GST – We Begin at 4% but Minister Given Enormous Power Again

As a member of the Pakatan Task Force on Anti-GST, I write in response to the letter that appeared in Views of the The Star, Thursday, 24th December 2009. The anonymous Tax Accountant from Malacca indeed said it all about the current acrimonious debate on the GST when the title of his letter states “We don’t need the GST to boost revenue”.

By Dr Dzulkefly Ahmad, Member of the Pakatan’s Anti-GST Task Force

In what I thought was a well argued submission, (apart from the usual ranting on leakages etc though) but not privy to the Bill, he first wanted a clarification on whether the GST will replace the entire current taxation on purchases of goods and services imposed by the government which, inter-alia, include the Sales and Services Tax (SST).

In the explanatory statement of the Bill, it is clearly stated that the GST replaces the Sales Tax Act 1972 and the Services Tax Act 1975. Nowhere in the Bill does it mention that it subsumes or replaces the Custom and Excise Duties. Businesses that are taxable include any trade, commerce, profession, vocation, or any other similar activity, whether or not for pecuniary profit.

The Bill also clarifies that, unlike the present sales tax which is a single stage tax, the GST is a multi-stage tax ie payment of tax is made in stages by the intermediaries in the production and distribution process.

GST shall cover all sectors of the industry and is a tax on final consumption of goods and services. It is also collected through an elaborate credit system where the GST incurred on inputs is offset against GST charged on outputs.

In simpler terms, input tax is tax charged on taxable goods and services to a taxable person on imported goods. Output tax means any tax charged on goods and services in the course of furtherance of his business in Malaysia. A taxable person is either a person registered under the Act or is liable to be registered under the Act.

If outputs exceed inputs, the company has to pay the difference to the government. If inputs exceed outputs, the company can claim a refund. Tax consultants are predicting that there would be price increases in some items, while a lowering of price in others as producers may pass savings from taxes on intermediary inputs to consumers. This has yet to be seen and quite unknown (read ‘unthinkable’) in Malaysia anyway.

At the suggested rate of 4% to begin with, the GST is surely lower than the existing service tax rate of 5% and significantly lower than the sales tax rate of 10%. It may be true that the drop in rate would be offset by the wider footprint of GST as well as its collection along the supply chain as opposed to only at the manufacturing or import stage of the SST. 

But given the fact that the Bill provides an enormous power to the Minister as in Clause 10(2)(a) and (b) of Part III to fix the rate of tax or vary or amend the rate, in no time the rate of the GST will have to be increased to be even more than 10%, as alluded by the Tax Accountant from Malacca. Countries with GST in place are known to increase it to as high as 10% in Singapore, Australia and Indonesia, 17.5% in the UK, 20% in Austria and 17-25% in Brazil. What will stop the government from increasing the tax rate, one may ask.

The Anti-GST Task Force has consistently argued that we are not against GST per se. As regressive as GST may be, the government could allow for many items to be exempted or zero-rated. These details are not immediately available and of course not in the Bill. 

However, the claim by the Minister that everyone will have savings – the lower income group, the highest income group, the exporters and business overall, stand to save RM5.4 billion – remain a ‘marvel’. Over and above that, there shall be an additional RM 1 billion revenue from the collection of the new GST in the first year for the government. Who is the minister trying to hoodwink now?

Regardless, our bone of contention has always been the fact that it will inevitably burden the low-middle income group. Professional consultants equally caution about ‘grey areas’ relating to the implementation of the new tax regime and on its potential impact on consumers especially the lower-income group (The Edge, Financial Daily, December 17, 2009, Yong Min Wei and Sharon Tan).

We wish to remind the government that according to the World Bank, between 1994 and 2007, real wages grew by only 2.6% in the domestic sector and by 2.8% in the export sector; which is to say they were flat over that thirteen-year period.

The signs of a low growth economy are all around us. Wages are stagnant and the cost of living is rising. We have not made much progress in becoming a knowledge-and services-based economy.

We want the government to defer its implementation to allow for real wages to grow and a bigger base of middle-high income earners to be generated. We are equally adamant that the government plug all holes of leakages in irresponsible practices of cronyism and nepotism that border downright corruption.