Business

Wednesday October 28, 2009

Do not rush to impose goods and services tax

Plain Speaking - By Yap Leng Kuen


THE Government’s intention to impose the goods and services tax (GST) in place of the current sales tax (10%) and service tax (5%) has to be backed by intensive research and detailed preparations.

Many have expressed their concerns over potential abuse, inadequate compliance and inflationary impact of the GST.

Ill-informed traders may take the opportunity to increase their prices despite the fact that they are entitled to claim back on GST they paid.

This is likely to be more prevalent in small towns due to lack of understanding.

In the case of sectors or companies exempted, the inability to pass on the GST may mean that the affected company or businessman cannot claim back on tax already paid to his suppliers. So, prices may just be arbitrarily raised to help absorb “costs”.

Exporters under the GST regime getting refunds on tax paid on raw materials must also be refunded quickly to ensure that the flow of capital and money is not stuck. In the current scenario, getting a refund on taxes can be a challenging task.

In countries like Singapore, where the GST is said to be well-enforced, certain groups can obtain relief and subsidies.

The Government has announced that certain basic necessities and sensitive sectors would be given preferential treatment. However, additional measures should be drawn to ensure that the lower income group is not unduly burdened.

This is on top of personal tax cuts or tax relief (as only three million people pay tax) to include segments of the population such as retirees.

Compliance and enforcement issues are crucial in the implementation of GST. A lot of documentation and understanding is required to make it a total success.

GST refers to tax collected at value-added points from production to the final point of sales. Proper invoices have to be produced as proof of tax paid at each level and in this sense, GST promotes transparency in terms of the real cost of goods and amount of tax paid.

Currently, the sales tax on goods is only collected at the point of import or when the local manufacturer sells the goods for the first time.

Meanwhile, the service tax is imposed only on a few services unlike the GST, which collects taxes on the value added at every point in the production and supply chain.

With this, a large part of the grey economy will now end up bearing a portion of the taxes. This includes smuggled or illegal goods.

There should be a single, low rate for GST with an indicative list of the likely changes in prices, post GST. It is said that Australia has come out with a price list whereby manufacturers, suppliers and buyers would be informed of the price limits.

·Senior business editor Yap Leng Kuen understands the urgent need for the Government to broaden its tax base but the timeline for the imposition of GST needs to be carefully drawn to ensure thorough consumer education and proper enforcement mechanisms. There should also be sufficient time for the business and software systems to be put in place.

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