Time for GST

With the distraction of electioneering over, it is time for the federal government to look into implementing the GST.

A consumption tax is somewhat overdue.

There will be a reduction in corporate and personal income tax. The extent of the reduction is not known as yet. A reduction to a top rate of 18% will be welcomed by everyone.

Idris Jala has floated the view that a 7% GST rate, consistent with the rate in Singapore, will raise a projected RM27 billion in revenues.

Can Malaysia afford to defer GST any longer?

I think not.

It is time for the federal government to exercise its political will.

GST and removing subsidies - can the poor afford it?

Mr Jagdev Singh Sidhu has made some cogent points here.

Accounting Bonanza

The next 3 years will be a bonanza for the accounting fraternity.

First, the fair value accounting regime under FRS 139 will come into force on 1st January 2010. Lots of additional compliance work there.

Second, in the next following year GST is expected to come onstream. So, 2010 will be a frenetic year with clients running helter-skelter to put in place additional compliance procedures.

There's several hundred million Ringgit worth of billable work there. Good times.

If only the Securities Commission and Bursa Malaysia can come up with a special "Services Board" to enable accounting firms to list some equity-type interests for the rest of the investing public to get in on the action...

GST and reduction of income tax

The introduction of GST should have 2 key implications apart from the obvious ones of the GST, being a broadbased consumption tax, being a more efficient form of taxation than income tax.

First, there must be a commensurate reduction in personal income tax. I still maintain that the ultimate target should be an 18% top tax rate. This will help to put Malaysia back on the competitive map.

Second, given the trade liberalisations that Malaysia so strongly subscribes to, the GST's value-added tax features will ameliorate some of the losses of customs revenue from tariff reductions.

That said, platitudinous and suitably nebulous remarks have been made on how GST will not be a burden on the ordinary rakyat. I hope there is true sincerity and genuine understanding on the part of the government regarding the true effect of the GST because all consumption taxes have a regressive effect i.e. where the lower income groups pay more as a percentage of their income than the higher income groups. The rakyat will want to know how "gentle" the implementation will be and what are the measures to "safeguard the interest of the people".

There is a projected increase in government revenues to the tune of an additional RM1 billion when GST is implemented (and sales tax retired ... what about personal income tax reduction???).
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Here's a useful excursus on the impending GST regime done by KPMG.

GST may be at 4%

No editorialising here. Thanks to bro Walla, here's the link to the GST Discussion Paper dated 18th July 2005 prepared by the Ministry of Finance. I'm just posting this report for the record:

The government plans to impose goods and services tax (GST) at 4%, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said Thursday.

"We are replacing the current sales and services tax, which is currently at 5% to 10%," he told reporters at the Culture, Ideas and Values Workshop organised by Foundation For the Future at Country Heights Resorts in Kajang.

He said the GST implementation was important for the country's future.

"The revenue source must be sustainable. If we can get sustainable revenues, we can get a good budget," he said.

He said the Consumer Price Index (CPI) would not increase as a result of the GST implementation.

Some selected items especially essential goods like rice, sugar, cooking oil and flour as well as domestic transportation would not be subject to GST.

Husni said the Bill on GST would be tabled in Parliament for the first reading this year, with a second reading in March next year.

GST would be implemented 18 months after the second reading.

The government expected an additional RM1 billion revenue annually after the first year of its introduction.

GST bill: Where can the public give comments?

A bill relating to the proposed introduction of the goods and services tax (GST) will be tabled for first reading at the end of the current Dewan Rakyat sitting.

Najib is quoted as saying that, "This will allow the public to give their comments, engage them, and if we find it necessary to fine tune it, we'll do so".

He stressed that if the government decided to introduce the GST in Malaysia, it would do so "very gently".

"It's not going to be an abrupt introduction," Najib said, adding that if the GST materialised, the rate would not burden the poor or middle-class Malaysians.

"And, it would not lead to inflation," he added.

Firstly, by tabling a Bill, the legislative process has commenced. There's a First Reading, then, there's a Second Reading and, then, a formal Third Reading whereupon the Bill becomes an Act of Parliament. The speed of the legislative process is at the discretion of the coalition in power.

A sincere effort at allowing public input should involve putting up the draft Bill in a suitable website, perhaps by the Treasury where comments can be received in an orderly fashion.

Tabling a Bill is a fait accompli which is, by definition, "an accomplished, presumably irreversible deed or fact".

Secondly, all consumption taxes has an inflationary effect even if it is a once-off effect.

Thirdly, "not be(ing) abrupt" is a relative view of the Prime Minister. If by "not be(ing) abrupt" he means that there will be lots of publicity about the Bill (and, therefore, following the reasoning, there should not be any psychological shock), then, he may be correct. But, the moment the Bill becomes an Act of Parliament and, it is given the Royal Assent and, is given a Commencement Date, then the implementation will still inevitably be felt by the public and the Malaysian economy as an "abrupt" phenomenon.

The question, therefore, is why the draft Bill should be tabled in Parliament when it can easily be posted at Treasury's website where public opinion can be sought for a period of, say, 6 months?

GST and Budget deficit: Any robbery of Peter or Paul?

The goods and services tax (GST) proposal has been a non-starter in Malaysia for nearly a decade now. The Malaysian government's reticence on the matter may, in large part, be due to the burden that the GST, which is an indirect and consumption tax, will have on lower-income Malaysians. For, to raise the ire of the lower-income groups may be the straw that breaks the proverbial back of the camel from a socio-political standpoint.

This is something that hardcore economists and tax professionals often ignore in the continuing quest for fiscal purity and neatness of design. It is, however, a matter of political life-and-death for political leaders.

So, do we take the long-term view that tends to favour the GST? Or, shall we take the short-term view that avoids the possible alienation of lower-income groups caused by the temporary but, potentially disruptive effect, of a consumption tax? Let us not forget that over the past 2 decades Malaysians, especially lower-income groups, have enjoyed consumption subsidies (a policy that has made us lazy and inefficient). How will they react to a consumption tax?

The inconvenient matter of the budget deficit

As if to make algorithm of policy-making even more complicated there is that inconvenient matter of a ballooning budget deficit which, for 2009, is expected to be at 7.6% of the GDP of Malaysia. That's a lot of debt. At the height of the economic crisis in 1998-1999 the budget deficit was slightly above 5% of the GDP. This is a source of concern.

All the bond-raising exercises by the Malaysian government that has so excited the Malaysian person-on-the-street in recent months is obviously intended to deal with funding the budget deficit. But, at some point, these bonds will be redeemed and, at specific annualised intervals, yields will have to be serviced.

Which leads us to the curling observations made by Prof Emeritus Datuk Dr Mohammed Ariff Abdul Kareem, executive director of the Malaysian Institute of Economic Research (MIER). He believes that tax revenues for 2009 will fall below projections. Tax revenue, as we know, is the primary source of income for any government.

Dr Ariff also noted, as many of us has, that the government operating expenditure has been ballooning. Coupled with the stimulus packages, this can only mean that the funding mismatch between revenue and expenditure is likely to push the budget deficit to 8% of GDP or, higher.

So, the Malaysian government may have a fiscal problem although it will be interesting to consider the extent to which the borrowings from the public generated by the government bonds, such as the 1Malaysia Savings Bond, will be able to ameliorate the revenue shortfall.

A renewed call for GST

Anyway, Dr Ariff pointed to the need for the broad-based GST as an important fiscal policy option that the Malaysian government needs to seriously look into implementing. There have been many "dry runs" conducted over the past decade. The narrow-based income tax has become insufficiently efficient as a source of fiscal revenue.

The other rationale for GST that many taxpaying Malaysians may find appealing, is that implementation of the GST will support the argument that Malaysian income tax must be reduced.

Will GST have a salutary effect to reduce income tax?

I still maintain that a top corporate income tax rate of 18% would be an excellent strategy that will put Malaysia back on the map for foreign corporate HQ planners now based in Hong Kong and Singapore. Many foreign executives believe, correctly, in my biased opinion, that Kuala Lumpur is a much better place to live in than the other cities mentioned. KL is imperfect and, it is that imperfection that endears KL to visitors. Imperfection means character (let this also be understood by people who feel the desperate need for cosmetic surgery, especially those who believe that an impassive facial expression caused by Botox is more alluring than cute wrinkles, but, I digress).

A commensurate reduction in personal income tax would, then, also be order.

Planning for GST implementation needs a 2 to 3-year gestation because there will be a tsunami of paperwork. Rush the implementation and Malaysia will feel like a living hell for paper-pushing punishment.

So, it is true that I am going from cool to lukewarm with GST.

The context of policymaking

But, to put the whole matter into the proper context again, it will be necessary for our economic managers to consider the matter holistically. To a Malaysian breadwinner who earns a monthly salary of RM1,200-00, a 2% GST on basic necessities can be a big deal, especially if he or she needs to pay the rent, the hire-purchase on the motorcycle and, tuition for the children (yes, even poorer people want their kids to have tuition).

Don't just formulate policies by sitting in the ivory towers of Putrajaya. Serious and sincere efforts must be made to turun padang to study the impact of economic policies before implementation. But, judging by the decision to reverse PPSMI, many of us don't think that Cabinet members believed Najib when he said that the era of "Government knows best is over".
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Postscript: here's something relevant to the topic from Reuters which was carried in Malaysiakini:

M'sia relying too much on Petronas, new taxes needed

The International Monetary Fund has cautioned Malaysia not to delay plans to introduce a goods and services tax (GST) and to remove subsidies to ease pressure on its budget.

The taxes were proposed in 2005 but were shelved due to political and inflationary pressures and since then, Malaysia's budget deficit has surged and will hit 7.6 percent of gross domestic product this year.

"Legislation has been drafted and the necessary administrative infrastructure has been laid out. However, in the current uncertain environment, no timetable for a rollout has been set," Malaysian officials said in the IMF's annual report on the country, published on Friday

Malaysia's budget deficit has ballooned at a time of strong oil and commodity prices and state oil company Petronas provides half of government revenues. Excluding revenues from oil, the deficit was 11 percent of GDP in 2008, the IMF said.

The report comes as Malaysia is readying its 2010 budget and as the government tries to rally support after record losses in state and national elections in 2008.

Economy hit hard by global downturn

Malaysia's economy is set to contract by up to 5 percent this year and with exports equivalent to 110 percent of gross domestic product it has been hit hard by the global economic downturn.

"They will try as best as they can to delay the implementation of GST.

"How long they delay will depend on how whether they can find new sources of revenue to reduce the over dependence on oil and gas income," said Bank Islam senior economist Azrul Azwar Ahmad Tajudin.

Last month, the government deferred plans to hike gas and electricity prices, fearing a repeat of anti-government protests that saw its popularity slump in 2008.

Govt has no plans to implement GST

The Malaysian government's confirmation that it has no plans to implement the Goods and Services Tax is a sensible decision.

The GST is a consumption tax. It is effectively a value-added tax. From a theoretical standpoint consumption taxes are intended to be broad-based and indiscriminate. It is an efficient source of revenue to governments.

The reality is that consumption taxes like GST are effective only when certain elements are in place. What are these elements?

First, you need to have a large middle-class base. This base provides the foundation upon which a large group of taxpayers with a significant disposable income provides the source of GST revenue. It is the consumption from this large middle-class base that drives a GST scheme.

Second, you need an economy that is in growth mode to gain acceptance.

The key is, of course, the first point. Malaysia has a narrow middle-class base. Only a small segment of income earners actually pay income tax.

Third, which is a corollary of the first point, the income disparity in Malaysia is still great.

The most widely accepted measure of income disparity is the Gini Coefficient. To amplify this point, I can do no better than to extract a recent post by my blogger friend, Sakmongkol AK47 here, where he displayed the following:

<Gini Coefficients by countries:

Country	HDI	GINI
Singapore	0.902	42.5
Malaysia	0.793	49.2
Thailand	0.768	43.2
Philippines	0.753	46.1
Indonesia	0.692	34.3
Vietnam	0.691	36.1
Cambodia	0.568	40.4
Laos	0.534

Source: UNDP Human Development Report

A commonly-used measure of development is the Human Development Index (HDI) devised and calculated annually by the United Nations Development Programme (UNDP). The HDI is preferable to a simple measure of per capita income because it takes into account other factors as well, including life expectancy and other measures of general 'well-being'. In the UNDP's 2004 Human Development Report, Malaysia ranked 59 out of 177 countries. With an HDI score of 0.793, Malaysia is just on the threshold of the UNDP's own definition of a 'Highly Developed Country', which is a score of 0.800 or above.