THERE is renewed interest in the possible resurgence of the goods and services tax (GST) as the government is focused on expanding its tax base and diversifying the tax revenue stream to rebuild the fiscal space.
The country’s fiscal deficit is expected to consolidate further to 5% of gross domestic product this year.Ultimately, the government aims to achieve fiscal sustainability with a fiscal deficit of 3% or lower. This is one of the seven medium-term benchmarks set by the government under the Madani Economy recently.
Nevertheless, the opportune timing for the reintroduction of the broad-based consumption tax remains to be a focal point of contention with the ringgit remaining in the doldrums, and disposable income seeing modest growth. Speaking with StarBizWeek, Prof Yeah Kim Leng, who is one of the recently-appointed finance advisers to Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim, says major tax reforms such as the reintroduction of the value added tax (VAT) or GST are best reintroduced when the economy is buoyant, inflation is low and prices are stable.
However, given the openness of the Malaysian economy and heightened uncertainties in the global environment, it is hard to get the timing right.
“The efforts to strengthen wages, currency and economic health are already ongoing with all the various plans introduced including the Madani Economy framework, the National Energy Transition Roadmap and the New Industrial Master Plan. They are setting the basis for economic transformation, as well as economic restructuring. As such, these measures can be pursued simultaneously with the implementation of the GST,” he says.
Yeah adds that investors have a more positive and favourable view towards governments that can undertake hard structural reforms, as this entails the prospects of higher, stronger growth for a country in the medium to long term.“I think what is crucial at this juncture is the current window of opportunity, given the stable government along with the other reforms that are complementary. This would create synergistic effects, because higher revenue as well as reduction in fiscal vulnerabilities or fiscal risks, will in turn enhance growth. Once the country’s public finance position is strengthened, it will also likely result in greater, higher, stronger investor confidence and sentiments,” he says.
Yeah says the focus next year is on fuel subsidy rationalisation which is more urgent as oil price has hit US$100 per barrel. However, following this the GST should be the next focus because it could take up to a year in terms of preparation before it is implemented. “GST is critical to restoring the country’s fiscal health and sustaining government spending on crucial development needs such as health, education, rural development and social protection,” he says. In April 2015, Malaysia substituted the sales and service tax (SST) with GST. However, when the Pakatan Harapan government assumed power in September 2018, GST was abandoned in favour of reinstating the SST.
Contentious issueGST has always become a recurring political hot potato – a contentious issue volleyed from one side to the other, often accompanied by promises of its removal for electoral gain.
On this note, KPMG Malaysia head of indirect tax Ng Sue Lynn says the nation cannot afford to experience another short-term tax measure and should GST be implemented, it is crucial for the rakyat to understand the mechanism and purpose of the tax.
On the appropriate GST tax rate, Ng says it could start at a lower level of below 6% as was implemented the last time and progressively increase as the economy and earning power of the people improve.
“Currently, sales tax rates range from 0%, 5% or 10% and service tax stands at 6%.
“Maintaining the rate of 6% should theoretically result in higher government collection due to a wider basket of goods and services subject to tax. However, one of the challenges faced in the past was the considerable increase in the cost of goods and services, with some beyond the GST incurred.
“Hence, there is a need to implement strict enforcement and monitoring mechanisms on how businesses are charging consumers,” Ng says.
Meanwhile, Ernst & Young Tax Consultants Sdn Bhd Malaysia tax leader Farah Rosley says the GST tax rate should be between 4% and 6%.
“Imposing a new tax entails additional administrative burden and significant resource utilisation. Therefore, it is crucial to strike the right balance because if the GST tax rate is set too low, then it defeats the purpose of introducing it in the first place, as collection may not justify the added costs. If not 6%, the rate should be 4%, which will allow for net tax collection,” she says.
Malaysians are not considered to have been overtaxed. The country’s low tax-to-GDP ratio of slightly over 11% is among the lowest for upper middle income countries. This means that the tax burden shouldered by firms and individuals is not high but concentrated.
“When compared with other countries in the region, Malaysia is one of the higher-taxed countries. Categorising by income classes, the Inland Revenue Board reported that the Top 20% group contributed 85%, whereas the Middle 40% group contributed 13% of the total personal income tax collected in 2022. Meanwhile, the Bottom 40% group generally falls below the income tax bracket.
“It was reported that only a small percentage of the population pays individual taxes. Consequently, even though the tax rates are high, only a small population contributes through taxes to support the entire nation. This illustrates that not all Malaysians are overtaxed,” Ng says. On the other hand, Farah says there is still room for taxes to be reduced, especially if any new taxes like GST comes in, so that Malaysia can continue to be attractive in terms of garnering investments compared with neighbouring countries.
“There is no point in reducing taxes if we are not able to collect or reap the benefit of investments into the country as well, whether it’s domestic or foreign investments. Of course when corporate or personal taxes are reduced, the tax revenue of the government will be impacted. However, as a result I think the return for the government in other forms, like trade balance and flow of new investments will probably be far more than the tax lost from the reduction of taxes,” she says.More revenue needed
This was concurred by Deloitte Malaysia executive director Senthuran Elalingam who says that as GST will be replacing the existing SST system, the government would need to ensure that whatever the format the GST takes place, it generates more revenue than the current SST.
For perspective, the government’s revenue was lower when collecting SST. GST collection was at RM37.9bil in 2015 (from April to December), RM59.3bil in 2016, RM67bil in 2017, and RM36.7bil in 2018 before it was abolished that year. On the other hand, SST revenue came in at RM26.7bil and RM27.9bil in 2020 and 2021 respectively.
He also notes that the correlation between GST or VAT rates and the relative cost of living in a country is not strongly linked and that tax is simply one element of a broad range of factors that impact the standard of living.
“It is also relevant to note that all but two countries within Asean have a GST or VAT system in place, the exceptions being Myanmar and Brunei. Among the Asaen countries that have a GST, the rate is 7% or higher, and Cambodia, Laos, Indonesia and Vietnam have a standard rate of 10%. Myanmar has a sales tax which is imposed at a range between 5% and 120%,” Senthuran says. The current corporate income tax rate for the country is 24%. For small and medium enterprises, the tax rate is 15% on the first RM150,000 chargeable and 17% for subsequent RM450,000 chargeable income. The tax rate is 24% for RM600,000 above.
For individual income tax, the chargeable income exceeding RM2mil tax rate is at 30%. Malaysia’s individual tax rate is at a staggered rate, between 0% and 30% above. For example, for the middle income level with a chargeable income of RM35,000, the tax rate is at 6%.
Yeah points out the reduction of income tax and corporate tax will not defeat the purpose of introducing GST to enlarge the country’s fiscal base. He says it is about promoting equitable sharing of the tax load, ensuring that goods and services are not excessively taxed to the detriment of consumers.
Fair distribution
“It is not fully offsetting. We do not want to come to a situation of overtaxing or where the tax burden seems to be shouldered by a small section of the population. Achieving this balance requires adjustments to create a fair distribution of the tax burden. This applies not only to corporate and income taxes but also extends to indirect taxes, particularly consumption-based taxes. The shifting to the consumption based tax will help to broaden the tax base for the economy,” he says. Apart from determining the appropriate tax rate for GST, the government also needs to relook at the basket of goods and services that are subjected to zero-rate or exempted from GST. Streamlining the GST tax refund mechanism is also another linchpin in ensuring the success of the implementation of GST.
Farah notes that there are differences between exemption and zero-rated. While exemption means that businesses are not required to complete the administrative processes of charging and claiming GST, they also cannot claim any input tax incurred. As such, there will be a tax on tax occurrence and businesses may past on the tax cost to the consumers. On the other hand, zero rating will allow the businesses to claim input tax that was charged to them by their vendors.
“In the last GST, healthcare was exempted, so if healthcare is expensive, and on top of that there is the added component of embedded GST then the price may be higher,” she says.
Moreover, PwC Malaysia Indirect Tax Leader Raja Kumaran says the government needs to improve and enhance the delivery system of GST before it can make a comeback.
“For example, the government should look into the refund mechanism of GST. In the last round, exporters and businesses who carry out zero rated supplies had to wait many months for GST refunds and this can result in cash flow problems. As such businesses would generally transfer the cost to buyers by increasing the prices.
“GST refunds should be quick and smooth. The policy needs to be changed whereby the government can give the refunds to businesses first and the necessary verification can be done later,” he says.
Raja also points out that during the previous round of GST implementation, Customs authorities permitted GST refunds within a 14-day timeframe. However, these refunds were only applicable for amounts below RM50.
“This is too low, especially considering that exporters and large businesses often have substantial GST amounts eligible for refund. In order to ensure that revenue generated from the GST is used effectively, it is also crucial for the government to maintain transparency in its utilisation of funds. A more robust system for parliamentary oversight is needed, where the government is encouraged to report to Parliament on the allocation and expenditure of additional funds. This information will then be subjected to parliamentary debate and scrutiny,” he says.
While Raja acknowledges that the progressive wage model needs to be rolled out while GST is brought back, he notes that the process may take some time and the provision of cash handouts to targeted communities (low income) can be considered instead.
“At the same time, personal income tax rates can be reduced as well like what was done during the last GST implementation where the highest income tax bracket was lowered by one notch.
“In the cash handout programme, the government can use the same channels to reach out to the B40 and B60 groups, as it did during the Covid-19 pandemic. Singapore, which continues to implement an 8% GST now, still provides cash handouts to its citizens,” he says.
Raja says cash handouts will not be counterproductive in the implementation of GST as consumer spending can be increased.
“What we want in the economy is for people to spend money and not save it or keep it somewhere. The more money that is spent, the more buoyant the economy is,” he says.
Already a subscriber? Log in
Get 20% OFF The Star Digital Access
Cancel anytime. Ad-free. Unlimited access with perks.
