GST: What, why and who

Posted on September 3, 2012, Monday

THE Malaysian government will soon be implementing the long awaited government sales and service tax (GST) which will replace the existing current sales tax five per cent to 10 per cent) and the service tax (six per cent).

If the percentage of GST is determined at four per cent or five per cent then, it will be lower than the current sales tax of 10 per cent or service tax of six per cent. This series of seven articles provided by the Ministry of Finance will be published on Mondays, Wednesdays and Fridays and highlight the purpose of the GST and why the public should support it.

In order to understand and support the enforcement of the GST, first and foremost one has to grasp why  taxes are collected.

Tax is an integral part of life, governance and the economy. In fact, when you look deeper into the issue of taxations, you will see that the real person who benefits from tax is yourself.

There is a long history to taxation – and having proven itself to work – it has been an integral part of civilization that helps form the backbone of a government.

Simply said, tax is the key to governance that works well and is here to stay. But to embrace tax, one must first understand how it came about and why it is in place in all countries.

From an economic perspective, tax is able to transfer wealth from land owners and businesses to the government for ruling purposes and economic welfare. Governments, tasked with the responsibility of building a nation, feeding an army and repairing damages in a natural disaster, needed the income from its people to run its programmes.

Among the responsibility of a government – which is possible with the support of taxes – is the building of schools for its children. After all, just imagine where you would be without education by the government?

Moreover, governments need funds for basic infrastructure such as building roads that connects villages, towns and cities to each other – thus enabling trade and commerce and the exchange of needs.

Governments are also behind the structuring of public buildings such as market places where commoners trade their wares for economic prosperity and daily needs as well as housing.

Who else can ensure we have these basic needs if not for the people whom we elect as our state representative?

There is more to taxes than just development. From an economic perspective, taxes play a role in reducing economic inequality and increasing economic efficiency. This occurs when goods that are taxable are traded less in view of the tax burden. One good example is polluting goods such as fuel. The reduced trade due to taxation factors salvages the environment. Hence, tax is able to regulate what is traded.

The local trader gains when imported goods are taxed – encouraging more people to buy the cheaper local goods. This is an essential trade strategy that is used by nations worldwide to protect the interest of its locals.

Another instance of good usage of tax is the sin tax levied on alcoholic beverages, cigarettes and gambling. Added tax burden ensures that drinking, smoking and gambling don’t proliferate in the country to the extent that it hurts social development.

Youths become discouraged to take up these habits and activities become contained to a manageable level. The profit from these activities goes back towards rehabilitation, the environment and various campaigns to encourage healthy living.

Working on the same principle, Malaysia offers tax exemptions for the purchase of books to inculcate the habit of reading. By tweaking tax rules, the government is able to impact society and encourage good habits among its people.

With the obvious benefits that tax has on society, there are various taxes in place. Among the taxes in place are income tax, capital gains tax, property tax, sales tax, services tax, business tax, inheritance tax, and value added tax (goods and services tax).

Property tax places a price on owning a land or home as the land is essentially under the governance of a government while business and income tax ensures wealth redistribution from the haves to the have nots.

One of the most common taxes is called the Value Added Tax (VAT) otherwise known as Goods and Services Tax.

Already implemented in more than 140 countries, this is another tax that has been tested and proven to work well in modern economies. Countries such as Singapore, UK, Australia and Thailand have long implemented the Goods and Services Tax and Malaysia is hot on its heels.

Soon, the country will be privileged to enjoy a more equitable tax on the goods and services purchased. Currently, sales tax stand at 10 per cent and service tax stand at six per cent. It is hoped that the soon to be introduced Goods and Service Tax –  rated at just four per cent – is a sigh of relief to the public.

This tax is not a new tax – instead it replaces the current Sales Tax and Service Tax which has been studied and deemed inefficient and ineffective in addressing key economic issues in the country. As such, this is a progressive step forward towards being a First World nation.

This article was written by Aziz Abu Bakar, president of the Malaysia Association of Tax Accountants (Mata). For further inquiries, please email to aziz@mata.org.myaziz@mata.org.my.

Read more: http://www.theborneopost.com/2012/09/03/gst-what-why-and-who/#ixzz2WC76EMxL