Collecting taxes more efficiently allows countries to improve their balance sheets after the pandemic while promoting business investment and sustainable economic growth.
Fiscal policy has played a big role in the economic recovery from COVID-19. Governments across Asia and the Pacific began rolling out stimulus measures early on and enhanced them as the pandemic unfolded. Policies have varied depending on the challenges each country faces, with measures ranging from increased public spending on health to enhanced unemployment benefits, business investment incentives, and direct cash transfers to the most vulnerable.
Governments have also granted tax relief. For instance, the People’s Republic of China introduced personal income tax exemptions for bonuses and subsidies paid to health care staff, tax waivers, and bigger tax refunds. Indonesia waived income taxes for manufacturing workers earning 200 million rupiah or less per year and lowered the corporate income tax rate.
With developing Asia’s regional GDP growth is projected to rebound to 7.3% in 2021, now is the time to plan to rebuild balance sheets and make sure tax policies are sustainable. To an extent, economic growth will automatically boost revenue. But the pandemic has caused structural changes: Many companies have closed, while others have fallen out of the formal economy, in some cases to avoid tax obligations.
In India, passenger transportation was one of the hardest-hit sectors, rendered almost idle during the second quarter of 2020. Commercial vehicle sales plummeted, and steel consumption fell by more than half. Across economies, some parts of industry have been wiped out because they were technologically obsolete or inefficient. Even as economies recover, some businesses may not reopen after taking on big debts and losing key employees.
Tax yields in developing Asia were unstable and unpredictable even before the pandemic. They generally fell well below the average for the mostly higher-income economies belonging to the Organisation for Economic Co-operation and Development (OECD). Some developing countries in the region have a tax-to-GDP ratio near or below the 15% benchmark often considered the minimum for sustainable development.
For instance, Bangladesh’s tax yield in 2019 was 9.1%, curtailing its ability to boost public spending. While the government has taken steps to enhance tax collection, the impact has been gradual. Indonesia’s tax-to-GDP ratio fell to 11.1% in 2019 from 12.1% in 2010, partly due to a narrow personal income tax base and limited tax compliance capacity.
New tax policies will have to target income inequality, which was already widening in Asia and the Pacific before COVID-19, and has gotten worse during the pandemic. Part of the answer is a better balance between direct and indirect taxes.
It is important to gain the trust of ordinary citizens so that everybody will pay their fair share.
Indirect taxes, such as value added tax (also known as goods and services tax) and excise tax, tend to dominate in some Asia-Pacific economies, while direct taxes, such as personal income tax and corporate income tax, account for a larger part of tax revenues in some advanced economies in this region. Compared to indirect taxes, direct taxes are better suited to address income inequality because of the larger scope for making direct taxes progressive and placing more of the tax burden on those with the capacity to bear it. A better mix of these taxes, and between personal and corporate income taxes, can make tax policies fairer and more equitable.
It is also important to gain the trust of ordinary citizens so that everybody will pay their fair share. Through the Global Forum on Transparency and Exchange of Information for Tax Purposes, the world has made progress in eliminating bank secrecy for tax purposes and increasing the exchange of information among tax authorities. This has helped expose tax evaders that were hiding their assets offshore. However, the Asia-Pacific region lags behind on this front.
As many as 19 developing economies in Asia have yet to join the Global Forum. An even greater number, 26 have yet to join the Inclusive Framework on Base Erosion and Profit Shifting, which aims to tackle challenges such as multinational companies shifting their profits to jurisdictions with low or zero taxes. The large markets and growing purchasing power of Asia-Pacific countries make them attractive for foreign trade and investment but also vulnerable to such practices. Tax policies will therefore require a balancing between incentivizing investment and ensuring a robust and just taxation system.
Ongoing talks at the OECD could lead to major changes that would compel large companies to pay taxes based on the location of their economic activity and to pay a minimum tax. This could effectively put an end to aggressive tax planning and accounting tricks that enable companies to take advantage of tax havens and low-tax jurisdictions. Asia-Pacific countries need a seat at the table as these decisions are being made.
Increased international cooperation within Asia and the Pacific is also critical. Until recently, it was the only region that did not have a forum for countries to discuss tax policy and cooperation. In response, ADB has launched the Asia Pacific Tax Hub, intended as a platform for strategic tax policy dialogue, institutional and capacity development, collaboration, and exchange of information and ideas.
The goal is to help rebuild a fair and effective tax collection system across economies in Asia and the Pacific that will enable a sustainable and inclusive recovery from the COVID-19 pandemic. The hub will focus mainly on revenue strategy, digital transformation of tax administration, and promoting participation in international tax frameworks.
By optimizing tax collection, countries can not only shore up balance sheets in the wake of COVID-19 but also ensure a broader revenue base, encourage business investment, and promote more inclusive and sustainable economic growth.