Business

Wednesday October 14, 2009

Why M’sia needs goods and services tax

By YEO ENG PING


THE Budget 2010 package will no doubt be a challenge to policymakers and this is certainly the year the Government will need support on potentially tough policy decisions.

It has been reported there are several indicators that some structural changes are needed:

·Malaysia is expecting a budget deficit of 7.6% for 2009 (revised upwards to factor in the Government’s stimulus packages of RM67bil), the largest deficit since 1987 and adding to more than 10 years of continuous deficit.

·Potential reduction in tax revenue collection compared with 2008 tax collections of about RM90bil (when petroleum prices were more than US$100 per barrel and exports were still relatively strong).

·Borrowings standing at about 41% of gross domestic product (GDP).

·Several months ago, Fitch Ratings cut Malaysia’s long-term local-currency rating to “single-A” from “single-A plus” on concerns over growing budget deficit and lower revenue collection.

The pressure to decrease the budget deficit is tremendous. This is currently one of the key policy objectives of major countries in the world, especially since the global recovery is still early and some would say, fairly uncertain at this stage.

One part of the solution that needs to be considered is to manage the Government’s expenditure, but this needs to be handled carefully so as not to stifle any recovery.

The other part of the equation is to increase tax revenues, and indeed the International Monetary Fund recently commented that it has become a matter of urgency for Malaysia to introduce the goods and services tax (GST), also known in other countries as value-added tax.

The GST is a broad-based tax on consumption of goods and services, and in simplest form, it means people will pay tax each time they purchase a good or service.

It is expected that the GST will replace sales tax (levied at the rate of 5%/10% on taxable manufactured and imported goods) and service tax (levied at the rate of 5% on selected goods and services such as food and beverage, consultancy services, etc).

So, unlike income taxation which is based on the profitability/income (and therefore largely affected by the state of the economy), a tax like the GST is based on consumption, and is a more certain and stable source of revenue.

The usual reaction to the notion of a new tax, especially in this tough economic climate, would be a mixture of suspicion and defiance. And that’s why several countries have faced difficulties when introducing such a tax.

Australia, for example, first mooted the idea in the mid-1980s, but only finally implemented the GST in 2000; Hong Kong proposed the idea in 2006 but it was quickly shelved due to various pressures.

On the other hand, there are success stories. Singapore introduced the GST in 1994, with a starting rate of 3% and today it is 7%. Arguably, GST revenue has helped cushion the impact of falling income tax revenues in Singapore.

The primary focus for policymakers in Malaysia is to design and build in features which make the GST an “equitable” tax – by this we mean that the tax burden falls more on those who can afford it, and is mitigated for those who are economically more vulnerable.

Considering that it is estimated there are three million people paying income tax, GST would bring many more into the tax net. Hence it is likely that any GST introduced for Malaysia will be tailored to ensure there is no undue hardship on the low income population.

For example, in Canada, GST credits, which translate directly into cash, are given to lower income earners. In Singapore, credits were also provided to low income earners and pensioners when the GST rate was increased from 5% to 7% recently.

Another way is to have a policy whereby everyday essentials are “zero-rated” i.e. for the items to be chargeable with 0% GST. This allows the supplier to get input credits and pass on those “savings” to customers – thus keeping the final cost to customers equal or less than the pre-GST price.

Another reason for GST is because it is a self-policing system. It is said that the “shadow economy” which currently escapes the income tax net is significant.

The GST system is a multi-stage tax. This means that goods and services providers will generally need to charge GST to their customers, and in turn they get a credit for the GST paid to their suppliers.

Theoretically, a business person would demand/require their suppliers to be GST-registered so that input credit claims can be made to set off against GST payable to the government.

In this manner, businesses along the supply chain would be encouraged to be GST-registered, thus bringing a larger part of the economy to the surface for tax contribution.

Based on the Australian experience, there may be a one-off price increase in goods and services but in the long run, this should not be the result in all cases.

Depending on the GST rate that is applied (compared with the sales tax or service tax rate), some items should actually cost less because the supplier may be able to “share” the tax savings from the rate differential.

It is important that a price-monitoring body be established to ensure suppliers do not unfairly or unreasonably use the GST as an excuse to raise prices.

On a macro-economic level, it certainly makes sense to introduce the GST in Malaysia.

An announcement on the introduction of the GST, with a 12 to 18-month implementation date, would certainly allow the public and businesses to get more familiar and take positive action to get ready.

·Yeo Eng Ping is a partner with Ernst & Young Tax Consultants Sdn Bhd.

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