The Ministry of Finance has released the Tax Expenditure Report 2024, offering a detailed analysis of revenue foregone due to various government tax policies. The report highlights the significant impact of tax incentives and deviations from benchmark systems on national revenue, with the total tax expenditure (TE) for 2023 reaching MVR 7.98 billion.
Overview of Tax Expenditures
Tax expenditures reflect government revenue forgone due to exemptions, deductions, and preferential rates that deviate from the standard tax system. The 2024 report covers four key areas: Import Duty, Goods and Services Tax (GST), Income Tax, and Tourism Land Rent (TLR). These incentives are aimed at promoting economic growth and supporting critical industries, though they represent a substantial cost to the government.
Key Findings by Tax Type
- Import Duty
- The total revenue foregone from import duty concessions in 2023 amounted to MVR 1.65 billion.
- Significant contributions included duty relief for government projects and concessions for foreign investments.
- GST
- GST expenditure surged to MVR 7.47 billion in 2023, a 49.3% increase from the previous year, driven primarily by the lower General Goods and Services Tax (GGST) rate of 8% compared to the Tourism Goods and Services Tax (TGST) rate of 16%.
- Construction commodities recorded the largest tax expenditure within GST, attributed to government development projects.
- Income Tax
- Total income tax expenditure for 2023 was MVR 243.4 million, with tax-free thresholds for businesses and individuals being the primary contributors.
- Negative tax expenditure from banks grew to MVR 430.4 million, reflecting higher tax collections from this sector.
- Tourism Land Rent
- TLR expenditure in 2023 stood at USD 27.3 million, unchanged from 2022. Rent ceilings and preferential rates for specific atolls were the main components.
- Waivers granted under the Public Finance Act increased significantly, adding USD 39.9 million to the expenditure.
What Does This Mean?
In simple terms, the government uses tax incentives to encourage economic activities like investment, job creation, and development projects. However, these incentives come at a cost — the government collects less revenue than it would under a standard tax system.
For instance, lower tax rates for specific sectors, exemptions, and rent waivers mean the government has less money to fund essential public services like healthcare, education, and infrastructure. While these policies aim to boost economic growth, the report suggests a need to evaluate whether they are truly effective in achieving their goals and if the benefits outweigh the revenue loss
Cumulative Impact and Policy Implications
Over the past five years, the Maldives has foregone an estimated MVR 25.28 billion in revenue due to tax expenditures, averaging MVR 5 billion annually. The report illustrates the need for regular evaluations of these policies to ensure they meet their intended objectives and align with fiscal goals.
The findings highlight the importance of balancing incentives to promote economic growth while safeguarding government revenue. As the report notes, increased transparency and evidence-based policymaking are critical to achieving this balance.
