Monday September 17, 2012
Why the goods and services tax may not be such a bad thing after all
By Nicolaos Giannopoulos
IN 2000, Australia introduced a goods and services tax (GST) and didn't look back. Their experiences will shed some light on what we can expect when GST is introduced in Malaysia, and why it's not such a bad thing after all.
Australia introduced GST primarily to improve on a tax system which people viewed as unfair, outdated and opaque for consumers. Many might say the same sort of problems exists with our current tax system.
For example, it is difficult to interpret when some services, such as management services, are subject to service tax.
Also, Malaysian consumers aren't aware of how much sales tax they pay in the price of goods they purchase. Nor can they see when they are taxed twice on the same purchase. For instance, when you have a soft drink at dinner, you're paying the restaurant a service tax for your drink. This is on top of a hidden' charge of sales tax on the soft drink from the manufacturer. If we had a GST, this wouldn't happen.
The GST gave Australia an opportunity to abolish a number of complex taxes (such as wholesales tax, Financial Institutions duty and Bank Account Debits tax).These were replaced with a single consumption tax. This simplified the tax system for individuals and businesses, with time and cost savings in complying with one tax (rather than multiple taxes). The same will occur in Malaysia with the removal of sales and service tax.
The GST was also a way to plug the cash economy and reduce tax evasion in Australia. High wealth individuals employing tax savvy consultants to minimise their income tax liabilities couldn't escape the GST. When they bought a fancy car or yacht with untaxed income, GST was paid, and collected by the Government. In this way, the GST will provide a level playing field for all Malaysians.
In Australia, the GST brought with it income tax cuts to individuals. The company tax rate too dropped from 36% to 30%. Both these measures were positive steps for the Australian economy. They gave individuals an incentive to work longer while paying less tax, and the business sector was seen as more competitive by international investors because of the lower company tax rate. Our neighbours already have individual and company tax rates which are lower than ours, so this is crucial to maintain our regional competitiveness.
In Australia, necessities such as basic food, education and healthcare were not subject to GST, to look out for the interests of the lower and middle income Australians. The Malaysian Government has decided to do the same for the benefit of our lower and middle income groups.
Australian exports of goods were also not subject to GST. And with the removal of wholesale tax, this made Australian exports more competitive. Previously, their exports included an embedded wholesale tax, which made them expensive. The same problem exists with some Malaysian exports containing embedded sales tax. The GST allows the removal of sales tax, which would be a boost for exports and the economy, and ultimately benefit all Malaysians.
The GST also reduced the Australian Government's reliance on income tax revenues. As GST taxes consumption, it is a more consistent and reliable source of revenue (as opposed to corporate taxes on profits which dry up during economic downturns). This gave the Government greater assurance in planning and budgeting for projects.
Sure, the GST did have some short term effects on the Australian economy. Some purchases were deferred or accelerated to take advantage of the transition from wholesales tax to GST. For example, motor vehicle sales dropped in the quarter preceding the GST to fewer than 50,000 per month. They spiked post GST to nearly 85,000 per month as consumers deferred their motor vehicle purchases to take advantage of reduced prices. However, these were one off and temporary.
Inflation rose 3% in Australia for the two quarters post GST but returned to pre-GST levels six months later. This was expected given Australia's high GST rate of 10%. However, the GST was not the sole reason - other factors such as the Olympic Games in September 2000 and two severe tropical cyclones also played a role. A Malaysian GST introduced at 4%-5% (which would be the lowest GST rate in the world), is expected to produce minimal inflation, if any.
To help keep a lid on inflation the Australian Government also established a price control watch dog to monitor prices. Businesses found profiteering under the GST were penalised heavily. The Malaysian Government has followed this example and enacted the Price Control and Anti-Profiteering Act 2010, which imposes severe penalties on any Malaysian businesses or individuals seeking to profit from GST. This will be important in controlling inflation and prices.
The GST will not mean the end of the world as we know it! Malaysians can expect the GST to be a more transparent and equitable tax. It will also be a fairer tax system - only when you spend will you pay GST (unlike income tax which taxes your savings). It will broaden the tax base and increase funding for Government projects which will benefit everyday Malaysians. Proposals to compensate the poor and elderly (such as direct transfers from the Government), and small businesses (such as GST start-up assistance), will mean that no one will be worse off under the GST.
The writer is the associate director of PwC Taxation Services, Malaysia