PRINCIPLES OF MICROECONOMICS 2013 The main purpose of this assignment is to study whether the increase in Tourism Goods and

Services Tax from 6% to 8% has any impact on demand and supply of Tourism industry and profitability of small business has affected to these changes or not. The Maldives is located in north East Indian Ocean Sea. There are 1192 isolated islands located in the Maldives throughout country, from this more than 200 islands are people Living Island, but this figure may be now alter because of migration of people from one island to another. Tourism, Fishing and Agriculture are major sectors in Maldives. For the purpose of nation development strategy, the Presidents Ibrahim Nasir planned to buildup and wider this industry. The dream comes to true when the first tourist resorts opened in 1972 in Bandos Island and Kurumba Village. These two resorts are opened in kaafu atoll, this atoll is the closest atoll to the airport which is only the international airport for that time. Then later other resorts are built in different area throughout the country. The tourism industry is developed in different phases throughout the country in for years. These resorts are managed by local owners as well as foreign management with management contracts and joint venture. Some of these resorts are solely owned by foreign owner today. Maldives tourism industry is normally like a seasonal product, because when the high season begins (end of year), more people are demanding for the tourism industry till to January or February. In this time, most of resorts are fully occupied, over booked and difficulty in supplying this product. Whereas, low season (middle of the year) less number of people is demanding, so there might be more resorts are available for the tourist till to peak. According to Visitor Survey Report of 2011 (Ministry of Tourism, Arts & Culture, 2012), the demand for tourism of Maldives might not seen any decreasing in compare to last year, whereas, the number of tourist resorts have been increasing year by year. However, according to Fourth Tourism Master Plane 2013-2017 (Ministry of Tourism, Arts & Culture, 2012) show that, the demand for tourism industry is decreased at twice in the 2004 Tsunami results and the 2008 Global Financial Crises (GFC) effect in 2009 tourism. These two times only noticeable were demand for tourism decreased. However, over the past 5 years (2011-2008) was very challenging period for the Maldives Tourism industry, because of global economic crises as well as political and other manmade disaster well. But, the numbers of tourist who are visiting are getting increase dramatically. According to the Maldives Visitor Survey Report (Ministry of Tourism, Arts & MOHAMED FURUGAN, BACH 5Page 1

PRINCIPLES OF MICROECONOMICS 2013 Culture, 2012) shows, the Europe was the large sources of tourist visiting to the Maldives (57.7%) are from that region in 2011, where as the second large market share is from Asia (35.9%) in 2011. However, this figure is now changed and the greater market share is now from Asia and reaching over 37% in 2011most of them are from China. In addition to this, the main reasons for tourist visiting are to spend holiday, for honeymoon and diving. In 2011, former government has decided to introduce the Goods and Services Tax (GST) at rate of 3.5%, whereas Tourism Goods and Services Tax are already introduced at the rate 6%. This concept was very successful and very effective for government revenue. However, according Tourism Goods and Services Tax (TGST) regulation act stipulate that Tourism Goods and Services (TGST) should be increase from 6% to 8% in January 2013. The big question is increased of 2 % from tourism services will affect the tourism industry is or not. The statistics from tourism industry show that, tourists visiting are increased year by year. And the effects of increase Tourism Goods and Services (TGST) from 6% to 8% might not see yet. The Maldives tourism industry might have an elastic demand. According to Riley (2013) sated, Price elasticity of demand measures the responsiveness of demand after a change in price. Because of substitutes of tourism market, the major competing tourism markets are Mauritius, Seychelles and now Sri Lanka. On the other hand, it might have an inelastic demand. According to the Maldives Visitor Survey Report (Ministry of Tourism, Arts & Culture, 2012) shows that, increase in number of tourists visiting, 86% of them are shows their intention to revisit again and 90% of them are advice or recommend others as Maldives is the best destination to spend holiday. Due to uniqueness of Maldivian Tourism industry, the effects of increase in 2% from Tourism Goods and Services Tax (TGST) might not seen from any statistical data. MOHAMED FURUGAN, BACH 5Page 2

PRINCIPLES OF MICROECONOMICS 2013 s Price of tourism D2 D1 Quantity The above (figure 1) shows that increase of demand for tourism industry. The demand for Maldives tourism is not being affected by economic crises and other factors. The major exporting component is tourism services. So the Maldives government is extremely concerned about any changes internally or externally that are face to the tourism industry. However, the increase in Tourism Goods and Service Tax (TGST) from 6% to 8% will increase the price goods and service from Maldives. According to the Maldives Visitor Survey report (Ministry of Tourism, Arts & Culture, 2012) shows that, the major tourists are visiting to the Maldives are for the purpose of spending their holiday (64%), second large famous reason for visiting to Maldives is honeymoon(20%) and diving purpose(10%). So the increase in 2% from TGST will increase the price of all the good, includes mainly food, beverages and accommodation which are tourist more demanding products. Therefore, the aggregate cost will increases, tourists are tending to buy less and spend less on those products. For instance, a tourist can spend an overnight in five star resorts for $550 and normally staid for a week. But now, increased TGST from 6% to 8% of $550, this makes the tourist short his/her holidays from 7 to 3 days. When more days means, more money has to spend on and vice- versa. MOHAMED FURUGAN, BACH 5Page 3

PRINCIPLES OF MICROECONOMICS 2013 The most competing tourism markets for the Maldives are Seychelles and Mauritius, the tourism of Seychelles is very similar to the Maldives tourism industry with having beaches and other similar nature. However, increased of 2% GST from tourism industry will increase the cost of tourism in Maldives, if the cost of tourism industry of Maldives is more in compare to our competing Seychelles, they will take that into account. In addition to this, increased priced will decreased the purchase power of tourists and they can spend less In Maldives. Thereby spending pattern of tourist might change and they will choose other similar alternatives that will give same satisfaction with the affordable price. Figure: 2 The indifference curve for the two service which is Airport service and Tourist resort. The indifference it is the line shows, when the person consuming combination of two goods that get same utility (satisfaction) to the person. Airport services 6 3 4 7Tourist resorts For instance, (figure 2) show the service tourist normally used. The person will be getting same utility (satisfaction) when he/she consuming 7 unit of tourists resorts and 3 units of Airport services, as they would if they consuming 6 units of Airport 4 units of Tourist resorts. MOHAMED FURUGAN, BACH 5Page 4

PRINCIPLES OF MICROECONOMICS 2013 If the tourist prefer to spend there time on Airport service, the same utility will be getting whether he/she prefer to spend in Airport services or Tourist resorts. The marginal rate substitution is the amount of one good (tourist resort) that has to sacrifice if the tourist wants to gain one extra unit of the other (Airport services). When increased of TGST from 6% to 8% will decrease the demand for tourist visiting to the Maldives. Mainly because of their purchasing power less. Tourist is more likely to spend less amount of day in Maldives. Tourist will not be staying in Maldives if they feel, they are not being satisfied well. They will prefer to go other country which provides similar types of tourism at affordable prices. If it is happen the demand for the tourism industry will decrease. Secondly, if the tourist coming is decreased, the revenue to the producer might be drop, hence the confident of the producer is also getting low, and because they might thing there is no use of providing tourism services without no profits. Furthermore, they will tend to supply fewer amounts as well. However, the introduction of Tourism Goods and Services Tax might be very helpful for the government budget, hence the tax revenue might be increased. Government can provide more jobs, better public services and so on. However, this action could be beneficial for the government in short run. In conclusion, the Maldives tourism industry is very sensitive industry. Any changes occur inside of country or from outside the country will be affected to the tourism industry directly or indirectly. Such effects are European economic crises, demand and supply of oil, Nine eleven in USA, political disruption and so on. Due to these crises, the Maldives tourism industry has been affected very much. So the Maldives tourism industry is has elastic demand. Due to the increase of TGST might also caused some effects not only short run, but it might be happen in long run. As same as tourism sector of Australia when the increased the GST from tourism industry. The effect has notice after 4 years later. How ever if we take great care on this industry might not get effects from this action. MOHAMED FURUGAN, BACH 5Page 5

PRINCIPLES OF MICROECONOMICS 2013 Reference list Ministry of Tourism, Arts & Culture. (2012). Fourth Tourism Master Plan 2013-2017. Maldives: Ministry of Tourism, Arts & Culture. Ministry of Tourism, Arts & Culture. (2012). Maldives Visitor Survey Report 2011. Maldives: Ministry of Tourism, Arts & Culture. Rilley, G. (2012). Price elasticity of demand 2012. Retrieved 28, February 2013 from http://www.tutor2u.net/economics/revision-notes/as-markets-price-elasticity-of- demand.html MOHAMED FURUGAN, BACH 5Page 6
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