Less taxing to tax consumption

Publication: NSUNT

Date of publication: Nov 3, 2013

Section heading: Main Section

Page number: 017

Byline / Author: By Sulaiman Mahbob

SOME say the 2014 Budget is one that is in keeping with the 13th General Election promises made in May this year. Some had issue with the proposed goods and services tax (GST), saying it would lead to inflation, while others questioned the rationale of increasing the Real Property Gains Tax (RPGT).

As they say, "uneasy lies the head that wears the crown". Whatever you do, someone will find a reason or reasons to criticise it. It's like saying hell if you do and hell if you don't.

The pressure for the government to seek new sources of revenue is understandable. The nation has moved away from taxing trade towards taxing income. Taxing income is a tax on effort and work. Nations in the region have reduced their tax rates on income to attract investments and talents. The alternative is, naturally, to tax consumption, which constitutes a bigger share (50-60 per cent) of the aggregate demand. A broad-based consumption tax, such as GST, has an inherent advantage. If a resident consumes, he is taxed. If he does not and saves, the nation can tap the savings for development purposes.

Malaysia will do away with its sales tax at a rate of 10 per cent on introducing the GST at a rate of six per cent in 2015. This is a logical move. Sales tax is based on the price of goods, irrespective of value addition and is therefore arbitrary. With our practice on giving exemptions, the government will have to entertain lots of applications for exemption and this is inefficient. Furthermore, sales tax is levied at every level of transaction and therefore, has a cascading effect and will result in higher prices.

GST is levied on value addition, which is a smaller component of the product price. The tax, therefore, is a smaller component of the final price. It does not cascade with other transactions.

People may want to know whether GST will lead to a price increase. By itself, it will. If it does, then it will only be at the point of introduction and no more. If the price increase persists in the second year and thereafter, this is caused by reasons other than GST, such as unfair trade practices and market imperfections.

The net effect on price initially will be between the impact of introducing GST and the withdrawal of sales tax. If we have a fair trade enactment, such unfair trade practices can be addressed through such law.

The government will collect more revenue from GST because of its broad base, notwithstanding the exemptions or zero-rating on goods such as fresh food, rice, cooking oil, coffee and sugar, as well as public transport, education and health.

We do not put GST on exports to ensure our exports remain competitive. Others do not practise this either.

On looking back, we should have implemented this tax earlier. Previous administrations did not do it to avoid a possible backlash on the party in power.

To be fair, it did in other countries.

The Malaysian voting pattern in the last two general elections, which resulted in some erosion of control by the party in power, was not at all associated with the suggestion of new taxes.

It is because of other reasons, politically motivated reasons. Thus, this move for GST is right. It is also timely to mount GST now as inflation is under control.

A slight increase in consumer prices arising from GST is tolerable. Malaysians have seen significant increases in prices before, such as oil price and food price hikes, rice to be exact, in 2008.

The action of the government to introduce GST is not peculiar. Others have done so earlier. Our neighbours, Thailand and Singapore, and even Cambodia, have GST. Of course, developed countries have implemented it much earlier, such as the United Kingdom and Australia.

Mounting the tax with other measures, namely, to do away with sales tax which is arbitrary and inefficient, and reducing income tax by one and three per cent, as well as terminating the sugar subsidy, is a strategic move aimed at improving our fiscal system amidst a stubborn deficit situation and pressing demand to raise revenue to finance social development projects.

Hence, this particular budget and its proposals are a step in efforts to strengthen government finances in the long run while putting in place initiatives that send a serious message that rationalising subsidies may be another option in the years to come.

We hope the budget, after equally giving support for the low-income citizens (BRIM, for one), will be well received by the majority of the population.

The 2014 Budget, on balance, is well conceived. It, however, needs its philosophy and its objectives to be explained to the public better to get a buy-in from society.