GST – the political TNT

Posted on 2 June 2013 - 08:27pm

Tan Siok Choo

IMPROPERLY managed, the plan to introduce in Malaysia the much postponed goods and services tax – popularly known as GST – could be political TNT.

Economically, the case for introducing GST in this country is strong. Admittedly, there are drawbacks but these are likely to be short-lived. For example, the administrative costs for businesses required to collect the tax can be cumbersome; with time, this could become easier.

More important, the debate should be framed in rational terms. Unfortunately, the GST issue has now become highly politicised.

Exacerbating this issue is the government's failure to present cogent arguments in favour of GST. If their efforts to explain this issue could be graded, they deserve an E – mainly for effort rather than effectiveness.

Thankfully, the government has announced GST won't be implemented immediately. And before arriving at a decision, it will engage politicians – hopefully this includes those from the sometimes obstreperous opposition – businesses and the public.

Meanwhile, several Pakatan Rakyat politicians have seized on the GST issue with the avidity of treasure hunters believing they have located a super-rich gold mine.

Some Pakatan members of Parliament have suggested GST would be unnecessary if corruption in Malaysia is eradicated. This argument is a distraction – because the two issues are unrelated.

No doubt Malaysia must take tougher action to combat corruption. Instituting open tenders and requiring more disclosure on government procurement projects, for example, are necessary – but this doesn't eliminate the need for GST.

Take the case of Singapore. In April 1994, it levied a 3% GST even though government finances were (and still are) healthy.

An even more relevant example for Malaysia is Norway. In 1990, oil producer Norway implemented GST – notwithstanding its long record of fiscal prudence and probity. That same year, Norway created an oil fund to invest current earnings from oil and gas for the benefit of future generations

Perennially top-rated as corruption-free countries, Singapore was ranked 5th and Norway 7th in Transparency International's 2012 Corruption Perception Index.

Furthermore, GST – also known as value-added tax or VAT, is the norm worldwide – with some singular exceptions like the oil-soaked Middle East and Brunei, the United States, Hong Kong and tax havens like the Bahamas.

GST offers five possible benefits.

First, because GST is difficult to avoid, it is a highly efficient system of taxation. In contrast, corporate and personal taxes can be either avoided or significantly minimised.

In Malaysia, only 1.7 million individuals paid income tax despite a workforce of 12 million. In an earlier article, I wrote this miniscule proportion suggests either Malaysia is full of artful tax dodgers or the salaries of 91.7% of employees are below the threshold of taxable income.

Releasing data showing how many of the 1.7 million taxpayers are salaried workers who don't have the financial means to hire advisers to minimise their taxable income could be immensely persuasive.

Second, if levied, GST won't be an additional tax. Instead, GST will replace the existing sales and services tax while the revenue generated should enable the federal government to reduce successively the current high level of corporate and personal taxes.

Again Singapore provides an excellent role model. From 3% GST, the republic progressively raised its GST to the current 7% level. During the same period, it has slashed personal and corporate tax rates to 20% and 17% respectively – among the lowest worldwide.

Third, GST will enhance the competitiveness of business because it is levied only on the value added. For every input purchased, manufacturers can claim a refund from the Treasury. This multi-credit system means the real taxpayers of GST are the end-users.

Fourth, because GST is a tax on spending rather than income, it is theoretically fairer than a pay as you earn tax (PAYE) system. Those who buy more goods and services will pay more GST.

Fifth, VAT could also give a fillip to tourism. Tourists visiting the UK, France, Singapore and Thailand, for example can get a VAT refund.

To offset administrative costs, most retailers in these countries require a minimum level of purchases before doing the paperwork for tourists claiming a refund.

Additionally, Singapore only allows those who leave the republic by air to claim a GST refund.

Many oppositionists claim GST is inflationary and regressive because it will hurt disproportionately the poor.

This can be partially offset by direct payments to the poor – like the BR1M aid of RM500 – while essential goods and services could be exempted. Singapore's GST experience also suggests the inflationary impact is likely to be temporary.

Because it is now a political issue, the government must adopt a two-track approach towards implementing GST. It must demonstrate its determination to crack down on corruption and it must engage in a dialogue with all stakeholders.

Preparing Malaysians for an oil-less future – including implementing GST – should begin soon.

Opinions expressed in this article are the personal views of the writer and should not be attributed to any other organisation she is connected with. She can be contacted at siokchoo@thesundaily.com