Business

Saturday October 31, 2009

Tax observers weigh the implementation of GST

By ERROL OH


THE goods and services tax (GST) has been waiting in the wings for several years now, but it may not be long before it takes to the stage. Although in his Budget 2010 speech, Prime Minister Datuk Seri Najib Tun Razak did not commit to the implementation of the tax, many observers believe it will happen within two years.

The idea of introducing a broad-based consumption tax in Malaysia has been floating around for two decades or so. Few people will warm up to the idea of paying more taxes, but the pressure to start imposing GST is not easing at all.

Reducing the Federal Government deficit is a priority. As such, the tax net has to be broadened and the leakages in the tax system need to be plugged.

Jeyapalan Kasipillai ... “GST can be a progressive tax.’

The International Monetary Fund (IMF) has long recommended the introduction of GST as a way of raising the efficiency of the Malaysian tax system.

In an August report, the IMF identified such a move as one of the fiscal measures that would reduce the exposure of the country’s budget to oil prices over the medium term. “The groundwork for the rollout of GST has been completed and implementation should not be delayed unduly,” it added.

This is clearly a reference to the past false starts. Budget 1993 mooted the plan to integrate and restructure the existing sales tax and service tax into a value-added tax called sales and service tax (SST).

That proposal did not take off, but Budget 2005 revisited the idea, this time labelling it GST, also known as value-added tax, or VAT, in some other countries.

Then Prime Minister and Finance Minister Tun Abdullah Ahmad Badawi, in his speech, said GST would be “more comprehensive, efficient, transparent and effective, thereby enhancing tax compliance”.

“Given that, under the new system, companies need to keep orderly accounts, the Government’s revenue collection is also expected to increase,” he added. “The introduction of the new tax will provide the Government with the opportunity to reduce corporate and individual income tax rates.”

He also assured that the low-income group would not be weighed down by GST and that small businesses would be exempted. The target implementation date was Jan 1, 2007, but in February 2006, the Finance Ministry said more time was needed to further refine the proposed GST model and to ensure that businesses were ready.

Najib issued a similar message in his Budget 2010 speech, saying the Government was studying the social impact of GST so as not to burden the rakyat.

He said, “If the Government implements GST, it will replace the current sales tax and service tax as well as exemption will be granted to the low-income group. The GST rate to be imposed will be lower than the current sales tax and service tax rates.”

Most observers read this as an indication that the Government is inclined towards rolling out GST, but has chosen not to announce its implementation when unveiling the budget. They reckon that the legislative changes will be tabled in the current parliamentary session, which ends in December.

After that, it will probably take about 18 to 24 months to ensure that the public and private sectors are GST-ready before the tax is imposed.

On Tuesday, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said the Government would decide before the year-end whether to introduce GST. It will surprise many people if there is yet another postponement.

Industry sources say the draft legislation is close to completion and that the Finance Ministry’s Tax Review Panel has initiated a public consultation process similar to the one that had followed the Budget 2005 GST proposal.

“It’s a question of finding the right time,” says KPMG Tax Services Sdn Bhd executive director Khoo Chin Guan of the likelihood that we will see GST in Malaysia.

It is a tough question to tackle because both consumers and businesses have reasons, justified or otherwise, to oppose the tax. Among the frequent pro-consumer arguments is that GST will push up prices and encumber the poor more than it would the rich.

There is also the worry that the costs of complying with the GST rules will be a strain on smaller businesses.

In a statement released before Budget 2010, when there had been calls for the implementation of GST, the Federation of Malaysian Manufacturers (FMM) warned against such a move.

The federation called the GST regressive and onerous, and said it could hurt the economic recovery. It added, “The greatest concern of businesses, in particular exporters, is the efficiency of refunds.”

It also pointed out that the individuals who did not have to pay income taxes prior to GST would be taxed on their everyday consumption of goods and services. “They would not benefit from the income tax reduction that is expected to accompany GST implementation. FMM understands that out of the 10 million working Malaysians, less than 20% are paying income taxes,” the federation argued.

However, according to a recent study by a Monash University researcher, GST is not necessarily a regressive tax.

Says Professor Dr Jeyapalan Kasipillai of the School of Business at the university’s Sunway Campus, “Contrary to popular belief, households spending less than RM900 per month would not be worse off due to the introduction of GST, as the percentage change of their expenditure is minimal, which suggests that, at lower levels of expenditure, GST can even be a progressive tax.”

He adds that the mild regressive aspects of the indirect tax can be overcome with a gradual reduction of income tax rates, imposing graduated excise duties on non-essentials, and prudent use of a subsidy system to support the lower income groups.

However, Jeyapalan supports the view that small and medium enterprises (SMEs) will suffer more in a GST regime because their compliance costs will be proportionately higher than those of larger companies.

“The most significant factor determining cost increases for SMEs in implementing GST is found to be ‘owner’s time’ needed by the proprietor to understand the GST system and maintain records,” he adds.

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