. Because of some difficulties and constraints on expenditure side, the
government began an expansionary policy on revenues side. VAT rate passed from 10 to 7 percent
and the 1.5 percent VAT on gross revenues for small enterprises with sales between Baht 600,000
to 1,200,000 was eliminated. Personal income tax relief was provided to all taxpayers, but
particularly low-income earners, by exempting from tax the first Baht 50,000 of net income (Baht
80,000 since 2003).
Further measures to reduce the tax burden were introduced in August 1999 through selected
excise taxes and import tariffs reductions and accelerated depreciation of fixed assets, targeted to
provide investment incentives, and the postponement of corporate income tax payments and
remittances from State-Owned Enterprises, in order to alleviate liquidity constraints in private and
public sectors.
Under the influence of the 1997 new Constitution, promulgated after the financial crisis, in
May 1999 the government launched the three-year Public Sector Management Reform Program.
Among the main objectives of this reform there were an improvement of revenues collection, a
more equitable distribution of the tax burden and an increasing fiscal decentralization.
To achieve the first two objectives, the tools of the Revenue Department were: a
strengthening collection enforcement, an increasing taxpayer compliance and an improvement in
information technology. During the crisis, tax debts increased strongly (from 0.7 percent of GDP in
20

1996 to 2 percent in 1999): as consequence, in 1999 collectible debt was 9.3 percent of total tax
collections, but thanks to the Public Sector Reform Loan program (a US $ 400 Million loan from
the IMF) this percentage was reduced to 6 percent in 2001. A Debt Collection Management
Division has been created with the following functions: preparing a 3-year debt reduction plan,
setting collection targets for each office of the Revenue Department, developing new enforcement
procedures and monitoring debt collection performance. Indeed, more resources have to be
allocated by the Revenue Department for debt collection activities.
Another consequence of the crisis was an increase in non-compliance, both in formal sectors,
where registered taxpayers have many incentives to understate their income and over-claim
expenses, and in informal sectors, where a weak business registration permits to many street
vendors to evade. The main actions underway to improve taxpayer compliance are: a tightening of
the rules regarding VAT refunds, the development of automated systems for the VAT refund and
for the audit case selection, the reduction of taxpayer compliance costs, the simplification of excises
taxes and VATs forms, a support to the Large Business Tax Administration Office in managing
the largest taxpayers, tighter control over marketplaces and street vendors, a strengthening of
requirement for business registration and an increase of registered VAT taxpayers.
Finally, the 1997 crisis evidenced the difficulties of the institutions in formulating and
implementing tax policy. These difficulties were due especially to the lack of information,
revenues data and other statistics that were necessary for the Revenue Department to formulate
forecasting models and predictions of the impact of tax changes. Recently, the responsibility for
determining tax policy has been transferred from the Revenue, Customs and Excise Departments to
the Fiscal Policy Office. The main tasks underway are the creation of a functional and integrated
computer system for the Revenue Department, the implementation of on-line taxpayer registration
and automated audit case selection systems, the development of modules for debt management and
the creation of data entry, processing and reporting schedules for all taxes.
Increasing fiscal decentralization was another main scope of the 1999 reform. The 1999
National Decentralization Act introduced changes in the local and central governments roles and in
their fiscal and administrative relations. First, it specified a gradual four-year devolution of
administrative competences in order to define the expenditure functions of local and central
governments and to avoid overlapping functions. Second, it aimed to increase local authorities
revenues to 20 percent of total government revenues by 2001 and to 35 percent by 2006. Some
national tax bases have been shifted to local governments, such as mineral resource tax, land
registration fees, gambling tax, underground water fees, bird net tax, but the receipts have registered
just a little increase. With the introduction of two local shared taxes, VAT and excise taxes, local
21

tax revenues have increased sharply in the period 2001-2002. Indeed, local grants have increased in
the same period (+75 percent in 2001 and +170 percent in 2002 from 2000). Most of these grants
were specific grants allocated through national government departments, in contrast with the
principles of fiscal decentralization: in fact local authorities dont have full discretion in using these
funds. An objective of the reform was a redefinition of intergovernmental transfers, by passing from
specific to general-purpose grants allocated through a more transparent system. Finally, underway
reforms concern the promotion of responsible local borrowing (the Regional Urban Development
Fund has been recently created in order to channel credit to projects of creditworthy local
governments) and the enhancement of local accountability.

5.3 Suggestions for further improvements

Since 1997 The IMF has suggested some measures necessary to improve Thailand fiscal policy and
tax administration. These measures concern particularly revenues collection and fiscal
decentralization.
An increase of tax receipts is indispensable to reduce budget deficit, especially because a
raising proportion of the budget will go towards mandated expenses, such as wages and salaries,
payment on public debt and specific grants allocated to local governments.
Some changes have been suggested for VAT, excise taxes, Personal Income Tax and
Corporate Income Tax. For the indirect taxes, VAT rate could be raised to 10 percent, while the
excise taxes should be increased, especially on beer and tobacco, petroleum products and motor
cars. Indeed, VAT refund represents a strong inefficiency in the VAT collection. The monthly
refunds require significant resources spent on this task and a proportional number of staff. In 1998
and 1999, 60 percent and 42 percent of audits were for VAT refunds. Legal procedures and
measures that reduce these administrative actions and the risk of fake invoicing should be taken:
among the options, VAT refund rights could be limited or the tax administration could shift the
VAT subject from the seller to the buyer, by forcing a partial or total withholding pre- payment in
certain transactions where tax evaders are involved, or VAT pre-payment could be applied for sales
of certain goods to risky retailers in order to shift the VAT subject and prevent tax evasion. Finally,
a minimum amount for tax refund could be introduced.
A general redefinition of allowances and deductions should be introduced in order to improve
PITs horizontal equity and to simplify the withholding tax rates computation. Targeted
exemptions, specific sector-based allowances and the lack of automatic adjustments of brackets and
monetary allowances necessary to avoid inflations effects are the cause of the low progressivity of
the rate structure. Some deductions, such as that of 40 percent for income from employment against
22

that of only 30 percent for income from professional income, appear illogical, while the many tax
allowances should be simplified and redefined for appropriateness. Finally, the need for employees
in many cases to file tax returns should be eliminated, in order to make the PIT a withholding
system.
The two major problems concerning corporations are the tax rate and the possibility for
corporations having international business to avoid taxes on dividends. In the first case, the IMF
suggests that the tax rates should not be too low in order to attract foreign investments, because
there could be a net transfer of capitals from poor countries to rich ones. For the second problem, it
suggests a reinforcement of the controls over the corporations with international business, because
they try very often to repatriate dividends without paying taxes. The mechanisms used are thin
capitalization, overpayments of royalties and intangible assets and over-invoicing of imports.
Against them, a reduction of options for hidden equity capitalization, anti-avoidance rules and high
penalties associated to a strong coordination between Revenue and Customs offices should be
applied.
In order to increase tax administrations efficiency, some improvements have been recently
introduced, such as the Large Taxpayers Office and the computerization of tax-paying system,
but others are still necessary. The priorities concern a more effective coordination between the
different departments of the Ministry of Finance and the third-party obligations for providing
information and collection of taxes.
The other field where the IMF has made some suggestions is fiscal decentralization.
According to the 1999 National Decentralization Act, in 2006 local authorities revenues will raise
up to 35 percent of the total revenues. In order to take advantage of all the benefits of fiscal
decentralization, local governments have to increase their financial management, to improve the
technical skills indispensable to decentralized functions, to strength accounting and financial
reporting and to plan efficient programs for the use of the resources. Collaboration between local
governments in providing some public services should be supported when a single small-size
government cannot do it efficiently. Finally, an increasing cooperation between central and local
governments is necessary to minimize and avoid duplication of functions.

References
International Monetary Fund (2000). Thailand: Selected Issues, IMF Staff Country Report, 00/21,
Washington, D.C., The International Monetary Fund, March.
23

International Monetary Fund (2001). Thailand: Selected Issues, IMF Country Report, 01/147,
Washington, D.C., The International Monetary Fund, August.
International Monetary Fund (2004). Thailand: Selected Issues, IMF Country Report,
Washington, D.C., The International Monetary Fund, January.

04/1,

International Monetary Fund (2002). Thailand: Selected Issues and Statistical Appendix, IMF
Country Report, 02/195, Washington, D.C., The International Monetary Fund, September.
International Monetary Fund (1998). Thailand: Statistical Appendix, IMF Staff Country Report,
98/119, Washington, D.C., The International Monetary Fund, November.
International Monetary Fund (2000). Thailand: Statistical Appendix,
IMF Staff Country Report, 00/20, Washington, D.C., The International Monetary Fund, February.
International Monetary Fund (2001). Thailand: Statistical Appendix, IMF Country Report, 01/155,
Washington, D.C., The International Monetary Fund, September.
International Monetary Fund (2003). Thailand: Statistical Appendix, IMF Country Report, 03/388,
Washington, D.C., The International Monetary Fund, December.
Mukul G. Asher, Ramkishen S. Rajan (1999). Globalization and Tax systems: Implications for
Developing Countries with Particular Reference to Southeast Asia, No. 99/23 Centre for
International Economic Studies.
OECD (2002), Revenue Statistics 1965-2001, Paris, OECD, October.
The World Bank Group (1999). Thailand Economic Monitor, Bangkok, The World Bank Thailand
Office, October.
The World Bank Group (2000). Thailand Economic Monitor, Bangkok, The World Bank Thailand
Office, February.
The World Bank Group (2000). Thailand Economic Monitor, Bangkok, The World Bank Thailand
Office, December.
The World Bank Group (2001). Thailand Economic Monitor, Bangkok, The World Bank Thailand
Office, July.
The World Bank Group (2004). Thailand Economic Monitor, Bangkok, The World Bank Thailand
Office, April.
United Nations (2004). Human Development Report 2004, New York, United Nations.

Web Sites
Asian Development Bank. http://www.adb.org
Bank of Thailand. http://www.bot.or.th
24

International Monetary Fund. http://www.imf.org

Ministry of Finance Thailand. http://www2.mof.go.th
National Economic and Social Development Board (NESDB).http:// www.nesdb.go.th
National Statistical Office Thailand. http://www.nso.go.th
OECD. http://www.oecd.org
The World Bank Group. http//www.worldbank.org
United Nations. http://www.un.org

25