Date of publication: Nov 15, 2013
Section heading: Business Times
Page number: 004
Byline / Author: By Ahmad Husni Hanadziah
IT IS not very easy to explain the goods and services tax (GST). It is quite technical, but I hope to dispel some of the myths that have built up around the GST.
We understand that nobody likes to pay a new tax and it must be made clear that the GST is not a new tax. It is a replacement tax to supersede the existing sales and service tax (SST).
The GST will carry a flat rate of six per cent as opposed to the varying sales and service tax, which has a tax charge of five to 10 per cent.
The government, the private sector, and all of us are working very hard to take this beloved country of ours to the year 2020 when we become a high-income economy. The investments required to equip this country to such a status is high. We are aiming to place the Greater Klang Valley as an important world-class metropolitan centre, not only in terms of physical amenities and infrastructure, but also its social, health, education and cultural offerings.
It is not good to have shining, sophisticated cities if the conditions of day-to-day living in the outlying rural areas are neglected. There has to be a balanced and widespread development across all states in the country.
No one must be left behind. The least we could do is to provide basic infrastructure, health and education to ensure that the rakyat living in these areas are given access to educational and economic opportunities, not only to better themselves, but also their home communities. This is very important.
Looking at the next 10 years, the Treasury has to ensure that the national finances are in good order, not only to finance our ambitions, but also to assure that we build up a healthy surplus to sustain us in case of rainy days.
Our economy will integrate further into the global economy and this will make us more susceptible to fluctuating global dynamics.
Certainly, developments abroad in recent years have served us many lessons. We must never, and I repeat, never, come even close to such situations. It is for all these reasons that we must have the GST.
The GST is an integral component of a strategic fiscal reform package to fulfil a fundamental long-term structural evolutionary process of our economy.
We see the introduction of GST as an opportunity for us to lower the rates on direct tax. Studies have shown that lower direct taxes encourage both domestic and foreign direct investments and savings, with the surplus funds channelled into our domestic capital markets. These spin-off benefits are in fact the most important opportunities that GST brings us and it has been grossly overlooked by its critics.
In an increasingly competitive FDI (foreign direct investment) climate, with more and more countries integrating themselves into the global economy, it is better for us to offer a lower, transparent certainty in our tax regime, doing less with cumbersome and bureaucratic exemptions, tax holidays and reliefs.
We must also be aware that since the failure of the Doha Round, there has been a multitude of free trade agreements worldwide, bringing down the traditional walls of tariffs and import duties. In order to remain competitive, we have followed suit, but we are also aware of the loss of revenue to our Treasury.
The GST provides us a comprehensive solution to these issues in so far as the Treasury's revenue is concerned.
There have been concerns whether the GST will negatively impact our exports abroad. Please note that the GST is zero-rated for all exports. Some of our exports may have sales or services taxes embedded in a number of their value-added inputs which are required in their value-chains.
The sales and services tax charge currently is not refundable while under the GST, exporters can claim refunds on the tax paid. As such, exporters will be able to price their goods and services more competitively than before.
One of the most important aspects of any tax is equitability - that is the tax is fair. It is inherently unfair for law-abiding citizens to pay tax, while others do not. The soon-to-be defunct SST is a porous tax regime. It is only payable at a single stage of a product's value-chain and this provides opportunities for tax-evasion, without any effective mechanism of check and balance.
On the other hand, the GST is a far more efficient tax regime, payable at every stage of the product's value-chain. This serves as a self-policing mechanism. There is less room for evasion, especially at the last point of sale - there is far less room for tax evaders to manoeuvre.
One of the biggest concerns raised by members of the public is whether the GST will increase the cost of living, especially in Kuala Lumpur, Penang and Johor Baru.
We have stated that a number of essential goods and services will be zero-rated - these include food items such as rice, flour, sugar, salt and cooking oil, fresh vegetables, meat, poultry and all types of seafood, domestic water supply and the first 200 units of domestic electricity.
We have a category of goods and services which are exempted from GST - these include land transportation such as rail, bus and taxi and car hires, highway toll, water transportation, private health and education, residential properties and the entire range of financial services, which include mortgages, consumer/personal loans and credit card payments.
In view of these exemptions and zero-rated items, the impact on the consumer price index is expected to be minimal, estimated at 1.8 per cent at the proposed six per cent GST rate.
We will be also taking various measures to ensure that dishonest traders do not take advantage of the situation to make undue profits.
As our country nears the year 2020, our economy will undergo numerous changes. Underpinning these evolutionary changes, we have to have a robust and efficient fiscal system, with meaningful investments in public infrastructure and social services, which are at par with those of other advanced economies.
In this regard, the Ministry of Finance has announced reductions of various subsidies. We have also announced our intention to regularise BRIM payments to deserving citizens. The underlying policy is to ensure that lower-income group will not be unduly burdened, while making our industries competitive, our Treasury robust and in turn, our developmental health, social and education initiatives well-funded.
We have seen in other countries how tax reforms have catalysed economic growth. We have seen in Europe how inefficient tax collection can result in financial and economic calamity. These are lessons for us.
The GST provides us with a stable, high-quality flow of revenue, while easing our dependence on corporate income tax and non-renewable fossil-based revenue. The GST will, in addition, allow us to recalibrate personal income tax rates to encourage greater levels of entrepreneurship and self-improvement.
We do not want to end up with a tax system that favours the rich to the extent that the gap between the have and have-nots is wide, so wide that it causes resentment and social instability. This we can see in a number of advanced economies.
Neither do we want to tax high-income earners to the extent that it encourages capital flow out of the country, reduces the nation's pool of savings and discourages investment within the domestic economy.
We need to find a balance between these two models of how we want our country to be. What is certain is that we want our country to remain competitive in the global markets, we want to attract and retain sufficient talent to take our country to the next level of economic development, an economy of innovation and high productivity.
This ambition requires high investment, investment in human resources, in physical infrastructure, especially in the less-developed geographic areas, to increase capacity to contribute to the economy as well as to provide socio-economic standards that are competitive.
It is essential that the GST is viewed within the entire eco-system of our economy, not as a single fiscal measure in vacuum, isolated from the realities and dynamics of domestic and global economies.
The road to April 2015, when GST will be finally implemented, has been hard and long since it was first mooted in the 1989 Budget. We cannot delay any longer. It is unfortunate that the GST has been politicised. The introduction of GST, I believe, merits bipartisan support. The GST is necessary for the country's fiscal long-term health and places our national finances on a firmer footing to move forward as a high-income economy.
Datuk Seri Ahmad Husni Hanadzlah, who is the Second Finance Minister, emphasised these points in his keynote address at the quarterly Business Times Insight forum in Kuala Lumpur yesterday