PETALING JAYA: Both bouquets and brickbats will be hurled at the goods and services tax (GST) if it is introduced in this Friday’s budget.
Though implementation has been delayed since its first mention in the 2005 budget, the premise seems simple enough: the more you consume, the more you pay.
Also known as value added tax, it is implemented in 160 countries worldwide. As for South-East Asia, only three countries - Brunei, Malaysia and Myanmar - have yet to follow suit.
Since the 1970s, Malaysia has imposed a sales and services tax (SST), which is comprised of the Sales Tax Act 1972 - with rates of 5%, 10% and 20% - and the Service Tax Act 1975 with its 6% levy.
The proposed GST, a consumption tax likely to fall between 4-7%, will replace the standard cumulative SST of 16% and extend to items not currently covered by it.
Ringgit and sens
But one of the major criticisms against the GST is its regressive quality.
The poor, who are not currently taxed on their income, will now have to shoulder some of the burden via the new consumption tax.
“To alleviate this negative feature, the GST is usually designed to be zero-rated or exempted for essential goods and services, which the poor consumes in greater proportion,” said RAM Holdings Bhd chief economist Dr Yeah Kim Leng to The Star Online.
These different rates - standard, zero-rated and exempted - is more difficult to implement from an administration perspective, says Malaysian Association of Tax Accountants (Mata) president Abd Aziz Abu Bakar.
“Back in 1994, Singapore imposed a standard 3% GST on everything, which is much easier for the government to manage. But here, the Malaysian government is taking the rakyat into consideration with different rates,” he said.
Though the GST is only likely to be implemented in mid-2015, Abd Aziz adds that consumers are already in the era of consumption tax.
“For example, a bottle of Coca-Cola has a 10% sales tax that is charged at a manufacturing or importer level. Consumers don’t know about that embedded tax as it’s not transparent,” he said.
Now, customers will be well aware of the GST’s impact, and make purchasing decisions accordingly.
He hastened to add that one of the GST’s main targets is to reform tax avoidance in the business community, and not so much the fiscal deficit: “The government loses an estimated RM3 billion in sales tax revenue due to loopholes and leakages. Now, they’ll be sucked into the net.”
And with or without the GST, says Abd Aziz, the prices of goods and services are on the rise due to supply and demand.
Our heavy dependence on income tax and oil and gas revenue - “The latter is close to 40%,” says Dr Yeah - also illustrates the need to broaden and diversify the country’s revenue base.
From a business perspective, key benefits will include the increased efficiency of tax administration despite the higher burden of record-keeping.
“Small businesses will be encouraged to register to get rebates on their inputs (raw materials or services that go into production). And if businesses want to claim rebates, they have to keep detailed records,” said Dr Yeah.
MARC Bhd economist Nurhisham Hussein agreed that input tax credits will provide an incentive for businesses to comply, and termed the GST a “really elegant system” with fourfold results.
“Businesses won’t incur additional taxes or double taxation, and the market prices of goods and services won’t be distorted, unlike under the SST system.
“Businesses will also act as de facto collection agents for the government, and the tax yield will be larger at any given tax rate relative to the SST,” he said.
While Nurhisham admits that the GST’s main drawback is a relatively higher tax burden on the poor in terms of percentage of income, the proposed rates are “fairly low” and essential goods will be either zero-rated or exempt, making the actual tax burden on them “relatively small”.
“This will be even more true if the government follows through with a higher BR1M payout and adjustment or cuts in personal income tax,” said Nurhisham.
He calls the current SST system “just as regressive” with none of the GST’s advantages: “The SST results in higher business costs and distorted market prices, is subject to a higher rate of evasion and fraud, and yields less tax revenue for the government.”
“SST is also a harder system to administer, and requires more audit resources. Most other potential revenue sources, such as a capital gains tax (CGT), also don't have the stability that GST offers,” Nurhisham adds.
Research indicates that while the investment-based capital gains tax system has a positive impact on mitigating income and wealth inequality, it is susceptible to the booms and busts of the business cycle and less suitable for increasing government revenue.
As exports are GST-free, it is also likely that the country’s export-oriented economy will benefit.
Dr Yeah adds that a “one-off inflation spike” will occur, which Alliance Research chief economist Manokaran Mottain agrees with.
“It’s the public’s mentality. When the government increased petrol prices by 20 sen, people were lining up nationwide. You will see this hoarding effect,” said Manokaran.
He also pointed out resource-heavy implementation and tax collection issues as potential teething problems: “Even Singapore faced issues in the first two years. The collection agents, or traders, could not pay taxes to the government. You’d want to ensure that the GST is strictly followed.”
Softening the budgetary blow
For a smooth roll-out, the imparting of systematic consumer education in the period between the announcement and actual implementation date was deemed of paramount importance.
Asked about the possible reduction of existing taxes, Abd Aziz said the GST’s introduction will normally go in tandem with the reduction of personal income tax and corporate tax to increase competitiveness.
“The government also has to help middle income individual by increasing their disposable income. For example, this group can be helped in terms of reduction and rebates against their income tax,” he said.
However, he cautioned against a reduction of tax rates across the board: “The well-to-do can afford to pay tax and help the country.”
With certain quarters decrying the GST in favour of first plugging leakages revealed in the annual Auditor General’s report, Manokaran called for a “high level task force” to look into the issue.
To him, the government should move towards only providing subsidies to the needy: “Kedai Rakyat 1Malaysia should be converted into an effective chain of “fair price shops”, where it is limited to low income groups. In that case, they should be run by the government.”
In India, this measure is known as ration shops, where low income groups receive monthly cards allocating a certain amount of food at a subsidised rate.
Purchases above said allocation will be subject to market prices.
“Instead of BR1M, which is a short-term solution, this should be carried out. If those payments are channeled into a fund, much can be done,” Manokaran added.
Dr Yeah also called upon the government to monitor businesses to ensure the GST is not taken undue advantage of and used as a pretext to jack up prices.
One assurance is the Anti-Profiteering Act, said Abd Aziz, which was passed in 2011 to ensure that savings in the GST era will be passed on to the consumer.
“The consumer can’t check every level of the distribution chain, so the Domestic Trade, Cooperative and Consumerism Ministry will ensure that distributors, wholesalers and middlemen don’t take advantage of the GST,” he said, adding that hypermarkets should act as price-setters to reflect actual costs.
A “last defence” is the government’s shopper’s guide, which will be provided three months before the GST’s implementation date to help the public learn the actual pre and post-GST price of goods.
It is then up to them to exercise their consumer rights and avoid purchasing goods from outlets that take advantage of the GST.
Abd Aziz also suggested an introductory GST rate not surpassing the existing 6% service tax, as it will be easier for retailers and customers to adapt.
Anything higher, he says, might have an adverse social and political effect.
“Even third world countries worst than Malaysia implement the GST. It is an economic tool used towards achieving high income status for the nation.
“There will never be a perfect time. If not now, then when?” he added.
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