Saturday, March 13, 2010

Malaysia's GST, A Must

Malaysia's government is to delay introducing legislation to bring in a goods and services tax that would have generated around RM8.8 billion in revenues. The government had been due to introduce the tax in 2011 to replace an existing sales tax as part of its measures to reduce Malaysia's dependence on oil revenues that currently account for almost half of government revenues.

'The bill will not be tabled this session as the government needs more time to engage with the public for feedback,' a top finance ministry official told Reuters.

Malaysia's budget deficit hit a more than 20 year high of 7.4 per cent of gross domestic product in 2009, according to government data.

Highlights of the Proposed GST
  • Implementation will be a slow & steady tax process, not until middle to late 2011 or 2012, so that individuals and small businesses will not be adversely affected.
  • It will replace the 10+5% services and goods tax.
  • Government’s income will increase. This will enable further development and budget control to the country, other than relying just on petroleum or income tax revenues.
  • It’s a broad-based tax system. Some items may be slightly more expensive & cheaper. It’s not an overall standardized taxation method.

Being a broad based tax, GST can be charged on practically all supplies of goods and services. GST adopts a credit offset mechanism whereby tax charged on supplies made by a taxable business may be net off against tax paid on inputs to production.

Only the difference is remitted to the government. The netting off goes on along the production and supply chain until the household consumer purchases the goods or services. The household consumer, not qualifying to claim the net off under GST, bears the burden of the tax.

GST is also known to encourage compliance and can be viewed as a self-policing tax. This is because the credit offset mechanism encourages businesses to register themselves to claim the input tax credits on purchases.

Combined with the broad base nature of the tax, it would be fair to say that a large portion of the grey economy will not be spared too.

Malaysia has been stuck with fiscal deficits for more than a decade. The budget deficit is projected to have ballooned to a record high of more than 7% of the country’s gross domestic product (GDP) last year, although the Government is determined to bring that level down to 5.6% of GDP this year, and less than 4% of GDP by 2015.

Many countries have successfully adopted GST as part of their fiscal strategy, including our neighbours Singapore, Thailand and Indonesia. And over the years, the scheme has proved to be a good tool to strengthen government finances.
Presently, the 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. A risky situation, considering the fact that oil and gas is not a reliable source of revenue over the medium to long term because the commodities are depleting natural resources, and their prices are volatile.

GST covers all types of goods & services sold to Malaysian & non-Malaysian residents (therefore consumers) except for a common commodities such as rice, flour & sugar.

Did you know that of all working Malaysians, less than 20% actually paid taxes. That is absolutely reprehensible. If you consume, you pay. There is too much grey economy living well without paying taxes. Owing to the netting effect, more businesses will have to produce revenue figures in order to get the net off effect. As things stand, if you want our salaries to rise, it is also important to remove stupid prohibitive taxes on certain consumption items such as cars. Any hike in salary will only be meaningful if we do not end up having to pay for the prohibitive "taxes" on cars. Technically speaking we are putting money into Proton's and Perodua's coffers - the government should really distribute free Proton and Perodua shares to all car buyers for the past 20 years. But I digress.

p/s photos: Wang Yibing


easystar said...

Hi Salvatore Dali,

Interesting - thought you are a Democrat and Democract hates GST as it is less progressive.

The solution to tax evasion should really be to hire more good inspectors rather than introducing GST.

Nah..GST is also prone to evasion, and worst, false refund claim. UK suffers from several billion pounds of false refund claim - when that happens, it transfer wealth from law abiding consumers and productive business to the fraudster.

Also, GST is not really a consumer tax, it is a half business, half consumer tax as it affects the price that can be charged by businesses.

The best form of government revenue is in fact from natural resources like oil or from land. Unfortunately, of course, that does not last forever and given the other alternative, I am not against a low level (i.e. sub 10% of GST) but anything beyond that can be fairly distoring (encourage smuggling, evasion etc). I would prefer a Land Value Tax over GST if given the choice. (Hong Kong and Singapore practises a form of LVT)

Also, can't see how introducing GST will transform malaysia into a high income country. The PEMANDU/Transformasi project is a small step forward but the compete or die motto will probably be more effective to transform Malaysian into a high income country,

Fook Weng said...

I can't see any catalyst to propel Bursa Malaysia from going up,is Bursa Malaysia heading for a double dip cause it is almost forming a double top?.Which bubble is going to burst?

ebisunishi31 said...

Is this a result of having a government with a weak mandate in power?
The shocking number of U turns recently does not bode well for Malaysia.
I fear for what this will mean for the soon to be proposed NEM. The things that we need to fix overall in our economic management will require much more pain compared to the gradual introduction of a consumption tax like the GST.
The opposition here have done the country a great disfavour. Although I agree that plugging leakages and stopping wastage will go a long way in bring down the deficit but there still needs to be an alternative tax source.

The pols need to get the message across that it is not that they do not want to countinue lavishing the a select group with unending rents, it is just that the country cannot afford to anymore.

soonyeah said...

I totally support GST and also removal of subsidies. It is a bitter pill to swallow but in long run it is good for Malaysia. One condition that I would expect income tax to be reduce on par with the regional. Additonal, I read that 10% of workforce actually paying tax.I see the tax scale need to be review.I believe most of the tax paying citizen are already on the high side of the bracket. The golden goose is getting very tired.


GST Sounds good, but what happen if they don't use it wisely?

Expect high inflation in coming year due to GST, businessmen will add the GST into their goods..

CheahSweeKuan said...

Obviously the government is going broke and they have to think of ways and means to squeeze more from the general public. The 5% property gain tax is another one and the targetted crowd is the urban dwellers no doubt. I am sure the govt is very happy about it. I believe they should look inward and search themselves. They have too many govt servants and too many directors general of this and that and I can say they are all buta gaji(getting paid for doing nothing). If you give a DG of some religious body a big fat pay and pension, what do you expect him to do? Do nothing? Of course to earn his keep he has to spend his time peeping at at other people's window or things like that. There are too many high paying officers holding obscure post and contributing nothing. I do not know why they are there in the first place. Do you? These are the people that ae sucking the nation dry.