Are more debate and feedback on the GST necessary?

Thursday March 1, 2012

Comment
By Kang Beng Hoe

THE recent announcement by the Deputy Finance Minister Datuk Donald Lim Siang Chai that the Government will be holding further discussions with various groups to ascertain “whether Malaysians are really ready for the GST” (Goods and Services Tax) raises questions among some on whether further engagement can add much more.

The whole business community, including the chambers of commerce, manufacturers and trade associations have participated with officials in extensive discussions over the course of the last few years.

While it is conceivable that some may have residual concerns, it is hard to imagine they can now have serious objections over its introduction or are unaware of how the tax will broadly operate. The law has, in fact, been tabled for first reading in Parliament.

As a business group, they will not bear the real burden of the tax. Their burden is the cost of helping the Government collect the tax. They are, in this sense, agents of the Government, not different conceptually to “tax farmers” in ancient times, who collect taxes for their lords or kings but get to keep some of it.

Economists recognise that all taxes have what is called a “deadweight” cost which is different from the amount of tax itself. It is the output, which will be higher if the same tax revenues were raised in a less burdensome way.

While the overall burden of collecting income tax is higher than a consumption tax, such as the GST, the business sector here has to bear a higher proportion of the deadweight cost by virtue of the structural nature of the tax. Discussions on how these can be ameliorated are obviously relevant and these would generally continue even after the implementation of the tax.

The challenge to any government seeking to introduce GST in times of economic uncertainty can be daunting.

Broadening the tax base under GST may not necessarily provide the expected additional tax revenue if the country's economic performance languishes, in line with possible dismal external conditions.

The plight of the lower income group would then be compounded by the new tax. It is in this light that the minister's message can be appreciated. GST will after all represent the most profound tax reform measure in the country's tax history and getting it right in terms of timing and coverage is utterly vital.

Looking beyond the micro issues of how the tax would affect businesses, it would be interesting and illuminating to consider the current debate in the United States on both spending and tax reform. Included in the latter are proposals to introduce a VAT (value-added tax, another name for GST), which some say, is the only way to address the US government's seemingly intractable deficit position.

The thrust of the arguments shows quite clearly how views on the VAT are highly influenced by politics, trumping technical arguments and the views of experts.

The Republicans, who oppose all taxes, are concerned that the efficiency of VAT will turn it into a money machine, encouraging excessive spending by the government. The Democrats consider the tax to have a harsher impact on low-income household relative to the more progressive income tax.

Bruce Bartlett, a tax expert and former advisor to Ronald Reagan in his new book The Benefit and the Burden outlines these and other reasons why the United States should have the VAT and why it will not.

The case for a VAT in the United States is no different from the case for us here:

● The need to fund the Government deficit except that theirs is at a vastly astronomical level;

● VAT is generally considered to be the best tax ever invented; it raises more revenue at less cost, and

● It eliminates the cascading effect in the sales tax and is difficult to evade.

Detractors point to the fact that:

● VAT is complicated particularly if it contains many exemptions. While it would be complicated to implement, once in, place it would not be particularly difficult to operate. The experiences of the many countries with the tax provide useful lessons;

● VAT is regressive but this is something to be addressed through the mechanisms available in the tax structure; and

● VAT is inflationary but economists do not consider the one-time price increase on implementation as inflation.

These reasons are incontrovertible and our own officials charged with framing the tax have clearly recognised them to be so. The political philosophical reasons which have not resonated in our public discussions are the fact that consumption tax is more in line with freedom than taxes on incomes because people can reduce their consumption if the tax is too burdensome and taxes on consumption - it has long been argued - are morally preferable to taxes on saving or the return on savings.

These are esoteric issues and really do not count for much for most who worry about the bread-and-butter concerns of the GST.

However, the one advantage that GST has is that it will be assessed on imports and rebated on exports. For an export-oriented economy, Malaysia is at a distinct disadvantage when almost all our trading neighbours have adopted GST and we have yet to do so.

This is because the GST adopts the destination principle; goods exported to different countries bear only the tax imposed in the country of final sale.

This means that a Malaysian product entering Thailand will suffer a 7% Thai VAT on importation. On the other hand, a Thai product entering Malaysia do not suffer GST since we have none, but the Thai exporter will benefit from a rebate for Thai input tax suffered when it leaves Thailand. So the tax cost of the Thai product sold in Malaysia contains no element of VAT whereas a Malaysian product sold in Thailand will incur Thai VAT when imported into into the country.

Malaysia cannot give an income-tax subsidy to our exporters to put them on level ground as this will contravene WTO (World Trade Organisation) rules.

Malaysian export manufacturers should have no compelling reason not to support GST.

● Kang Beng Hoe is an executive director of Taxand Malaysia Sdn Bhd. He can be contacted at kbh@taxand.com.my.