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Friday, November 1, 2013

It's a better tax collection system that casts a wider net

Publication: NST
Date of publication: Oct 29, 2013
Section heading: Main Section
Page number: 018
Byline / Author: By Mat Rodi

WITH the implementation of the Goods and Services Tax (GST), soon our cost of living will go up, spending power reduced and ultimately, the poor become poorer.

Bleak days ahead, right?

Well, no. For one thing, the price of goods and services will not rise as much as six per cent as claimed. This is a general perception towards the GST. It should be countered that GST will eliminate the cascading and compounding effects of the Sales and Services Tax (SST).

Currently, the SST is charged at every level of production, thus raising the final price of the product. In other words, it's double taxation.

For example, a shirt that costs RM10 for the fabric material will be taxed 10 per cent (sales tax) to the garment manufacturer. That would be RM11. The garment manufacturer then turns the fabric into a shirt (production cost RM40) valued at RM51 to sell to the supermarket.

At this stage, the tax paid by the supermarket is 10 per cent of RM51, which brings the total cost of the shirt to RM56.10. Applying the profit margin of RM20, the supermarket will sell the shirt at RM76.10.

When you buy this shirt, the sales tax will be RM7.61.

Now, under the GST, the six per cent will only be taxed to the final consumer as the manufacturer and the retailer can claim a rebate since they are not the final consumers.

So, the RM10 shirt will now be sold at RM70 and the consumer then will pay a GST of RM4.20, which is lower than the tax paid under the SST.

One wonders since the tax collected by the government is much lower than the current SST system, why is the GST being introduced?

How can the GST increase revenue for the government?

This is possible because the GST will be broad-based and have more points of collection. As more people become affluent, government income from GST will increase in tandem. Some might say GST is a tax on everything. They are partly correct.

However, a slight modification has been made with zero-rated items for necessities. You will pay no tax for rice, vegetables, budu, belacan, public transport, property, finance and education.

In brief, the GST is a fairer system, for the tax is not based on income but on spending. Therefore, it taxes those who can afford to spend more.

If the government doesn't widen the tax base, there will be no room to cut income taxes. With the GST, personal income tax and corporate tax will be greatly reduced for the simple reason that the government will rely less on them for income.

A lower corporate tax will attract more investments. If Malaysia wants to catch up with countries like Hong Kong, Taiwan, South Korea and Singapore, the GST must be introduced so that corporate tax can be reduced.

For a heavily-subsidised country like Malaysia, we depend too much on income tax. It is unfair for 1.9 million taxpayers to continue "paying" for the rest so that they could enjoy fuel subsidy, affordable healthcare and first-class infrastructure. But we cannot afford to tax more people. Therefore, GST is the only way to get more revenue. And it makes sense, too.

Mat Rodi, University of Manchester, England

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