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Saturday September 7, 2013 MYT 12:00:00 AM
Saturday September 7, 2013 MYT 9:38:48 AM
by fintan ng
MALAYSIA is a laggard where implementation of a goods and services tax (GST) or value added tax (VAT) is concerned but the state of public finances will now hasten the implementation once the necessary legislative process passes it.
The market expects that when the Budget 2014 is tabled in Parliament in late October, a timeline for the long-postponed GST will be announced.
Most economists believe the GST will be implemented in 2015 assuming a lead time of between 18 and 24 months when the ecosystem for the GST is put in place while businesses and consumers are duly notified.
The GST will replace the existing sales tax of between 5% and 10% and the service tax of 6%. Whether or not the Government will reduce the income tax rates or introduce more tax reliefs is still unclear at this point especially given the state of public finances.
In recent history, the GST was first announced during Budget 2005 for implementation in 2007. But in February 2006, the implementation was deferred as the Government wanted more time to get feedback from the public.
Then the GST bill was tabled for first reading in late 2009 for implementation in the third quarter of 2011. The bill was supposed to go for the second reading in March 2010 but was withdrawn after facing opposition.
If the GST bill becomes law, Malaysia will finally join the 146 countries which have GST or VAT by 2015. She will also be joining the seven out of the 10 members of Asean which have either GST or VAT.
Therefore, the announcement during the tabling of Budget 2014 will be widely watched as international investors, forewarned by rating analysts from Fitch Ratings and Moody’s Investor Services, will want to see how sincere the Government is in its efforts to bring down the budget deficit.
There is opposition to the GST, rightly or wrongly. Lack of knowledge and transparency are some of the issues that will have to be dealt with since this tax is broad-based tax and affects all consumers.
Ernst & Young Malaysia tax leader Yeo Eng Ping tells StarBizWeek that once the GST implementation is announced, the regulators will likely see heightened demand for finalisation of certain policy positions and clarity on the regulatory processes.
“We also expect the Government’s GST public relations machinery to be in full swing to inform and educate the general public,” she says, adding that businesses may have a broad idea of how GST will work but have not fully assessed the effects nor possess the detailed mechanics on how to become GST-ready in an efficient and risk-managed manner.
“Public acceptance and education will be the key areas to work on. The Government must ensure that its GST awareness programmes are far-reaching and all-encompassing so that the public is equipped with the requisite understanding, which will in turn promote acceptance and compliance,” Yeo says.
She adds that for businesses, it will be important for them to continue to have avenues to regulators to address specific industry issues, including clarification of grey areas, before the implementation date.
According to a recent report by CIMB Investment Bank Bhd economic research head Lee Heng Guie, how the GST impacts prices will depend on the rate. If the rate is 4% as widely speculated, then the consumer price index will see a half-percentage point increase. Lee says if the rate is 5%, then there could be a 1.2% increase while a rate of 6% will see a 1.9% increase.
Others such as BDO Malaysia tax advisory head David Lai says whether the GST is inflationary is debatable as the country already has existing sales and service taxes.
Yeo says there is evidence that the introduction of GST in other countries has been accompanied by a slight increase in inflation, which then tapers over time as businesses and the public adjust to the environment.
“Equally important will be the need to ensure that overall prices are adjusted appropriately, with proper enforcement of the Price Control and Anti-Profiteering Act 2010 to curb profiteering acts of unscrupulous traders and business organisations,” she says.
PwC Taxation Services Malaysia senior executive director Wan Heng Choon expects the Government to embark on an extensive awareness and education programme to address the misconception that GST will by itself increase prices.
“I understand that the authorities have already simulated the potential impact of implementing GST on a range of goods and services. This should be released to guide businesses and consumers before the GST implementation date,” he says.
Wan says some prices will fall while others will rise depending on the ability of businesses to recover GST compared to the current sales and service tax.
He points out that the GST presents an opportunity for businesses to reduce their operating costs which in turn gives them the ability to lower selling prices.
“This is critical. If businesses do not see this or do not pass on the potential savings to the consumer, the price lowering potential of GST will not materialise. Prices of some goods and services may increase because they were not previously taxable,” Wan says.
Moreover, he says the experience in other countries that introduced a VAT or GST is mixed where prices are concerned. “It is not supported by empirical data that the introduction of a GST has a prolonged effect on the increase in prices. The trend seems to be a hike just after implementation and a return to “normal” after 12 to 18 months,” Wan says.
However, the experts agree that some temporary disruption to consumption may occur as people adjust to the new prices.
Lai says in an email reply that there may be some short-term effects on consumption patterns as consumers will compare and decide whether it is beneficial to accelerate purchases before the implementation date.
“The GST effects would be different for different goods and services. From our Australian experience, it is important for retailers to study and communicate the effect of GST on their pricing to consumers in advance,” he says.
Will income tax be adjusted lower?
This is an important question for the estimated 1.7 million tax payers in the country. BDO’s Lai says any reduction in income tax rates will depend on the GST rate and this adjustment will only be implemented gradually in line with economic growth.
“At 4% the government does not expect an immediate substantial increase in revenue compared to the current sales and service tax,” he says.
Lai says other countries such as Singapore have gradually increased their GST rate in tandem with reduction of income tax rates.
Tags / Keywords:
Business, goods and services tax, deficit, debt, subsidy cuts
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