Facts and myths of this tax

Publication: NST

Date of publication: Jul 2, 2013

Section heading: Main Section

Page number: 018

Byline / Author: By D.K.

WHILE the government is mulling the implementation of the goods and services tax (GST), it would be good to examine the fundamentals and implementation to separate the myth from the facts.

GST was first introduced in France in 1954. It is a comprehensive value-added tax (VAT) on goods and services.

It is called value-added tax (VAT) in the United Kingdom and was introduced there in 1973. GST is now implemented in about 150 countries. Several countries in Asean have already implemented GST; Singapore introduced it in 1994.

How does GST work? GST is paid on the purchase of goods and services, except for exempted goods and services.

The government may decide that certain essential goods and services are exempted from GST. These would be certain groceries, medical supplies, educational materials and may even include petrol. The implementation and exemption is to be left to the government, as it has to take into account various social and economic factors.

The consumer is the last person in the supply chain and will bear the GST, which is like the last point of retail tax. Nevertheless, GST paid on the purchase of goods and services may be offset against that payable on the supply of goods and services.

Consumers, in many instances, are both suppliers and purchasers of goods and services.

Let's look at a professional, who is both a consumer and a supplier of services. GST paid on his consumption may be offset against that payable on the supplies required to provide his services.

On the contrary to misconceived beliefs that the cost of goods and services will go up, in the long run, it should actually go down, as the set-off mechanism should encourage suppliers to reduce prices. This reduction of prices, should, of course, be monitored by the government as suppliers should not benefit, on the one hand, and not pass down the benefits to consumers in the form of reduced prices.

The government should also take into account the impact of GST on imports and exports, as there would be either a direct or indirect effect on the domestic supply chain. It is envisaged that imports may be subject to GST, and exports zero rated. GST paid on the imports may be refunded and again, the set-off mechanism should take care of prices in the long run.

It is presumed that the government will impose a GST rate of seven per cent. While this may or may not be the rate implemented, it is anticipated that the 10 per cent service tax and six per cent government tax be abolished.

Tipping should be optional as in many other countries. Services rendered will improve, as customers will only tip if they are satisfied with the services rendered. The quantum will also be decided by customers.

With the imminent implementation of GST, consumers will develop a mindset of asking for receipts on the purchase of goods and services, as they would want to know that they have been charged the correct GSTrate, and whether they have been charged at all.

This collection and producing of receipts would provide a control mechanism that the correct rate is charged, exempted goods and services are not charged and controlled items are being charged at the right prices.

The rates on the receipts would provide a check and balance for both the authorities and consumers.

D.K., council member,

Gerson Lehrman Group Inc, New York, the United States