A Value-Added Tax (VAT) in Thailand: Who Wins and Who Loses?l

During the last few years, the Thai government has been planning the introduction of a value-added tax (VAT) in the country. If and when this tax is implemented, Thailand will be among the more than 40 countries in the world that have adopted a VAT (Gillis et al. 1990). The primary reason for introducing a VAT is that existing indirect taxes—such as Thailand's business tax—have a "cascading" effect. As an ad valorem tax levied on every transaction, the business tax accumulates along the chain of production. Thus, an initial tax rate of 10 percent can lead to an effective rate of over 25 percent. Furthermore, the effective rate will vary across goods depending on the number of intermediate stages in their production. This leads to at least two problems. First, the business tax distorts production decisions by causing the tax rate to vary across goods. Second, it creates an incentive for vertical integration. Finally, the business tax discriminates against exports. Even if exporters are exempt from paying the tax, they pay tax-ridden prices for their inputs, which undermines their competitiveness in world markets.