Published: Tuesday October 29, 2013 MYT 10:32:00 AM
Updated: Tuesday October 29, 2013 MYT 10:35:06 AM
There are certainties and uncertainties that will arise from the introduction of the Goods & Services Tax (GST).
THE biggest announcement arising from the recent budget speech is undoubtedly the long awaited and long dreaded Goods & Services Tax (GST) at a 6% rate. Much ink has already been spilt leading up to this announcement and cyberspace has already contributed many opinions for and against the GST.
For my part, I merely wish to point out some certainties of what will occur as a result of the GST and also make an educated guess about some of the uncertain outcomes.
The first certainty is that the price of most goods to the consumer will increase. Some have used the argument that since GST is replacing two taxes – the sales tax which is levied at 10% and the service tax which is levied at 6% - the price of goods may actually fall.
This is very misleading since a large basket of goods are currently exempted from the sales tax. I was surprised when I discovered the full list of exempted items under the sales tax – including items such as milk, coffee, tea, ice-cream, soap, newspapers, stationery, canned fruit, notebooks and paper, just to name a few.
All the items mentioned will be taxed under GST as will others which are exempted from the sales tax but not the GST. According to the Sales Tax (Rates of Tax No.2) 2012, the number of items which are exempt under the Sales Tax i.e. not taxed runs to 250 pages.
In contrast, the number of items which are zero rated under the GST - not taxed at any point of the supply chain – is only 21 pages long. Hence, the price of most goods will increase despite GST replacing two kinds of taxes.
The second certainty is that the taxes collected by the government will be more than what the government will lose from abolishing the sales and service tax, from lowering the corporate tax and from lowering and widening the bands of the income tax.
If the government fails to collect extra revenue from the GST, it will constitute a failure of fantastic proportions since one of the key reasons for introducing GST is to collect more revenue using a more broad-based tax in the form of the GST.
The third certainty is that the GST will be regressive. This means that the poor will end up paying a greater proportion of their income for the GST compared to the rich. Using a simple example, a person who earns RM1000 and spends it all on GST taxable items will end up paying RM60 in GST or 6% of his income while a person who earns RM10000 but spends only RM1000 on GST taxable items will end up paying RM60 in GST which is only 0.6% of his income.
Even if the rich gets taxed more in absolute terms, the poor will end up paying more in proportionate terms. The regressive nature of the GST is widely agreed upon by mainstream economists.
Of course, with the introduction of the GST for the first time, there are bound to be uncertainties.
The first uncertainty is the extent to which prices will rise as a result of the GST. Some shops may want to round up their selling price and in doing so, increase the price by more than 6%. Very few shops or businesses would voluntarily round down their prices and absorb some the GST cost themselves. What we do not know is the extent to which this rounding up will raise inflation.
Related to this is the uncertainty in relation to how much the price of tax-exempt goods and services may rise. You may be surprised to hear that tax-exempt items may get more expensive. The reality is that tax-exempt goods are only exempted from the GST charge at the point of sales. The goods and services which are used in the process of making these tax-exempt goods are not exempt from GST.
For example, residential property is tax-exempt but the materials – marble, quartz, wood, electricity – are not tax-exempt which means that developers will almost certainly pass these cost increases to the consumer. The exact amount of this price increase is uncertain and will differ from sector to sector.
The second uncertainty is the extent to which the poor, the middle class and the rich will be affected by the GST after taking into account the BR1M handouts, the one-off RM300 cash handout, the reduction and the widening of the income tax rates. Some of the thriftier among the middle class – those who earn between RM50,001 to RM70,000 a year and who would experience income tax savings of RM1050 – may even save more money.
But most families will probably have to spend more, the only question being – how much more? This would depend on the consumption patterns of individual families and also the first uncertainty – how much will the price of different goods be raised as a result of the GST.
The third uncertainty is whether the GST can be implemented smoothly. This includes putting in the proper tax software and systems in the relevant government departments, briefing the private sector on what they need to do on their part, preparing the mechanisms so that the Anti-Profiteering Act 2010 can be properly enforced, just to name a few.
It is a mammoth exercise and our government doesn’t exactly have a stellar record in this respect, if the evidence from the Auditor General’s report is anything to go by.
At the end of the day, most people will grudgingly pay more taxes if they thought that their hard-earned cash would be put to good use and not wasted.
Unfortunately, in this budget, the government has asked the rakyat to prepare itself for the pain of the GST but has not demonstrated for itself a similar intention. The expenses of our government continue to increase, with the Prime Minister’s Department increasing its budget from an already high RM14.6 billion in 2013 to RM16.5 billion in 2014.
One can only wonder how much of this will go to expensive consultants.
In the meantime, the rakyat should tighten our belts in anticipation of higher prices in 2015.
> Dr. Ong Kian Ming is the MP for Serdang. He can be reached email@example.com. The views expressed are entirely the writer's own.