By Prof Datuk Dr. John Antony Xavier
IT is good that Malaysia is taking a slow approach in the goods and services tax (GST) implementation as the country is still smarting from the recent petrol price hike. A big bang could overwhelm the public and businesses.
The fear is that growth might stall if consumers take fright that it outweighs any revenue increase from the GST. For example, the two per cent VAT rise in 1997 was blamed for blunting growth in Japan for a decade.
Companies would be equally overwhelmed if the GST is extended across the board without exemptions. This is because the latter would need to change their invoicing and tax payment and tax credit systems.
Even the government machinery will have to ready its enforcement system to collect the tax and check for fraud. As such, there must be an adequate gestation period between announcement and actual implementation to get everyone ready for the GST execution.
What will be the impact of the GST on government revenue, businesses and the public at large? A value-added tax has the ability to pump a lot of cash into the Treasury coffers. The base (the total amount of goods and services that would be subject to tax) would range from one-third to one-half of Gross Domestic Product (GDP).
Given the massive exemptions from the proposed GST, it is fair to adopt the base of one-third. So, at today's GDP of RM1,001 billion, a GST of five per cent will raise RM16.5 billion in tax revenue.
This may seem a lot of money. But offset that against the RM15.3 billion from the sales and service taxes (SST) that will be repealed upon the introduction of the GST, and administration costs to the GST, at five per cent, will be revenue-neutral.
The authorities have alluded to a possible reduction of personal and corporate income tax rates to make the GST more palatable to the public.
Personal and corporate income taxes did come down in Singapore upon the introduction of the GST. If individual and corporate tax rates do fall or the government exempts from all income tax those who earn less than RM100,000, then the combined effect will categorically dispel any notion that the GST is a money machine for the government.
So where's the beef? The proposed GST model is superior to the existing SST for four reasons.
FIRST, the GST eliminates the cascading and compounding effects of the SST. While the SST is charged at each stage of the supply chain, raising the final cost to the public, and thereby distorting production, the proposed GST model allows for reimbursement of taxes on inputs by businesses.
The GST, therefore, will reduce the overall cost of doing business.
SECOND, unlike the SST, the GST model offers relief for exports.
THIRD, the imposition of the GST at multiple stages of the supply chain will overcome issues related to transfer pricing. A corporation that pays a lower GST because of an understated transfer pricing can only claim reimbursement for that lower amount.
FOURTH, as the GST is imposed at multi-stages of the supply chain, it will encourage vertical integration across the supply chain. Such vertical integration will enhance production efficiency.
The GST will be a transparent tax-collection instrument as there are minimal classification issues and the tax will be shown on the invoice. This transparency, too, will enhance tax compliance.
Japan's three per cent rise in VAT to eight per cent scheduled for next year is expected to reduce its GDP by over one per cent. However, the impact on our GDP would be negligible as, at five per cent, the GST is revenue-neutral.
A GST often results in a once-only spike in inflation. That increase usually tapers off as the government contracts the money supply in the economy through the revenue it collects from GST, causing the rate of growth of the general price level to decline.
However, at a five per cent revenue-neutral GST, the impact on the consumer price index will be negligible, if at all. There will even be a reduction in taxes (elimination of SST and exemption from GST) in 60 per cent of the CPI components, such as clothing and footwear, communications, transport and utilities.
Notwithstanding this, much communications blitz has to be done to gain a wider public acceptance of the GST and to ease misperceived fears of hardship as a result of its implementation.
As the GST is widely expected to be introduced in 2015, time is still on the government's side. Cash handouts under Bantuan Rakyat 1Malaysia may also help placate any misgivings among the public about the GST.
If past experience is anything to go by, every tax or price increase creates its own ripple on general inflation, largely through profiteering. So although they are exempted items, expect your roti canai and teh tarik prices to go up upon implementation of the GST!
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| A value-added tax like the goods and services tax (GST) has the ability to pump a lot of cash into the Treasury’s coffers. |
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