MARC: GST more efficient than sales tax

Published: Thursday July 11, 2013 MYT 12:00:00 AM 

Updated: Thursday July 11, 2013 MYT 6:42:19 AM

KUALA LUMPUR: The goods and services tax (GST) will be more efficient and cause less economic distortions than the sales tax it will replace, said an economist.

Malaysian Rating Corp Bhd chief economist, Nor Zahidi Alias, said the structure of the GST would provide a strong incentive for businesses to register with tax authorities, and thus improve the efficiency of collection.

“One way it would benefit the economy is that the GST is neutral with respect to market forces and businesses, unlike the sales tax,” he told Bernama. Nor Zahidi said a proposed rate of 7% would have minimal impact on the prices in the medium and long term compared to the current sales tax of between 5% and 10%.

He said there was a possibility of higher inflation in the initial phase, especially if profiteering activities were not properly contained.

RHB Research said the introduction of the GST would likely lead to a one-off spike in inflation, depending on the level of goods and services in the basket of the consumer price index (CPI) that would be affected.

The implementation of the GST was expected to add between 0.8 and two percentage points to the CPI, assuming about 20% and 50% of the goods and services in the CPI basket would be subjected to the 4% GST, it said in a note. In the 2013 budget, the Government said it was a national imperative to implement a new tax regime to ensure that its finances remained strong.

Meanwhile, Nomura International chief economist for Asia ex-Japan, Rob Subbaraman, said the consumption tax could boost Government revenue and reduce the fiscal deficit, possibly also increasing the current account surplus. “A consumption tax should act to increase the current account surplus, as it can reduce household consumption relative to income, thereby increasing personal savings,” he said.

Nomura, in its Asia’s Rising Risk Premium report, said Malaysia’s current account surplus had narrowed significantly over the last two years, reaching a 10-year low of 3.7% of gross development product (GDP) in the first quarter of 2013 from over 10% of GDP in 2011. “The reduced current account surplus was driven by a combination of weak exports, strong domestic demand and low commodity prices,” it said. — Bernama