Saturday July 9, 2011

GST in the pipeline?

By CECILIA KOK
cecilia_kok@thestar.com.my

THE implementation of Goods and Services Tax (GST) in Malaysia is not a question of if, but when.

Widely regarded as a more efficient and fairer scheme compared to the present system that the country has, GST – or value-added tax (VAT) as it is known in some countries – is expected to generate more revenue to the Government’s coffers when it is in place.

To put things into perspective, Minister in Prime Minister’s Department Datuk Seri Idris Jala, at the seventh Economic Transformation Programme (ETP) update briefing held over the week, said a 4% GST rate could generate RM6.3bil in incremental revenue for the Government, while a 5% rate would generate RM7bil.

He, however, did not give any indication of when the new tax would be put in place, although assumptions by the Public Finance Strategic Reform Initiative (SRI) Lab under the Performance Management and Delivery Unit (Pemandu) seemed to point to 2014 as a possible date.

According to Idris, who is also the CEO of Pemandu, the aim set by the Public Finance SRI is to create a fiscal space of RM13bil through revenue generation and cost savings by 2015.

GST has to be in the picture for that to materialise (see chart 3).

Widening fiscal space

Most economists say there is an urgency for the Government to build up its surpluses so as to strengthen its financial position, as a stronger fiscal position will afford the Government greater flexibility in carrying out measures to stimulate and develop the country’s economy when the need arises in the future.

The problem now is that Malaysia has been struggling with its budget deficit position for more than 13 years. The surpluses accumulated during the boom period of the mid-1990s were completely wiped out after the onslaught of the 1997/98 Asian Financial Crisis, and since then, the Government’s revenues have not been able to keep pace with the growth of its operating and development expenditures.

Data from the Ministry of Finance showed that the Federal Government deficit last year stood at RM43.3bil, or 5.6% of the country’s gross domestic product (GDP). While that was an improvement from a deficit of RM47.4bil, or 7% of GDP, in 2009, it was still an unhealthy position in which to be.

The Government is expected to incur yet-another deficit this year – at RM45.5bil, or 5.4% of GDP.

Under the 10th Malaysia Plan (10MP) that covers a five-year period from 2011, the Government has stated its intention to narrow the country’s fiscal deficit to RM33.4bil, or 2.8% of GDP, by 2015. While cost-cutting measures, which include the subsidy rationalisation programme, are already in place to reduce the Government’s expenditures, those measures alone are not sufficient to boost its coffers. Revenue base has to be strengthened and stabilised for a sustainable growth in collection.

At present, the Malaysian Government has a narrow revenue base that is dependent mostly on direct taxes on income and contributions from oil-related sources. Contributions from oil and gas to the Government’s coffer have been growing over the years, and presently account for around 40% of the total. But that is not a reliable source of income over the medium to longer term because the commodities are gradually depleting, and their prices are volatile.

Not new news

In general, economists believe GST would help the Government not only to diversify its sources of revenues, but also to broaden its tax base to enhance revenue collection.

A consumption-based tax, GST is levied on the supplies of goods and services at every stage of the supply chain. While the tax burden ultimately falls on consumers, such payment is incurred only when one purchases the taxable goods or services; otherwise no such payment will be incurred. Essentially, the more one consumes, the more one has to pay for taxes.

For the Government, the collection of taxes is almost certain under the GST, regardless of the prevailing economic cycle. And that’s where the efficiency of the system comes in, explains MIDF Research chief economist Anthony Dass.

To date, more than 140 countries have already implemented GST as part of their fiscal strategy. These include developed nations such as France, Germany, Japan, Canada, Australia and the United Kingdom; the world’s two fastest-growing economies, China and India; our neighbours, Singapore, Indonesia and Thailand; and even less and under-developed economies like Bangladesh, Cambodia, Ethiopia and Pakistan.

“The high numbers of countries adopting the GST system says something - that there must be some benefits out of it; so there are merits for us to consider doing the same,” Bank Islam Malaysia Bhd chief economist Azrul Azwar Ahmad Tajudin.

Now, it’s not that we want to keep up with the Joneses, but why have we lagged in this area?

One thing: The lack of public support. And that explains the Government’s lack of political will to carry through in this area.

The fact of the matter is, GST has been discussed by the Government since the early 1990s, when Tun Dr Mahathir Mohammad (then Datuk Seri) was still at Malaysia’s helm.

His successor Tun Abdullah Ahmad Badawi during his Budget 2005 presentation took the courage to announce that Malaysia would implement GST with effect from Jan 1, 2007. But few months before the GST was supposed to come into effect, Abdullah’s administration backed down and said the plan would be deferred indefinitely.

The idea to put GST in place was revived again by current Prime Minister Datuk Seri Najib Tun Razak in 2009, with expectations to have that system ready by the third quarter of 2011 at a 4% rate. But like his predecessors, his administration also backed down on the pursuit. Few months after the first reading in Parliament in December 2009, it was announced that GST would be postponed indefinitely, citing the need for more time to study the matter and gather comments and feedback from the public.

Public concern

The main concern of the Malaysian public with regards to GST implementation is the likelihood of the system causing a spike in the final prices of goods and services and its impact on the low-income and poor households. Already have to grapple with subsidy cuts for essential goods like sugar and petrol, further rise in prices of goods and services will only erode the purchasing power of the general public and make the low-income and poor group worse off.

But some economists say GST may not really be as “scary” as it seems. They explain that the impact of GST on inflation is dependent on the structure of the scheme and the manner in which it is implemented. Increase in prices may be inevitable for certain goods and services, but in some cases, prices could possibly go down. And if zero-rating and exemption of essential goods and services were observed under GST, the negative effects on the low-income and poor households could somewhat be mitigated.

“Many people have spun stories saying that GST will hurt the poor and the low-income group. This is absolutely not true, as all staple food such as sugar, rice and flour would be exempted from the GST, and such exemption would also be expanded to cover public transport,” Idris says.

During his presentation, he further reiterates the fact that GST is not an additional or a new tax. The scheme is meant to replace the outdated sales and services taxes that the country still practises today.

“We want to make sure the public fully understands and is supportive of the GST before it is implemented,” Idris says, adding that even if the green light were given to implement GST today, it would take 18 months for the scheme to be fully in place.

Indeed, the public has to buy in to make GST work. And one way of doing that, say economists, is to assure the public of some form of compensating measures.

Bank Islam’s Azrul, for one, says, “The system could only make sense in Malaysia if its implementation were matched by a corresponding decline in other form of taxes, personal income tax, in particular, so as to offset the impact of GST on consumers in general.”

Dass concurs, saying that unless consumers’ disposal incomes increase, GST may be perceived as a hard pill to swallow.

With the domestic economy strengthening, the next two years provides the opportunity for the Government to implement GST. Resistance is still likely, but fundamental reforms have to be pursued where necessary to restore the health of the country’s fiscal position.

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Saturday July 9, 2011

GST in the pipeline?

By CECILIA KOK cecilia_kok@thestar.com.my

By CECILIA KOK
cecilia_kok@thestar.com.my