GST is not the cure for budget deficit – Chong Zhemin

OCTOBER 25, 2013

The implementation of Goods and Service Tax (GST) is imminent in the Budget which is due to be tabled by Datuk Seri Najib in parliament today.

The GST will replace the current Sales and Service Tax (SST) and will be a blanket consumption tax on a wider range of goods and services.

However, the government may exempt some of the essential items from GST, for example food and public transport.

Unlike the income tax which is taxed at a progressive rate, where the lower income groups pay a lower tax rate and the higher income groups pay a higher tax rate, the GST is charged at a flat rate.

Everyone regardless rich or poor would be subject to the same GST rate under GST so long as they consume goods and services.

The GST will have a huge burden on the poor since the lower income group will spend almost all their earnings on goods and services. Hence the tax paid will form a higher proportionate of income they earn, which is social injustice. It is argued that the rich will spend significantly more and contribute more in the form of GST since they have higher spending power.

However the amount of GST the rich paid in proportion to their income will be much smaller due to their high salary. Therefore, the government's argument that the GST is to restructure the social wealth by taxing the rich for the poor does not hold water since the GST will have a higher impact on the poor than the rich.

If the government is sincere in taxing the rich, the government should implement a "rich man's tax" by proposing a higher tax bracket for the super wealthy with a higher tax rate. For example, the highest income tax bracket in the UK is currently at 50% compare to the basic tax rate at 20%.

GST will not affect businesses; it will be the consumers who will be paying the GST.

However the GST will bring a compliance cost or administration cost for businesses in implementing GST. This makes the GST a highly uneconomical method of collecting tax.

The cost of GST collection is quite high. Every source of production and transfer of goods has to be guarded. A larger administrative team is required to administer such taxes.

This turns out to be a costly affair to raise tax and to boost government revenue. The GST will also cause the price of goods and services to rise by more than the GST tax rate.

A fraction of the money unit cannot be calculated, so every middleman tends to charge more than the tax. This process is cumulative which would only worsen Malaysia's inflation rate.

The government must realize that the key to overcome the deficit budget is to avoid leakages from our delivery system, not by collecting more taxes.

By widening the tax base to include the poor, all Malaysians regardless of their income level are now pouring money into a black hole. The taxes collected are siphoned off into the delivery system only to be wasted and leaked through corruption and bad management.

Until the government start to trim the spending on mega projects and be transparent in awarding contracts and public procurement, Malaysia will not be able to achieve a balance budget for the foreseeable future. – October 25, 2013.

* Chong Zhemin is the political secretary to the Taiping MP and a former accounting lecturer.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.