'GST will be neutral to business costs'

Published: 2013/07/10

THE introduction of Goods and Services Tax (GST) to replace the current sales tax and services tax (SST) system has been a long-standing issue in Malaysia.

First mooted in the 1980s, GST has been put off countless times due to the public's doubts over it.

Much of the criticism of GST fall into three distinct categories:

* GST is hard to comply with, as it requires proper accounting and audit systems;

* GST is "regressive" since it is a flat tax and doesn't take into account the income level of consumers;

* GST is supposedly inflationary since it is applied to the prices of all goods, at all stages.

All three criticisms have some validity but not to a degree that critics will have them to be.

First, because of the multi-stage nature of GST and input tax credits, businesses incur no tax liability. Businesses paying GST on raw materials can offset this cost against the GST they collect on sales, which gives them an incentive to invest in the systems. GST, therefore, also does not have a "cascading" cumulative tax effect.

In other words, GST will be neutral to business costs, unlike the sales tax, which is levied at the manufacturing stage and incorporated into the input cost at the retail level.

Second, the regressive nature of GST should be balanced against the equally regressive sales tax. In fact, the government can make GST somewhat more progressive than the sales tax, as basic staple goods such as food can be "zero-rated", i.e. not charged GST at all. 

Certain other consumer items that are deemed beneficial, such as books, are typically often zero-rated as well.

Third, the historical evidence regarding the implementation of GST and other ad-valorem taxes (VAT) across the globe shows that, at worst, such taxes cause a one-time increase in the final prices of consumer goods. 

There have not been cases where the introduction of such a tax has caused a systemically higher rate of inflation. Consumers only pay the final tax rate, not the cumulative effect of GST levied at each stage of production.

In cases where GST/VAT system has replaced a pre-existing sales tax system, the evidence suggests final prices change very little, and in one case (Canada), have actually fallen. 

At the level that is being discussed (circa seven per cent) relative to the sales tax (10 per cent), the likelihood is that GST will cause little movement in consumer prices, if at all.

The arguments against GST are thus weaker than they appear at first blush.

To counterbalance any weaknesses, a GST system causes far less market distortions and is much more efficient than the SST, while promising to yield higher tax revenue at lower tax rates. 

Consumers will see how much tax they're incurring on consumer goods, unlike under SST where the tax burden is "hidden". No tax system is perfect, but a GST is much less imperfect than many assumed.