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Thursday, October 24, 2013

Winning the GST argument

First Published: 7:01am, Oct 24, 2013
Last Updated: 7:05am, Oct 24, 2013


IT SEEMS the stage is set for another round of battle for the hearts and minds of the people between ruling coalition Barisan Nasional (BN) and opposition coalition Pakatan Rakyat (PR) this month.

Not long after a fiercely contested general election in May, the political rivals are poised to fight not for parliamentary seats this time, but on the Goods and Services Tax (GST), which many believe will be announced in Budget 2014 on Oct 25.

None other than Datuk Seri Anwar Ibrahim, the de facto leader of PR, sounded the battle cry first. "We will not only oppose the tabling of GST in Parliament, but also organise protests in the entire country," he was quoted by the media as saying after a walkabout in the Seberang Jaya market in his constituency recently.

The Permatang Pauh MP also announced that the parties in the opposition coalition had reached a consensus against the tabling of GST. In fact, it will embark on a 'No to GST' campaign. 

Clearly, PR is of the view that the tax will burden the people.

A common argument against GST is that it is a form of regressive tax. This means the poor will be paying a higher percentage of their income in GST and will therefore be the worst affected.

Opponents of GST also argue that it will inflate the prices of most essential goods and make the poor suffer further, especially after the recent petrol price hike and expected execution of the subsidy rationalisation programme.

One of the most serious criticisms against GST is that it will be a new form of broad-based tax that will impact the majority of Malaysians who are not taxpayers now.

Also, much has been said about the 2012 Auditor-General's Report and the continued appalling revelations of the government's excesses. Some critics argue that had the government put a stop to all the leakage that ran into millions of ringgit, GST would not be necessary.

However, like in any other public policy debate, there is no shortage of equally forceful counter arguments. For instance, proponents of GST argue that contrary to popular belief, the rich will not be necessarily better off as the more they consume, the more they will have to pay. The poor, however, will be protected because essential goods such as sugar, flour and rice will be exempted from GST.

Moreover, the impact of GST on the poor will be cushioned by various cash-aid schemes, such as BR1M (1Malaysia People's Aid) introduced by the BN government.

On the potential inflationary pressure on prices caused by GST, although economists in general agree that there may be a disruption to consumption as people adjust to the unavoidable price hikes, they argue that it would be temporary and that things will return to "normal" after 12 to 18 months. They cite the experience of those countries that have already adopted GST.

In this regard, the government has enacted the Price Control and Anti-Profiteering Act 2010 with the primary objective of curbing profiteering by unscrupulous traders and business organisations after the implementation of GST.

As for the argument that GST is a new form of tax, the proponents have reminded the opponents that GST is being introduced to replace the existing sales tax of between 5% and 10% and service tax of 6%.

The GST debate did not come out of the blue after the May polls. In fact, it has been on the table since 2005. GST was first announced in Budget 2005 and scheduled for implementation in 2007. However, in February 2006, the government deferred its implementation because it wanted more time to study feedback from the public.

The GST Bill was tabled for first reading in late 2009 for implementation in the third quarter of 2011. It was poised to go for second reading in March 2010, but was withdrawn after facing strenuous opposition.

So why is BN pushing this economically necessary but politically explosive agenda so soon after the people renewed its mandate in the recent election? Why is it risking being accused of burdening the people?

It seems rising public debt has set the alarm bells ringing and necessitates such urgency. Government debt is at a relatively high 53% of gross domestic product as a result of continuous budget deficits for the past 15 years. Also, Malaysia's household debt is one of the highest in the region.

It is not surprising then that global rating agency Fitch Ratings cut its outlook for Malaysia's A-minus sovereign debt to "negative" from "stable" in July, citing a lack of reform to tackle rising debt.

The implementation of GST could help fix the perennial structural problems of Malaysia's economy - an addiction to unproductive subsidies and over-dependence on petroleum money. With the introduction of the tax, the government hopes to rationalise the subsidies, broaden its tax base and reduce its reliance on dividends from state oil company Petronas.

So, in the days to come, we will see politicians from both sides of the divide making their case for and against GST inside and outside the august house of Parliament. However, we the people will ultimately decide whether to accept GST.

The real test is not how elegant a particular theory is or how persuasive or popular a particular argument or view. It is quite simply whether Malaysia can afford not to implement GST, given the pressure to undertake subsidy rationalisation to cut the budget deficit.

Khaw Veon Szu, a former executive director of a local think tank, is a practising lawyer. Opinions expressed in this article are the writer's own.

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