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Thursday, October 31, 2013

Budget 2014: GST rate within analysts expectations

Published: Saturday October 26, 2013 MYT 12:00:00 AM 
Updated: Saturday October 26, 2013 MYT 7:57:18 AM
In theory, the price of manufactur ed goods should come down
because sales tax is now levied at 10% compared with 6% for GST.
THE “long-overdue” goods and services tax (GST) – unveiled by Prime Minister Datuk Seri Najib Tun Razak in Budget 2014 – has received the thumbs up from economists and tax experts.

The broad-based tax, which comes into force on April 1, 2015 at 6%, was largely within expectations of 4%-6%, Kenanga Research economist Wan Suhaimie Saidietold StarBizWeek.

“This budget is geared towards fiscal reform. The lead-time of 17 months also leaves ample time for compliance,” he said.

Although Wan Suhaimie is leaving most of his economic projections unchanged, he pointed out that the Government’s fiscal deficit reduction target of 3% by 2015 might be a stretch given that the new tax will not take effect until the second quarter of that year.

Still, the country’s fiscal balance would get some reprieve from subsidy cuts to sugar and other items, he said.

Consumers would also need an adjustment period of six to 12 months, but the “offset package” in the form of tax-exemptions on food, healthcare and public services, as well as the one-off RM300 cash handout, would cushion any impact on low-income households, Wan Suhaimie added.

Demand, along with inflation, might spike just ahead of the April 2015 deadline as consumers hoard goods and services to stave off higher prices, which could spur an interest rate hike by the central bank, he explained.

Conversely, a knee-jerk reaction in the opposite direction could take place right after GST is implemented, which might see consumers refraining from discretionary purchases or spending less.

This might dent growth rates, if only slightly, in the short term, Wan Suhaimie said.

“Given that a 4% GST rate would largely be revenue-neutral, the 6% rate bodes well in terms of signalling the Government’s serious intent to improve its fiscal housekeeping,” OCBC Bank economist Selena Ling said in a statement.

“Coupled with the market-friendly 1% point corporate income tax cut to 24% is the one-off cash assistance of RM300 to BR1M recipient households, as well as an individual income tax cut between 1%-3% points to improve their disposable income. These will surely help soothe GST transition pains.”

RHB Research said it expected headline inflation to average 2.2% for this year but head north to 2.8%-3.2% next year, depending on the extent of subsidy rationalisation.

Crucially, GST would eliminate double-taxation and overlap that plagues the current sales and service tax regime, said Crowe Howarth Malaysia managing partner Poon Yew Hoe.

“GST does not add to the costs of doing business as prices are based on cost and not cost-plus-tax,” he told StarBizWeek.

In theory, the price of manufactured goods should come down because sales tax is currently levied at 10%, compared with 6% for GST, Poon explained.

The consumption-based tax, which is more comprehensive and transparent due to the multiple layers of cross-checking, was also an effective measure to curb tax evasion, he said.

Poon noted that telco players, restaurants and those in the hospitality industry should not feel the pinch because they already pay 6% in service tax currently.

“For the Government to rely on GST as a stable source of revenue, the rate will need to be progressively raised over time. It could be increased to 8% after the first three years and to 10% three years later.

“That said, 6% is a good start and the Government’s income will improve with GST’s coverage of the whole supply chain,” he explained.

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