KUCHING: It is critical for the government to increase its revenue to reduce its budget deficit, especially given the country’s narrow tax base from registered companies and labour force.
The implementation of Goods and Services Tax (GST), expected to be announced during Budget 2014 in October, is expected to reduce Malaysia’s operating expenditure (OE) and use the savings to offset a reduction in revenue caused by a cut in income tax rates, if it materialises.
In a briefing to economists, the Ministry of Finance (MoF) said the impact of the GST will likely be positive on economic growth, but with slightly higher inflation and increased debt burden on the consumers.
The ministry expected a 0.3 percentage point positive impact on overall gross domestic product (GDP) growth based on a five per cent GST.
RHB Research Institute Sdn Bhd’s (RHB Research) research team viewed that the narrow tax base (with only 11 per cent of registered companies and 14.8 per cent labour force, paying taxes), coupled with the dependence on oil revenue, which accounted for 32.6 per cent of total revenue in 2012, makes it difficult for the government to manoeuvre.
“Already, it limits the government’s ability to cut corporate and individual income taxes to make Malaysia more attractive to investors and retain talent.
“In addition, the high dependency on oil revenue makes the government vulnerable to the fluctuation of international crude oil prices, which is beyond its control.
“A sudden and significant drop in crude oil prices will likely strain the fiscal position dramatically. This is an area of concern raised by Fitch Ratings Agency when it downgraded Malaysia’s sovereign rating outlook in July.
“In 2009, the government also experienced a sharp drop in the crude oil price by 38 per cent and oil revenue accounted for close to 40 per cent of its revenue then.
“However, it managed to cushion the impact via the change of base year of the tax on petroleum income from preceding year to current year in 2010 and fortunately the crude oil price only fell briefly before it bounced back subsequently in 2010,” it explained.
Nonetheless, the government may not have the luxury, if it happens again.
As such, the government will likely announce the date to implement the GST in the 2014 Budget with indications which suggest that the GST will likely be implemented in 2015 and at a rate of around four to five per cent.
“We understand that at four per cent GST, it will be revenue neutral to the government, as the current five to 10 per cent sales and six per cent service tax (SST) will be replaced by the GST,” the research firm commented.
It noted, the government had collected a total of RM15.1 billion of revenue from the SST in 2012, of which RM9.5 billion came from the sales tax and RM5.6 billion from the service tax. However, the government has promised to look into the possibility of cutting personal and corporate income taxes upon the implementation of the GST and there is also a need to provide cash rebates to the non-tax payers.
The implementation of the GST could potentially take three years to stabilise before the government could look to increase the rate in subsequent years. This implies that the government has to reduce its OE and use the savings to offset reduction in revenue caused by a cut in income tax rates to begin the GST at four per cent.
Meanwhile, RHB Research noted that under the GST, the supply of goods and services will likely be categorised into three groups, that are standard-rated, zero-rated and exempted groups. It added, based on a preliminary proposal and computations, about 71 per cent of the 944 items in the consumer price index (CPI) basket will be standard-rated, 23 per cent zero-rated and six per cent GST tax-exempt.
This compares with 47 per cent of the items under the SST. The overall impact on CPI is 0.4 percentage point based on four per cent GST and 1.17 percentage points based on five per cent GST.
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