I HAVE been digesting the comments made about the 2018 Budget announced last Friday by Prime Minister Najib Razak and also the Pakatan Harapan Alternative Budget for 2018. I want to address several critiques directed at the Pakatan Harapan Budget, starting with our proposal to abolish the Goods and Services Tax (GST).
One of the major critiques levelled against the alternative budget is that we are not being responsible or realistic by advocating for getting rid of the GST. The following are the responses to some of these critiques.
1) Critique: Companies have spent millions, if not billions of ringgit in implementing the GST system. Won’t all this money be wasted if we get rid of the GST?
Response: We will not get rid of the GST system. All of the items which were not taxed during the Sales and Services Tax (SST) regime will be ‘zerorised’ i.e. 0% GST tax rate. All of the items which were taxed at the point of production during the SST regime will have the same tax level at the point of production. We will use the existing GST system to collect the SST related taxes.
2) Critique: Why not say you will ‘zerorise’ the GST rate, rather than saying that you will get rid of it?
Response: Most Malaysians don’t know the meaning of ‘zerorising’ the GST or the difference between goods which are zero-rated versus exempt. The effect on the consumer will be that they no longer have to pay the GST so this effectively means we are getting rid of it.
3) Critique: Will there by a reduction in the price of goods and services if you get rid of the GST? Wasn’t the GST already priced in during the implementation phase in 2015 and 2016
Response: When we get rid of the GST, consumers will expect prices to go down. Even if retailers don’t decrease prices by 6%, there will be competition between retailers to offer at least some discounts in order to attract customers. Getting rid of the GST puts downward pressures on prices on the whole.
Also, by collecting less taxes (by going back to the SST regime), we are directly and indirectly putting money back into the wallets of consumers and business. This will have a healthy multiplier effect on the economy.
4) Critique: But the GST is not really that regressive because many items are tax-exempt and/or zero-rated.
Response: Firstly, the impression that many basic goods and services are not subject to the GST is not entirely accurate.
For example, the government has said that banking services are exempt from the GST. But in reality, whenever you transfer money online to a friend or employee, you have to pay the 6% GST on the cost of the financial transaction. If you are charged for withdrawing money from a MEPS ATM, you will have to pay the 6% GST on that charge. There are many such items whereby GST is charged on areas that many people think they do not have to pay GST on.
Secondly, just because an item is exempt from GST does not mean that the price of that item will not increase post-GST. For example, even though residential property is GST exempt, this merely means that the developer cannot tack on a 6% GST charge on the final price of the property. The inputs – i.e. the construction materials and the professional fees which goes into the building of that property – are still subject to GST. This means that the cost of the GST will be implicitly included in the final property price.
In cases where the cost of the GST cannot be passed on to the consumer because of price regulation, others have to bear the cost. For example, public transportation such as taxi fares are not subject to GST, but the cost of the taxis’ maintenance and insurance policies are. This means that either the taxi drivers have to bear the increase in these costs due to the GST (more likely) or their taxi companies need to absorb these costs (less likely).
5) Critique: We are making it easier for people and companies to avoid tax by getting rid of GST.
Response: We will still be using the existing GST system to collect taxes that will be based on the SST regime. Hence, the same reporting system that was supposed to have increased tax transparency will still be in place.
At the same time, having the GST is no guarantee that the amount of illicit financial flows out of the country (another form of tax avoidance) as decreased. Malaysia was ranked as one of the top 5 countries in terms of illicit financial flows by non-profit research organisation Global Financial Integrity (GFI).
Three of the other countries in the top five list – namely Russia, Mexico and China – had GST or value added taxes during the time period of the study. What is needed to decrease these illicit flows is a government which is committed to transparency and not dictated by self-interest especially when it comes to illicit financial flows of billions of RM in and out of personal bank accounts.
One commentator has also said that having GST will make it less likely that companies will evade tax by parking their profits in low tax countries. Despite the fact that Ireland has a value added tax of 23%, its low corporate tax rate of 12.5% continues to attract many multinational companies to park their profits in this country.
The European Union (EU) has been clamping down on these practices of getting income tax breaks from low corporate tax countries but this is due to the EU having an institutional framework that has the force of law, rather than the presence of the GST.
There is no such framework in Asean and I would be surprised to learn, for example, if the government would go after Malaysian companies which park their profits in Singapore because of its relative low corporate tax rate of 17%.
6) Critique: If we get rid of the GST, we are narrowing the tax base
Response: It is true that the GST broadens the tax base by taxing a larger number of people compared to the personal income tax. Only 15% to 20% of the working population earn enough to pay personal income taxes whereas everyone has to pay the GST through the goods and services consumed. But this is the very reason why the GST is regressive since it shifts the tax burden from those who are rich enough to pay income tax to the larger population, the majority of whom don’t earn enough to pay income tax.
Even then, the argument that implementing the GST will broaden the tax base is not necessarily accurate in the context of Malaysia. Theoretically, implementing the GST and reducing the personal income tax rate should decrease the percentage of overall revenue collected via the personal income tax. Instead, the % percentage of total revenue collected via the personal income tax has increased from 11.1% in 2014 (pre-GST) to a projected 13.4% of total revenue in 2018.
This is in spite of the 2% reduction in the income tax rates among those who earn between RM20,000 to RM70,000.
The total personal income tax collection is projected to increase from RM30.1 billion in 2017 to RM32.2 billion in 2018, an increase of 7%. While some of this increase could be due to increasing wages and bonuses in 2018, one cannot discount the possibility that the Internal Revenue Board (IRB) will pursue a more aggressive strategy in chasing after back taxes from individuals.
One commentator also said that having the GST will allow us to tax those who consume heavily especially in luxury items. The example he cited was that GST would enable more than RM6 million to be collected on the sale of a diamond ring costing more than RM100 million. Perhaps he has forgotten that if this diamond ring (and other such luxury items) was bought overseas, then Malaysia would not be able to collect the GST for this diamond ring.
7) Critique: The GST is a very effective way of raising revenue for the government.
Response: This is the very reason why Pakatan Harapan is committing ourselves to getting rid of the GST. In times of economic hardship or if the government is forced to raise additional revenue for bailouts and massive infrastructure spending, the easiest way to increase this revenue is by raising the GST rather than cutting expenditure in other areas.
Increasing the GST as a way to raise additional government revenue has adverse effects especially on the poor since they are the ones most susceptible to sudden price increases.
Would anyone be surprised if the BN government is forced to increase the GST rate if they win GE14 and need to raise additional revenue to bailout 1MDB or to pay for the ECRL, for example?
8) Critique: What about the more than 100 countries which have implemented GST?
Response: The countries which have implemented some form of value added tax such as the GST can be divided into two categories. In the first category are the developed countries whereby most of the working population earn enough to pay income taxes. Shifting the tax burden from income tax payers to the consumer does not have significant adverse effects in these countries since their citizens, by and large, are rich enough to absorb the value added taxes.
For many developing countries, their tax collection systems are too weak to collect significant amounts of revenue from personal income and corporate taxes. Hence, implementing the GST is a way for them to improve their tax collection system and also a necessary means of raising additional revenue.
Malaysia is not rich enough to be categorised as a developed country especially in terms of the percentage of the population which earn enough to pay personal income taxes.
But we are fortunate to have a relatively competent tax collection system under the Internal Revenue Board and to a lesser extent, the Customs Department.
Given this, Malaysia had the choice of postponing the implementation of the GST until we reach the status of a developed economy. The finances of the government were relatively intact prior to the implementation of the GST and there is no reason to think that under a new government, with a new mandate to decrease wasteful expenditure and corrupt practices, cannot survive without the GST.
9) Critique: Most tax experts and economists agree that implementing the GST is a good thing. Are they all wrong?
Response: Most of the tax experts work for auditing companies such as PwC and Ernst & Young. They stand to gain from the implementation of the GST in terms of increase business from tax advice and auditing services. It is unlikely that they would speak out against the implementation of a policy from which they stand to gain financially.
Most economists follow the conventional theories regarding taxation some of which has been highlighted above. GST is a broad-based tax that is more efficient compared to other forms of taxation. But most economists don’t have much to say about the effects of corruption on government finances.
There is less conventional economic theory on this except to say that corruption is bad for the economy and for government finances. But by how much? Have economists estimated how much we can save through the reduction of corruption and wastage in the government? Not to my knowledge, at least not in the case of Malaysia.
It is also worth noting that tax experts and economists are most likely to be in the upper 20% of the income bracket and thus, are not likely to feel the brunt of the implementation of the GST in the same way as someone in the B40 income bracket.
10) Critique: We cannot afford to get rid of the GST as the financial gap is too big to cover.
Response: We have shown in the PH budget that we can cut wastage and corruption by as much as RM20 billion which is almost enough to fill the financial gap of RM25 billon as a result of getting rid of the GST and reverting to the SST tax rates.
But since this is an important topic, this will be explained in greater detail in a later statement.
* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.