Malaysia needs tax reform

By Prof Datuk Dr John Antony Xavier 

EXPANDING REVENUE BASE: With only 16 per cent of workers paying tax, unsustainable oil revenue and trade liberalisation, GST is the only way

BENJAMING Franklin once quipped that in this world nothing can be said to be certain except death and taxes. That four billion of the world's population live in countries that have a consumption tax is testimony to that truism.

Malaysia is a laggard when it comes to implementing the goods and services tax (GST). When Malaysia does introduce GST, it will be joining 160 other countries, or 80 per cent of the countries, including seven other Asean countries.

While many taxpayers may be more accepting, many others oppose GST on the grounds that it is a "money machine" for the Federal Government. They argue that the Leviathan should be starved rather than be given a lifetime pass to further raise taxes.

Truth be told, the government needs a money machine, but not of the money-printing variety, if it wants to continue Malaysia's trajectory to becoming a rich nation.

The looming public debt level is so close to the statutory limit of 55 per cent of gross domestic product (GDP) that it blunts our ability to raise debt to finance growth. With a fiscal deficit of 4.5 per cent, there is not much revenue left after paying for operating expenditure to finance the capital expenditure of around RM40 billion. We need that amount, and even more, to fuel the 6.5 per cent growth that we need to become a rich nation by 2020.

The government has relied on direct (individual and corporate) taxes for 35 per cent of its revenue and petroleum revenue (32 per cent) for far too long. There is not much scope to enhance revenue from these sources and there are many reasons for this.

FIRST, of the 12 million who are gainfully employed only 1.9 million (or 16 per cent of the working population) pay taxes.

SECOND, the worldwide trend is to either reduce the corporate levy or keep it unchanged. Singapore (as well as other neighbouring countries) intends to reduce it further from the already low rate of 17 per cent. As such, it would be uncompetitive for us to increase the corporate tax.

THIRD, the high petroleum revenue is unsustainable as petroleum is a depleting resource. If it is gone, so will the revenue from it.

To add to these woes, increasing trade liberalisation will cause revenue from import duties to shrink.

There is a need, therefore, to expand the revenue base. GST offers that opportunity.

For example, Singapore collects 18 per cent of its revenue from GST. The value-added tax, or VAT in Thailand and South Korea, produces 28 per cent and 34 per cent of total revenue respectively.

Unlike personal and corporate taxes that distort investment/savings decisions and which are susceptible to economic downturns, GST will be capable of generating a more stable source of income and has no discriminating effect upon saving/investment decisions.

GST is self-enforcing. A business can claim a refund of GST it had paid on its inputs only if the claim is supported by purchase invoices.

GST will demonstrate the commitment of the government towards greater fiscal rectitude to convince ratings agencies that it is serious in putting fiscal management in order.

Unlike personal and corporate taxes that are susceptible to economic downturns, GST will be capable of generating a more stable source of income while reducing reliance on direct taxes and petroleum revenues.

The eventuality of GST is a forgone conclusion. The question that remains is what the rate will be. Singapore and Thailand currently impose a seven per cent GST/VAT. The rest of Asean has settled for 10 per cent.

The average VAT in the European Union is 20 per cent. At 17 per cent for lease of tangible property, 11 per cent for transport services and six per cent of the rest of the goods and services, China's VAT is steep. Japan will increase its VAT from the current five per cent to eight per cent next April and 10 per cent by 2015. By then, its VAT will be the same as South Korea's. On average, most countries have fixed their initial consumption tax rate at 17 per cent.

Our current sales tax is 10 per cent and service tax six per cent. So, we can surmise that the range within which GST will be fixed will be between 6-10 per cent. A precise guess will be seven per cent, on the premise of Singapore's practice.

It has been the norm of one-third of the countries with GST to increase the rate after implementation. To have a substantive impact on government revenue, GST could be increased gradually from the speculated rate of seven per cent by one per cent at each time of renewal until it reflects the maximum 10 per cent rate in the Asean.

If implemented fully, GST will immediately lighten all pockets. Fortunately, that is not so. Our taxman has chosen to cross the river by feeling for the stones.

To reduce any negative impact on the poorer segment of society, he has proposed a small-bang reform by zero-rating (that is, no GST is applied at any stage of the supply chain) or exempting many goods and services from GST.

These include agricultural and essential food items, seafood, public transport, sale and lease of residential property, private education, health, electricity and water and agricultural land. Some 80 business establishments, those with sales of less than RM500,000, will also be excluded from the GST system.

Public transport, agricultural and essential food items, seafood, private education,
healthcare, electricity and water supply, and sale and lease of residential property are
to be excluded from the goods and services tax.

Read more: Malaysia needs tax reform - Columnist - New Straits Times http://www.nst.com.my/opinion/columnist/malaysia-needs-tax-reform-1.370605#ixzz2gzdvJmMS