ON Jan 2, the Finance Minister wrote an op-ed in the StarBizWeek, which amongst other things, talked about the government “executing its Medium-Term Revenue Strategy... to meet medium-term revenue goals.”
He reached out to civil society to contribute viewpoints on the country’s finances.In recent days and weeks, tax consultants, union leaders and politicians have been speculating on this very issue.
One wrote that the previous value-added goods and services tax (GST) will make a return simply because the government needs more taxes, implying that it will raise more revenue than the current sales and service tax (SST 2.0).
A report in Focus Malaysia that appeared on the same day as Tengku Datuk Seri Zafrul Aziz’s article, warned that the GST should not be reintroduced until a “living wage” was first introduced to increase the people’s income, especially of the lower income groups, so that they can meet the higher living costs under the GST.
So, it is perhaps time to once again consider the merits of GST versus SST 2.0. We have had experience with both systems in a matter of three short years.
The experience gained by the government, the private sector and the consuming public should inform our choice. If ever the government wants a return to the GST, it is probably because it is attracted by the RM44bil raised in 2017 (last full year of GST).
In 2015, SST raised RM18bil, and under SST2.0, revenue rose to RM28bil in 2019. The GST also has the advantage of avoiding the problem of cascading effect of tax, a tax on tax, and is transparent, which the consumer can see on the shopping bill.
The GST was an election issue in 14th general election, and it was not popular because most people felt it had caused prices to go up across the board, despite generous exemptions and zero-rating. It was promptly repealed in 2018.
In this debate, I will bring to the table several points that have not been sufficiently aired before, and which I think will swing the debate decisively in favour of the SST. Additionally, I have several ideas on how we can improve SST 2.0, such that it will incorporate some of the desirable features of the GST but without its weaknesses, resulting in lower costs to the public and greater ease of compliance by the private sector.
How much more tax did GST collect?
First, we need to correct the misconception that at current rates, GST collected far more taxes than SST. The figure of RM44bil GST was in fact the gross collected tax without deducting the yearly GST refunds of about RM9bil (the refunds were due but not paid). Therefore, the net tax per fiscal year was only about RM35bil. Contrasting this with the SST 2.0 collection of RM28bil, the difference has narrowed to RM7bil.
But this “gain” came at great cost. Proponents of GST didn’t take into consideration the cost of tax collection – tax efficiency. Whilst the SST involves only 80,000 companies as collection points, the GST needed 480,000 as it involved companies big and small across many levels. Because of the requirement to keep detailed records of input and output taxes under GST, firms needed to employ extra staff and tax accountants and accounts systems.
The average cost is easily RM30,000 per year, and for 480,000 firms, this meant RM14bil in additional overhead cost. Most of the extra costs were passed down to consumers via higher prices. Firms that couldn’t simply folded up. This supported the public’s claim that prices had gone up under GST. And this does not even factor in the additional costs that Customs Malaysia had to incur to audit hundreds of thousands more collection points for compliance.
Is an extra RM7bil in taxes worth an additional cost of RM14bil collecting it? Put another way, the real GST cost to the public was not RM35bil but closer to RM49bil (RM35bil plus RM14bil). Again, is it worthwhile to subject 400,000 additional firms to GST compliance when the Minister himself has hinted at leakages due to smuggling of high-duty goods? (fixing cigarette smuggling alone is said to cost RM5bil in lost revenue)
GST’s impact on business cash flow
Second, the GST had a debilitating effect on the cash flow of businesses. The GST Act promised refunds within 14 days, but the reality was far different. Disputes over input and output tax compliance and interpretations over tax exempt and non-exempt inputs, caused delays, and when GST was repealed the government owed firms about RM19bil. Business cash flow and complexity was especially devastating on small businesses operating on low margins.
Unintended effects of GST
Third, a major area of dispute concerned exempted goods and services. In striving to achieve social equity, the government rightly exempted certain services and products from the GST. For example, education and health services and certain goods such as sporting goods and diapers were exempt.
However, while the finished product or services were exempt from GST, the inputs that went into producing them were not. It is like giving with one hand and taking a portion back with the other. This meant that tax-exempt educational institutions could not claim input taxes on the goods and services that they purchased and therefore had to increase their prices to the consumers.
Likewise, for manufacturers of tax-exempt items, the input tax paid (and not claimable) on components had to be recovered by incorporating that into the price of the final product again to be charged to the consumer. Apart from the higher prices this also led to an unintended result in which a fully imported tax-exempt product is cheaper than a locally manufactured one incorporating components carrying input sales tax, going against the made in Malaysia policy.
For Customs officers, the auditing of stocks of inputs for manufacturers that produced both exempt and taxable products was a challenge. They had to pore through thousands of bills of materials and components and decide if the segregation of input taxable and non-taxable items were properly done.
To illustrate, consider a factory that makes air-conditioners, which are taxable, and dehumidifiers which are tax-exempt. Many input items such as electric motors, switches, nuts and bolts, cooling coils, paint and sheet metal are common but have to be accounted for separately because the inputs for the tax-exempt dehumidifiers were taxable whereas those for the air-conditioners were not.
Many countries have GST
So, what about the argument that GST has been adopted by some 150 countries in the world, and so it must be good? Without studying each and every one of them, we can only venture a general comment that they have different social-economic circumstances than us, and perhaps they had found ways to overcome the difficulties we faced.
The United States and Hong Kong, both prosperous and open, competitive economies have conducted extensive studies on GST before and decided against it.
We also need to be mindful of the fact that only 16% of our working population of 15 million pay any income tax so for the vast majority we were not able to offer a reduction in income tax as a quid pro quo for introducing GST.
Furthermore we are one of a few countries in the world where the external trade is higher than GDP and that leads to higher-than-normal input tax refund transactions. Tax refunds is a major issue in GST and have often been referred to as the Achilles heel of a GST system.
To my mind, there is no doubt that the SST is a simpler tax to administer. The sales tax is a single-stage tax to be paid only by the manufacturer, and not to be further taxed by the wholesaler or retailer. It involves far fewer collection points, 80,000 instead of 480,000. It avoids the collection and refund of large amounts of input taxes and thereby obviate the problem of delayed refunds It is more cost effective both for government and businesses. Yet there are some calls for the reintroduction of the GST, this time using a lower rate of 3% or 4%. However, such low rates are unrealistic as that would result in much lower revenue than the current SST 2.0 and probably won’t even cover the cost of collecting it. Advocates for GST have not sufficiently factored in the enforcement and compliance costs on the entire economy.
Can we improve the SST?
If we are to reject the GST, can we improve the current SST system to avoid its deficiencies or mitigate them? One big negative of the current SST is the real cascading of tax on tax amongst service providers as well as between the service and manufacturing sectors.
Manufactured food supplies carry a sales tax to a service provider, say a hotel that in turn charges a service tax on top of the sales tax to the consumer. Conversely, services like logistics, advertising, legal and auditing companies charge a service tax to manufacturers who in turn charge sales tax on top of these included taxes when selling the product. This tax on tax makes our industries and services less competitive and increases the final cost to the consumer.
We must adjust the SST2.0 now to remove this cascading tax on tax before it is entrenched and government becomes too reluctant to remove it, to the long term detriment of business and consumers.
Can we have the simplicity of SST with the benefits of GST? The answer is yes.
The existing sales and service tax can indeed be tweaked and improved on to do just that. This will be discussed in tomorrow’s follow-up article.
Tan Sri Yong Poh Kon is a former president of FMM, and has served on the boards of Bank Negara, EPF and Mida. He was co-chair of Pemudah and member of the Economic Council. The views expressed here are the writer’s own.