Start GST at a lower rate, say experts

Monday, 01 July 2013 admin-s

(The Sun Daily) - Lai believes that businesses would welcome a reduction in corporate and personal tax rates as this would increase their competitiveness in Malaysia compared with the region. However, for individuals, it would only benefit less than 15% of the Malaysian workforce who currently pay income tax.

The proposed goods and services tax (GST) should be introduced at a lower rate of 4% to 5% in order to encourage wider public acceptance of it, said economists and tax consultants, even as a launch date remains elusive.

Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah had last Thursday said the government has yet to decide when it will implement the GST.

"An initial GST rate of 7% (which is similar to Singapore's current rate) may be too high for Malaysia. At 7% GST, Malaysia may have to consider reducing its corporate and personal income tax rates to 20% or below," BDO Tax Services Sdn Bhd head of tax advisory David Lai told SunBiz in an interview.

He said Singapore was able to increase its GST rate to 7% from the initial 3% in 1993 as its corporate and personal income tax rates were already at 17% and 20% respectively.

"In order to encourage wider public acceptance in Malaysia, it may be prudent to introduce GST at a lower rate, for example, 4% to 5% and to reduce corporate tax and personal income tax rates more gradually," he said.

He reckoned that if GST were to be introduced at 4% to 5%, corporate and personal income tax should ideally be reduced by 2% to 3%.

Lai also said when the government indicated that it would start GST from a fixed rate of 4%, it would be tax neutral if it were implemented two years ago. But once implemented, GST revenue is expected to grow in line with the country's gross domestic product even if the rate were maintained at 4%.

However, any further delay in implementing GST would result in greater pressure for the government to increase the initial GST rate beyond 4%, he said.

"The government should ideally maintain the GST rate for at least three years before making any adjustments. Taxpayers should be given sufficient time to adapt and fully comply with the requirements under the new GST system.

"Furthermore, any increases in GST rate should only be contemplated after the government has properly studied any inflation effects. From the experience of other countries, any inflationary effects are expected to be short term and should taper off," he added.

Lai believes that businesses would welcome a reduction in corporate and personal tax rates as this would increase their competitiveness in Malaysia compared with the region.

However, for individuals, it would only benefit less than 15% of the Malaysian workforce who currently pay income tax.

On how a subsidy rationalisation programme would affect the implementation of GST, Lai said the programme is intended to gradually shift and target subsidies to the lower income groups. Similarly, when GST is implemented, a list of basic necessities would be categorised as 'zero rated' to protect the lower income group.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng also recommends a lower GST rate of 4% to 5% to start with in order to mitigate the initial concern over inflation.

"When implementing GST, you want to get the businesses and consumers familiar with and used to the system first to ensure that there is greater acceptance. You do not want to have a major shock in terms of price. It's good to start from a lower level and gradually move up," he toldSunBiz.

"This rate can be reviewed annually based on economic conditions."

Yeah said the government should take advantage of the current economic environment where there is growth, full employment and low benign inflation to introduce the GST.

"There can never be a good time to implement hard reforms but we can't ask for a better economic environment.

"Also, now that we have a new mandate, the first two years should be the time to implement GST because by the third year, it will be more difficult as other political considerations kick in. The earlier it is implemented, the better," he said.

Still, Yeah is expecting the GST to be introduced next year.

"There will be some likely clarity in the coming budget (on Oct 25) and then perhaps they can announce the implementation for 2015. It's already long overdue. The important emphasis here is to reduce government's dependence on oil and gas revenue as government income," he added.

Yeah also said the subsidies rationalisation programme has to be more targeted and efficient in order to ensure that the benefits reach the targeted group.

"The basis of subsidy is actually to help the disadvantaged. Right now, the benefits of subsidies are spread to everyone, rich and poor.

"So, there's a good justification to have a more targeted subsidies system as it would reduce the fiscal deficit by 1% to 2%. Those will be the low hanging fruits that the government can quickly benefit from."

RHB Research Institute Sdn Bhd economist Peck Boon Soon believes that the implementation of the GST could well be delayed until 2015.

"The introduction of the GST will likely lead to a one-off spike up in inflation, depending on the level of goods and services in the basket of the consumer price index (CPI) that will be affected. We expect it to add around 0.8-2.0 percentage points to the CPI, assuming about 20-50% of the goods & services in the CPI basket will be subjected to the 4% GST," he said in a report last Friday.

"As we expect inflation to average around 2.4% in 2015, the introduction of the GST could potentially push up the CPI to 3.2-4.4%, if it were to be implemented in 2015."

He expects the negative impact due to the introduction of the GST will likely be temporary and consumer spending is expected to return to a normal level after a brief period.