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Thursday, May 8, 2014

GST: Who has the better argument?

Selena Tay | May 3, 2014

GST will not solve fiscal problems but in fact will make it worse.

More than 50,000 people turned up for the anti-GST rally held on May 1 recently. This columnist who took the KTM Komuter train to KL had met up with a few members of the PAS Women’s Wing and joined them for the rally.

All these women opined that they opposed the GST (Goods & Services Tax) for the simple reason that goods will cost more after GST is implemented on April 1 next year.

The BN federal government relied on its 133 majority in parliament to push through the GST and gave two arguments for backing up the same.

The first argument was that GST will not hurt the rakyat because it replaces the Sales and Service Tax (SST) which has the higher rate of 10% whereas GST is only at 6%.

Furthermore, they claimed that under the current SST system, there are two types of taxes, the 10% tax and the 6% tax which will overall total up to 16%.

This argument is a fallacy as not many people pay the SST on a regular basis as it is implemented in upmarket restaurants and hotels only, whereas GST will tax the poor on a daily basis due to many more goods falling under the jurisdiction of the GST.

In actual fact, under the GST everything is taxable unless exempted, unlike under SST wherein everything is exempted unless taxable. See the great difference?

The World Bank in a paper entitled ‘Value Added Taxation: Mechanism, Design and Policy Issues’, in acknowledging that VAT (GST) is inherently regressive, stated that attempts to reduce it through exemptions and zero-rates have proven ineffective.

This is simply because it is impossible to do so as one cannot segregate food, goods and services consumed by the poor from those consumed by the rich.

Of course the poor will go for the cheaper toothpaste, for example, but the toothpaste will still have the GST imposed on it.

This means that under GST even the poor will be taxed (although they are excluded under SST) and this certainly will make the poor much poorer as their daily purchases will be taxed.

Rising debt levels

The second argument put forward by the BN federal government in support of the GST was that 160 countries have adopted GST and therefore it must be good.

This is yet another fallacy as countries that have to be bailed out as well as those verging on the edge of financial collapse all have GST. Among these countries are Greece, Portugal, Spain, Italy and Ireland.

Prior to the 1960s before the introduction of GST, these European countries had debts on a percentage of GDP (Gross Domestic Product) below that of USA who does not implement GST.

Since the introduction of GST, these European countries with the exception of Spain has a higher debt level than the USA.

According to the International Monetary Fund (IMF), the public debt of the USA is 106% of its GDP, Greece is 158%, Portugal 123%, Ireland 117% and Italy 126%.

Even the Asian Tigers such as Japan and Singapore have a higher debt level than the USA with Japan is at 208% and Singapore at 111%. Clearly GST has not helped in reducing these countries’ debt level.

Therefore the warning of Milton Friedman rings true: “In the long run, the government will spend whatever the tax system will raise, plus as much more as it can get away with.”

Thus GST will not solve fiscal problems but in fact will make it worse. In addition to that, many countries have increased the GST rate after its inception. When this happens, the poorer citizens will be burdened more and this will lower public consumption as these people struggle to make ends meet.

Based on the experience of the 10 largest countries that had adopted the GST, the average GST rate has risen from 10.7% at inception to 16%, an increase of more than 50%.

For GST to generate higher revenue, a combination of base broadening and rate hikes will have to be considered. This is the norm as all governments typically prefer to allow a higher spending than making the difficult decision to cut expenditure.

This means that the more the government collects from the rakyat, the more they will spend on what is collected instead of being prudent in spending and saving up by curbing wastages, leakages, corruption and cronyism.

The more the government has, the more they will be spendthrift so our effort in paying GST is all wasted.

The rakyat must not forget that while the SST is a tax paid at the level of the final production or supply of services, GST is payable at every level of the supply chain and finally borne by us, the consumer and GST as mentioned earlier applies to many more goods and services compared to the SST.

At the end of the day, we will be burdened more while the government can still continue to simply spend. Looks like terrible times lie ahead. And this GST too will be added on to the current price hikes going on.

Selena Tay is a DAP member and an FMT columnist.

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