KEEP Malaysia’s Goods and Service Tax (GST) simple. Use a single tax rate and do not allow too many exemptions.
That’s the advice to the Government from two academics who said Malaysia should adopt a model similar to New Zealand’s when it implements the consumption tax in 2007.
A paper released by Universiti Utara Malaysia (UUM) accountancy faculty professor Dr Jeyapalan Kasipillai and a visiting professor from Australia, Dr Jonathan Baldry, said New Zealand’s broad-based GST system, with minimal exemptions and no zero-rated items other than for exports would provide “a good template” and was “an ideal option” for Malaysia.
Although many countries in the region from Thailand to Australia had adopted a similar type of value-added tax (VAT), most had succumbed to pressure from interest groups to allow compromises in the form of a complex network of exemptions and zero-rated items that made the tax difficult and expensive to administer, the paper said.
The best GST system, it said, was a comprehensive one levied at a single rate with no exemptions and no zero-rated items except possibly for certain pragmatic considerations like exemptions for small businesses..
“Simplicity leads to minimal administrative costs and minimal compliance costs for tax-paying firms,” the paper added.
In announcing the planned implementation in 2007 of the GST in his budget speech last week, Prime Minister Datuk Seri Abdullah Ahmad Badawi said goods and services considered as basic needs would either be zero-rated or exempted, while small businesses, probably determined by the level of their annual sales, would also be exempted.
He said this was to ensure the low-income group would not be overly burdened by the GST.
Analysts have said the impact of GST on the lower income group would likely be one of the most critical issues facing the Government in the two-year run-up to the introduction of the new tax.
It is widely believed that the GST, which is likely to be inflationary, would hit people in this group hardest as they currently pay little or no income tax.
In their paper, Jeyapalan and Baldry, although agreeing that GST would have a “disproportionate impact on the real incomes of the poor,” said a number of considerations suggested that the impact would be “quite moderate.”
Firstly, there was a sales tax and, to a lesser extent, services tax component already hidden in the prices of all commodities currently. Also, basic items would be largely exempted from GST, they noted.
“Where other necessities such as fuel and power, public transport and medical care are concerned, there is already sufficient government intervention to ensure that appropriate protection of the poor is quite feasible and can be well-targeted,” they said.
If there were equity issues still to be addressed, the Government should use means other than the GST – like direct taxes or the social security system – to solve them, the paper said.
“What should not be done is to apply zero rating to necessities; this compromises the effectiveness of a GST, increases its cost, can have an unintended equity impact and is a virtually unmovable set of concessions once in place,” it said.
The GST will be replacing the current sales tax of between 5% and 20% and service tax of 5% on Jan 1, 2007. According to a survey by Deloitte Touche Tohmatsu, some 121 countries worldwide – including five in Asean – currently have a similar tax in place, while 12 others are in the process of introducing it, making this the most dominant indirect tax system in use.
A StarBiz poll after the budget presentation last week found Malaysian tax experts seeing a GST rate of between 3% and 5% when it is first implemented in 2007. Within Asean, Indonesia, the Philippines and Vietnam currently impose a GST of 10%, Thailand 7% and Singapore 5%.
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