First Published: 12:00pm, Oct 13, 2013
Last Updated: 12:00pm, Oct 13, 2013
The GST is widely seen as an important measure for the government to reduce the long-running national budget deficit.
ALL eyes are on Budget 2014 to see if the government will announce the implementation of the much anticipated Goods and Services Tax (GST) in 2015. Its imminent implementation has revived the debate on the pros and cons of this consumption tax, which would replace the existing sales and service tax.
The government’s Performance Management and Delivery Unit (Pemandu) has estimated that a 5% broad-based GST rate would result in a net increase of tax revenue by up to RM8 billion in the first two years. GST would replace the current narrow-based sales tax and service tax of 10% and 6% respectively.
If the additional revenue is higher – at RM10 billion – it would contribute to roughly 5% of the annual government revenue (based on 2013 figures).
While the GST is widely seen as an important measure for the government to reduce the long-running national budget deficit, at the heart of the debate is whether this replacement tax will improve the government’s own financial position at the expense of burdening the people.
The public’s increasing sophistication has raised the bar for the government to rise beyond the usual standard answer, which is that GST will raise more money for the development of infrastructure and amenities to benefit the people, especially the lower and middle classes.
The government can prepare itself well by demonstrating how the inherent benefits of GST will work for the public good and getting the people’s buy-in.
To achieve this, the two key messages it should consider emphasising in promoting the tax are:
1. Fairness of GST revenue collection and benefit distribution
The government set the tone in Budget 2013 by calling for a fairer tax system, an indirect allusion to GST, which is widely seen as fair as it taxes the consumption of goods and services. As an example of the fairness of a GST system, in some GST countries such as Singapore, it has been noted that:
• Seventy-five percent of the GST is collected from the top 25% of rich Singaporeans and expatriates because the rich consume relatively more goods and services.
• The bulk of benefits – permanent and temporary – from the revenue collections are targeted at the lower and middle classes. The permanent benefits include increased subsidies for education and health, while temporary benefits consist of GST offsets or rebates that alleviate the cost burden to the poor.
Speaking of the Singapore experience, Finance Minister Tharman Shanmugaratnam had said the GST is a redistribution system from the rich to the poor and middle income group.?Where the new system is effectively implemented in redistributing the benefits to the targeted groups, it may well be a form of a modern day "Robin Hood tax"!
From the Malaysian perspective, the principle of fairness in GST revenue collection and distribution of benefits can be further enhanced.
For example, the BR1M cash benefit, which was introduced in recent times outside a GST regime, could be increased and given annually for a temporary period, if not permanently, to help offset the GST cost burden to the poor.
The tax is also inherently fairer in Malaysia, which has more zero rating and exemptions compared with some countries such as Singapore, which generally has no zero-rated goods besides exports as well as exemptions besides financial services. For example, in Malaysia:
• Zero rating applies to essential goods consumed by the lower/middle class such as rice, bread, eggs, raw chicken meat, fish and so on. Such food staples make up a major proportion of the household expenditure of the lower and middle classes.
• Exemptions include public transport services, healthcare and education.
As for cash benefits for the tax-paying middle class, the government could announce GST with cuts in personal income tax rates, particularly for the middle income bracket.
Looking at our close neighbour again, Singapore announced a personal tax cut of 3%, from 33% to 30%, when it introduced GST in 1994 at a rate of 3%.?Today, the GST rate there is 7%, and the top rate of personal tax is 20%.?
Australia introduced GST in 2000 in return for reductions in personal income taxes, abolition of wholesale sales tax, financial institutions duty, debit tax, bed taxes and stamp duties on certain instruments.
Due to these measures, the government indicated that the people were effectively paying no extra taxes. This is what is meant by tax reform abolishing inefficient taxes, simplifying existing ones and reducing the tax burden.
Taking that as a trend, perhaps the government may take the position to trim personal tax rates progressively, particularly for the middle income bracket, when GST is implemented, and into the future if we continue to shift away from direct taxes to a consumption tax.
In terms of permanent benefits distribution from GST revenue, it is a given that substantial portions of the government’s expenditure are spent on social services such as education, healthcare and housing.
With the additional revenue from GST, the expenditure on such services could be bolstered. Of course, the government has to clearly distinguish between any increase in subsidies for healthcare and education as a result of GST revenue collection from its ongoing subsidy rationalisation programme.
The proper enforcement of the Price Control and Anti-Profiteering Act 2010 to deter unreasonably high profiteering from the introduction of GST, as well as the indicated publication of a Shopper’s Guide on expected prices before and after GST, could go a long way to indirectly help the public.
2. Better internal control and accountability of public expenditure
With the expected improvement in the government’s topline revenue due to GST, it should meet the growing expectations of the public in controlling cost.
This is a more contentious area for the government in preparing its case for the GST. With the allocated total expenditure for 2013 of around RM250 billion, comprising RM200 billion in operating expenditure and RM50 billion in development expenditure, the government can demonstrate its seriousness in addressing this issue together with the introduction of GST.
In this regard, the instruments of check and balance in public expenditure – whether through the Public Accounts Committee in Parliament or otherwise – could be enhanced.
The government should be commended for reviewing the priority of infrastructure projects to ensure that those with high multiplier effect are given preference and to practise open tenders in awarding contracts. Such measures will not only help counter adverse perceptions of public wastage or leakages but also contribute towards attaining a balance budget by 2020.
Advocating the case for GST in the abovementioned two-pronged manner, emphasising fairness and accountability, may help the government win over Malaysians.
Tan Eng Yew and Chandran Ramasamy are the Country GST Leader and GST Director of Deloitte Malaysia respectively. This article was first published in The Edge Malaysia Oct 7-13 issue.
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