“AS countries look to restore their public finances, tax will have a key role to play, both in terms of revenue levels and of the tax structure, which may need to be adapted to a post-Covid era.
“However, policy makers should consider that the best way to boost tax revenue is to support solid growth, including through sufficiently strong and sustained stimulus, as this will expand tax revenues.”– Organisation for Economic Co-operation and Development (OECD)
Undoubtedly, the goods and services tax (GST) in Malaysia is a polarising issue. However, as noted by the OECD, Malaysia’s tax structure may need to be adapted for a post-Covid-19 era to restore public finances and fund future growth.
In this context, the opportunity for the GST to feature positively in these respects in the government’s ultimate tax landscape cannot be overlooked.
Certainly, it would be presumptuous to expect that the GST could return without the government properly confronting the lessons of the past implementation.
Businesses and the public alike are both rightfully wary of the tax.
There is no assurance that it would be any better a second time around. To succeed, a strong commitment to the people and businesses would be needed to address the issues from the previous implementation.
Below are some considerations for such a commitment:
Commitment to the people
Protect the B40/M40: To address the regressive nature of GST, and its disproportionately negative impact to those most economically disadvantaged, ideally, a defined part of the additional GST revenue raised must be earmarked and channelled directly back to supporting these income groups. Such open accountability will go a long way in building trust with the community.
Monitor prices and enforce anti-profiteering rules: Critically, the potential for profiteering must be eliminated. The government must show strong leadership here and equip its government agencies with the necessary legal and practical tools, as well as the resources, to reign in such predatory behaviour without delay.
Provide regular visibility to the GST Fund for Refunds: To mitigate concerns on how future GST monies will be administered, the government should publish the status of the GST Fund regularly, and be openly accountable and transparent that there is due oversight in relation to it.
Commitment to businesses
Pay GST refunds quickly: Potentially, businesses’ support for GST depends on this issue alone. Clearly, the government is entitled to guard against fraud, and is legitimately required to verify claims to avoid paying fraudulent refunds.
However, the government must commit to striking a better balance than what was experienced previously, lest businesses lose confidence in their GST credits and start incorporating the unrefunded tax into their prices – a lose-lose result for all.
Register early-stage businesses: A previously effective strategy to safeguard the government’s cash flow was delaying the GST registration of early-stage businesses that pay no GST in the startup phase (having no revenue yet) but who claim significant amounts of input tax on capital and operating expenses. If a GST is to succeed, it would be imperative to fundamentally rethink this approach; such businesses must be registered quickly to encourage investment and support growth.
Allow special methods for exempted businesses: Previously, exempted business (such as those in health, education and financial services) suffered unnecessary GST costs as they were not approved to use special methods envisaged by the law to claim their GST credits. These special methods must be allowed, both to gain the confidence and support of these major industries and to prevent higher education, health and financial services fees from being passed on to the rakyat.Reward compliant taxpayers, penalise those who are not: The government should introduce a permanent programme that grants automatic penalty remissions for voluntary disclosures of inadvertent GST errors. This will send a strong message that taxpayers doing the right thing will be rewarded, and those who do not should expect no concessions.
Increasing the registration threshold to RM1mil: The revenue forgone by the government may be well worth the savings to business in compliance costs and the enforcement effort otherwise required by the government to collect it.
Reducing reporting to bi-monthly or quarterly GST returns: Any relief to monthly filings of GST returns would be welcomed by registered businesses currently used to bi-monthly SST returns. A move to quarterly returns would be ideal to reduce the compliance costs to business.
Improving SST an alternative
While considering the above, it should be noted that the current SST may be improved to achieve the same objectives.
Proponents suggest expanding the current SST’s narrow base by including new taxable services, and removing some exemptions under the sales tax.
In the current environment, this would seem a difficult task. The industry lobbying that would likely ensue would result in prolonged consultation and debate, and may ultimately not achieve the required expansion. Recent examples are the attempted inclusion of logistics management services and amusement park services which were eventually withdrawn only after a few months.
However, the main concern with keeping but improving the SST is the continued potential for tax cascading. A GST system largely avoids such cascading by design with its input credit mechanism. Along with higher revenue, clearer definitions for business, and the safeguard of tax invoices that increase transparency in business (and reduce the black economy), its features may be more attractive to the alternative of improving the SST.
In the end, the bigger question is not whether to re-introduce the GST, but rather, what mix of taxation levers should be chosen to advance the socio-economic outcomes for our citizens.
In this mix, the GST is but one lever, not a panacea for all fiscal ailments, let alone one caused by Covid-19. If done well, it would provide the opportunity to increase government revenue significantly and reliably over the long term. The additional GST revenue could contribute strongly to restoring the public purse and underpin the continued growth aspirations of Malaysia.Chan Wai Choong is director, indirect tax, of PwC Malaysia. The views expressed are the writer’s own.