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Thursday, April 10, 2014

GST: Future generations to pay for the sins of their fathers

8 Jamadil Akhir 1435 H | 10 April 2014
Harakahdaily, 10 April 2014

The passing of the Good and Services Tax (GST) by Parliament with the majority being held by Barisan Nasional, was akin to sparing the rod and spoiling the government, said Selayang parliamentary member William Leong.

Leong said the government is relying on its 133 representatives to offer two unconvincing arguments for adopting GST.

In a statement Apr 9, Leong pointed out that the first argument that GST would not hurt the people because it replaced the Sales and Services Tax (SST) which is higher at 10 percent and 6 percent respectively was a "straw man argument".

"Malaysians will soon painfully discover that this argument is a fallacy. GST is a far more burdensome tax than SST," he said.

He said unlike the SST which is paid at the level of the finaly production or supply of the service, GST is payable at every level of the supply chain and finally borne by the consumer.

"GST also applies to many more goods and services than SST," he said.

He also dismissed the second argument given that some 160 countries have adopted GST and therefore it must be good.

"This is jumping on the bandwagon kind of argument appealing to those with a herd mentality. Those who follow this argument will like the lemmings when they fall off the cliff find out, too late, that the rest of the countries who did not adopt GST or abolished it were right,"he said.

GST will not solve deficit

Leong said GST would not solve the country's budget deficit problem and that tax is likely to make matter worse.

He said when it comes to public finances it is important to have discipline to adress the deficit.

"If we allow the Federal government to raise additional revenue through GST this will undermine the discipline needed to address the real cause of the problem,"he said.

He said the real cause of the problem is not insufficient revenue but instead uncontrolled and runaway operating expenditure.

He pointed out that in 2012,the Federal government revenues crossed RM200 billion for the first time but expenditure also for the first time crossed RM250 billion.

He noted that Federal government collected RM207.913 billion, an increase of 12.1 percent from 2011 with income tax revenue increasing by 13.9 percent, customs duties by 6.4 percent and petroleum income tax by 22.3 percent.

However, he pointed out that the federal operating expenditure for 2012 was RM207.9 billion and RM46.9 billion for the development budget.

He noted that the government had since 1999 been on a spending binge and government finances deteriorated.

Although revenue was sufficient to cover operating expenditure, he noted it was insufficient to meet the development expenditure needs.

Leong said if the expenditure had been put to good use and provided good returns the rising expenditure could have been justified.

However, he pointed out that a look at any of the Auditor-General’s Reports for these past 13 years would show that the substantial leakages, wastages and corruption.

He noted that the leakages and wastages is estimated between RM28 billion to RM40 billion a year.

"Providing the Federal government with an additional stream of revenue will not solve the fiscal deficit problem," he said.

He pointed out that the estimated net revenue generated from the 6 percent GST is only RM3.87 billion.

He said the deficit could only be resolved by instituting cuts in the operating expenditure and ending the leakages, wastages and corruption.

He said with Parliament having allowed GST, there would be no incentive to rein in excessive expenditure and the leakages.

"A government typically prefers to allow higher spending than making the hard decision to cut expenditure,"he said.

"Those supporting GST would typically acquiesce to higher rates of GST from time to time," he said.

Harmful effects to economy

Leong said GST would also cause consumption to be reduced, lowering the GDP and that Malaysian would then be worse off.

"GST being a tax on consumption will reduce consumption and lead to a negative effect on the GDP," he said.

At the initial rate of 6 percent, Leong said the impact would be painful but tolerable.

He pointed out that the International Monetary Fund(IMF) in its March 2004 report had noted that the 6 percent GST rate was low and that it is only a starting point.

"At 6 percent it will not have a significant impact on the government’s revenue and will have to be increased after the tax is operational," he said.

He noted that that the IMF had pointed out that many countries have increased the GST rates after its introduction.

Leong said based on the experience of the ten largest countries that adopted GST, the average GST rate has risen from 10.7 percent at inception to 16 percent, an increase of more than 50 percent.

He pointed out that the average rate of the Organization of Economic Co-operation and Development (OECD) is 18 percent.

He pointed out that in the United Kingdom the tax was increased to 20 percent in January 2011.

For GST to generate higher revenue, he said a combination of base broadening and rate hikes have to be considered.

"Once the rate is increased it will have a negative impact on the GDP," he said.

GST will hurt the lower and middle class

Leong said since GST is a highly regressive tax, it would hit lower and middle classes much harder than wealthy families.

"GST will put further financial stress on the 56 percent of Malaysian households whose monthly income is less than RM3,000,"he said.

He said GST would result in an increase in the tax burden of the middle-income families.

GST-induced price hikes would compel households to search for cheaper goods and services but he pointed out that 60 percent of the Malaysian households would find it difficult to substitute basic necessities and essential services.

He noted that the Federal government in an attempt to reduce the regressivity of GST has provided for exemptions and zero-rating for certain basic goods for the poor.

However, he pointed out that the World Bank in a paper entitled “Value Added Taxation: Mechanism, Design and Policy Issues” in acknowledging that GST is inherently regressive, stated that attempts to reduce it though exemptions and zero rates had proven ineffective.

"It is indeed impossible to do so because one cannot segregate food, goods and services consumed by the poor from those consumed by the rich," he said.

Leong said subsidy rationalization and GST were the chickens coming back to roost for Malaysians.

"Malaysians have voted BN to rule for 56 consecutive years ignoring their extravagance, recklessness, wastefulness and corruption," he said.

The future generations of Malaysians, he said would have to pay for the sins of their fathers and mothers unless Pakatan Rakyat could win over the 47 percent who retained BN before the next elections.

"It is hoped that the pinch in their wallet will wake them up,"he said.

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