Date of publication: Oct 29, 2013
Section heading: Main Section
Page number: 014
Byline / Author: By Prof Datuk Dr John Antony Xavier
WITH the unveiling of the 2014 Budget, the long-awaited goods and services tax (GST) has at last come knocking at our doors.
Come April 2015, the GST will replace the service and sales taxes (SST). Previously, we predicted that the rate would be between six and 10 per cent, the former being the current service tax rate while the latter is the sales tax rate.
The common expectation was that the GST would be four per cent on the supposition that that rate would be revenue neutral. That is, the revenue from the GST will just offset the revenue lost from the repeal of the SST. By setting it at six per cent, or one per cent lower than that of Singapore and Thailand, the government has to showcase our GST as the lowest in Asean.
There is always a risk in introducing an unpopular tax. The fear is that the GST may shrink consumption and, consequently, stall growth if consumers take fright. When a two per cent rise in a similar value-added tax (VAT) took the rate to five per cent in Japan in 1997, the nation slipped into a recession. And, the premier lost his job!
It would, however, be disingenuous to attribute this unfortunate turn of events entirely to the VAT increase. Other knock-on effects such as the Asian financial crisis and Japan's notorious 50 per cent corporate income tax rate then (it has since been brought down to 40 per cent) had a part in dispatching Japan to the doldrums.
With our economy expected to post a modest five per cent growth, the risk of a recession is negligible. More so, government expenditure is expected to remain stable, if not increase, as the year wears on.
Reduction in personal income taxes, the RM2,000 tax relief for those with monthly incomes of up to RM8,000 and the RM300 for households who are BR1M recipients, should have the Keynesian effect of increasing the overall propensity to consume in the economy. Such increased consumption should spur economic growth and further fill government coffers through the GST.
So, will the proposed GST bring in the expected increase in government revenue? We consider that at the proposed rate of six per cent, the impact on the government's treasury will be minimal. Let us do the math.
The base, that is, the total amount of goods and services that will be subject to tax will often range from one-third to one-half of the gross domestic product (GDP). The 2014 Budget outlines massive exemptions from the GST.
These include 40 essential food items, public services, public transport, highway toll, sale and lease of residential property, private education, health, electricity, water and selected financial services. Further, some products will only attract half the GST rate. Also, some 80 per cent of businesses, that is those with sales of less than RM500,000, will be excluded from the GST system.
So, it is fair to adopt a base of one-third. With GDP at RM1.051 trillion (accounting for the five per cent growth rate), a GST of six per cent will raise RM21 billion in tax revenue. This may seem as a lot of money. But offset that against the loss of RM16 billion from the sales and services taxes (SST), the net amount will be RM5 billion.
In keeping with international practices, the government has brought down corporate and personal income taxes.
There is now a one per cent slash of corporate income tax rate and a one to three per cent reduction in individual income tax rate. Additionally, the chargeable income subject to the maximum marginal tax rate has been increased from exceeding RM100,000 to exceeding RM400,000.
Combined with the special tax relief of RM2,000 for taxpayers with a monthly income of up to RM8,000, all these reductions will conservatively shave off RM1 billion (or one per cent) from the RM127 billion revenue from corporate and individual income taxes. The net proceeds from the GST will then only amount to RM4 billion or two per cent of the total government revenue. Nevertheless, it will reduce the fiscal deficit by 11 per cent.
However, the GST has the potential to net more revenue as the rate is increased in the years to come. This gradual increase of the GST has been the norm among one-third of the countries applying a similar consumption tax. Even here, the potential for expanding government revenue is limited as any rate increase may be contingent upon decreases in direct income tax rates.
This is so as, even with cuts of one per cent in corporate income tax rate to 24 per cent, and the reduction of the maximum personal income tax rate to 25 per cent, the rates are nowhere near those of Singapore.
There, the corporate tax rate is 17 per cent while the maximum personal income tax rate is 20 per cent. These rates are among the lowest in the world. Even the cash-starved United Kingdom has proposed to reduce its corporate tax rate to 20 per cent by 2015, although one must hasten to add that the VAT in the UK is 20 per cent on most goods.
So, the presumption is that the government will continue to cut the direct income tax rates even as it increases the GST in the future.
The GST at six per cent is an acceptable start. Its impact on government coffers will only be significant when the rate is increased gradually in the future. Assuming all things are constant, the real impact on government revenue will be felt at 10 per cent, the maximum rate in Asean. At that rate, the GST had will draw in RM19 billion net, after factoring in the RM16 billion lost from abolishing the SST, and halve the budget deficit. Then, we shall be within striking distance of a balanced budget by 2020. With a little belt-tightening, we should by then be safely "home".