The Malta Independent 14 July 2024, Sunday
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COVID recovery - a fiscal remedy is smarter than cash handouts

George M Mangion Tuesday, 11 August 2020, 10:59 Last update: about 5 years ago

A recent meeting with the Prime Minister by the Chamber of Commerce discussed the best recovery plan post COVID − this has revealed interesting topics. One of the topics advocates a fiscal remedy. It was suggested by the Chamber to lower VAT on travel and hospitality services. At present, the VAT rate of 18% can be reduced to 7% and the wage subsidy retained until a COVID-19 vaccine is found.

This major recommendation (costing millions) was the fruit of a consultation exercise carried among the members of an elite industry think tank. Obviously, there were other recommendations forming part of a wide-ranging document drawn up to map out an economic strategy in the wake of the COVID-19 pandemic.

Such a bold fiscal measure is not a unique one, since both Germany and the UK have already introduced lower VAT rates at 5%. There were other interesting proposals such as the regeneration of depleted areas in towns and villages, incentives for digital smart manufacturing and the creation of a rapid mass transit system.

This document kicks in a stark reminder to government that an immediate reduction in the cost of living could be the antidote for a revival of a subdued “feel good factor”. There are many other recommendations, but in my opinion the stabilisation of the demand lost due to COVID-19 lockdowns and a severe drop in tourism needs to be given top priority.

The recent issue of free cash vouchers (some are still to be collected) was but a knee jerk tactic. It gives lower income workers a chance for a couple of free meals but will not necessarily guarantee a permanent solution to restaurants, hotels and the travel sector, which are facing low occupancy.

It is a smart solution to achieve parity in VAT rates, reducing them to match those charged in other Med. countries. Really and truly, there exists a sclerosis in the system that so far has blinded operators not to take up arms and protest that they are being charged a higher rate of VAT than similar businesses in other EU countries, which compete to attract quality tourists.

The writer fully concurs with the lowering of tax since this smart initiative is one which, if well supervised (by linking all cash registers to a central unit), can boost demand. One acknowledges that sections of this industry are known to under declare VAT returns in an effort to meet increasing overheads and fierce competition from foreign packaged tour operator rates. This anomaly is not being tackled and perhaps is pushing operators to indulge in tax evasion, possibly trade in the black economy to mitigate losses arising from steady cost escalation in catering products, mainly food, drinks and rents.

Conversely, there is a silent majority which says that it is better not to rock the boat − let sleeping dogs lie, don’t push for a tax reduction. This ostrich like attitude is dangerous. Some fear we spent millions in the first wave only to have to dig deeper in our pockets, top up more debt − should God forbid a severe second wave hits us this autumn.

Therefore, it is not rocket science to argue that in order to attract more tourists and help the hospitality and restaurant sector, an island-wide embellishment road map plus a drop in VAT is essential. This concept has been wholeheartedly accepted by Germany, a country which in the past always refused to give any fiscal incentives even during the peak of the last global financial crisis but now deeply feels that palliatives won’t work.

The latest MHRA studies show a dismal low occupancy rate and some hotel owners are mulling over the idea to close for this year and reopen for business next Easter. This, therefore, calls for added state aid to furlong idle workers. Critics have repeatedly turned down the merits of reducing tax.

They say (and not without merit) that a reduction in direct taxes will go straight to the pockets of owners as in practice, they will never reduce the menu or travel prices. This may be true and studies in Ireland have proved that without adequate surveillance (a familiar local trait) consumers saw little drop in prices. It goes without saying that poor compliance and surveillance on the sector by the fiscal authorities does scupper the desired advantages of lowering direct taxes.

Therefore, the situation creates a dichotomy – those who appeal for a reform in taxation to lower the cost of living and enhance demand against those who prefer the status quo − by continuing to abuse the system. It is estimated that unrecovered tax revenue is substantial. In the past, the finance minister had admitted that abuse exists. He is reported to have exclaimed that, "this is a continuous struggle. Abuse can be limited, but never eliminated. What we need to do is address the black economy and treat it as a beast on its own. It creates unfair competition and loss of revenue".

The writer advocates a number of smart initiatives as recommended by the Chamber of Commerce to achieve a level playing field. One acknowledges that the travel and hospitality industry is known to suffer from low profitability on capital employed and high risks faced.

They habitually fight to meet increasing levels of overheads, reduction of tables due to COVID rules and fierce competition from cheaper destinations. The problem is not being solved by simply opening all the ports (done on 15 July) and trying instant schemes by MTA to attract masses. This in practice includes paid international adverts to lure low-paying youths to join us in three-day pool parties of deafening techno music, a vodka fest and love.

These gatherings helped increase the number of infections which at the time of writing exceed the numbers registered at the peak of the first lockdown. The energetic tourism minister acts nonchalantly to protests from doctor, nurses, social organisations and other unions which demand a complete ban over such mass gatherings, as logically youths dancing in pools cannot easily maintain a social distance or wear protective face masks!

Authorities changed tack and issued new guidelines against Ibiza-styled mass gatherings. Naturally, there is a strong argument that jobs need to be protected and the ministry of tourism was advised that taking a measured risk to attract foreigners for mass pleasure events (currently banned from other countries) is a money-churning opportunity; too good to be ignored. Such a short-sighted attitude exacerbates the dire long-term health risks inflicted on the community and leverages the cost of medical care.


The writer is a partner at PKF Malta − an audit and business advisory firm.

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