By Prof Datuk Dr John Antony Xavier

Public transport, agricultural and essential food items, seafood, private education, healthcare, electricity and water supply, and sale and lease of residential property are to be excluded from the goods and services tax.

EXPANDING REVENUE BASE: With only 16 per cent of workers paying tax, unsustainable oil revenue and trade liberalisation, GST is the only way BENJAMING Franklin once quipped that in this world nothing can be said to be certain except death and taxes. That four billion of the world's population live in countries that have a consumption tax is testimony to that truism. Malaysia is a laggard when it comes to implementing the goods and services tax (GST). When Malaysia does introduce GST, it will be joining 160 other countries, or 80 per cent of the countries, including seven other Asean countries. While many taxpayers may be more accepting, many others oppose GST on the grounds that it is a "money machine" for the Federal Government. They argue that the Leviathan should be starved rather than be given a lifetime pass to further raise taxes. Truth be told, the government needs a money machine, but not of the money-printing variety, if it wants to continue Malaysia's trajectory to becoming a rich nation. The looming public debt level is so close to the statutory limit of 55 per cent of gross domestic product (GDP) that it blunts our ability to raise debt to finance growth. With a fiscal deficit of 4.5 per cent, there is not much revenue left after paying for operating expenditure to finance the capital expenditure of around RM40 billion. We need that amount, and even more, to fuel the 6.5 per cent growth that we need to become a rich nation by 2020. The government has relied on direct (individual and corporate) taxes for 35 per cent of its revenue and petroleum revenue (32 per cent) for far too long. There is not

much scope to enhance revenue from these sources and there are many reasons for this. FIRST, of the 12 million who are gainfully employed only 1.9 million (or 16 per cent of the working population) pay taxes. SECOND, the worldwide trend is to either reduce the corporate levy or keep it unchanged. Singapore (as well as other neighbouring countries) intends to reduce it further from the already low rate of 17 per cent. As such, it would be uncompetitive for us to increase the corporate tax. THIRD, the high petroleum revenue is unsustainable as petroleum is a depleting resource. If it is gone, so will the revenue from it. To add to these woes, increasing trade liberalisation will cause revenue from import duties to shrink. There is a need, therefore, to expand the revenue base. GST offers that opportunity. For example, Singapore collects 18 per cent of its revenue from GST. The valueadded tax, or VAT in Thailand and South Korea, produces 28 per cent and 34 per cent of total revenue respectively. Unlike personal and corporate taxes that distort investment/savings decisions and which are susceptible to economic downturns, GST will be capable of generating a more stable source of income and has no discriminating effect upon saving/investment decisions. GST is self-enforcing. A business can claim a refund of GST it had paid on its inputs only if the claim is supported by purchase invoices. GST will demonstrate the commitment of the government towards greater fiscal rectitude to convince ratings agencies that it is serious in putting fiscal management in order. Unlike personal and corporate taxes that are susceptible to economic downturns, GST will be capable of generating a more stable source of income while reducing reliance on direct taxes and petroleum revenues. The eventuality of GST is a forgone conclusion. The question that remains is what the rate will be. Singapore and Thailand currently impose a seven per cent GST/VAT. The rest of Asean has settled for 10 per cent. The average VAT in the European Union is 20 per cent. At 17 per cent for lease of tangible property, 11 per cent for transport services and six per cent of the rest of the goods and services, China's VAT is steep. Japan will increase its VAT from the current five per cent to eight per cent next April and 10 per cent by 2015. By then, its VAT will be the same as South Korea's. On average, most countries have fixed their initial consumption tax rate at 17 per cent.

Our current sales tax is 10 per cent and service tax six per cent. So, we can surmise that the range within which GST will be fixed will be between 6-10 per cent. A precise guess will be seven per cent, on the premise of Singapore's practice. It has been the norm of one-third of the countries with GST to increase the rate after implementation. To have a substantive impact on government revenue, GST could be increased gradually from the speculated rate of seven per cent by one per cent at each time of renewal until it reflects the maximum 10 per cent rate in the Asean. If implemented fully, GST will immediately lighten all pockets. Fortunately, that is not so. Our taxman has chosen to cross the river by feeling for the stones. To reduce any negative impact on the poorer segment of society, he has proposed a small-bang reform by zero-rating (that is, no GST is applied at any stage of the supply chain) or exempting many goods and services from GST. These include agricultural and essential food items, seafood, public transport, sale and lease of residential property, private education, health, electricity and water and agricultural land. Some 80 business establishments, those with sales of less than RM500,000, will also be excluded from the GST system.
Prof Datuk Dr John Antony Xavier is the Graduate School of Business, Universiti Kebangsaan Malaysia

New Straits Times, 7 October 2013

By Prof Datuk Dr. John Antony Xavier

A value-added tax like the goods and services tax (GST) has the ability to pump a lot of cash into the Treasury’s coffers.

IT is good that Malaysia is taking a slow approach in the goods and services tax (GST) implementation as the country is still smarting from the recent petrol price hike. A big bang could overwhelm the public and businesses. The fear is that growth might stall if consumers take fright that it outweighs any revenue increase from the GST. For example, the two per cent VAT rise in 1997 was blamed for blunting growth in Japan for a decade. Companies would be equally overwhelmed if the GST is extended across the board without exemptions. This is because the latter would need to change their invoicing and tax payment and tax credit systems. Even the government machinery will have to ready its enforcement system to collect the tax and check for fraud. As such, there must be an adequate gestation period between announcement and actual implementation to get everyone ready for the GST execution. What will be the impact of the GST on government revenue, businesses and the public at large? A value-added tax has the ability to pump a lot of cash into the Treasury coffers. The base (the total amount of goods and services that would be subject to tax) would range from one-third to one-half of Gross Domestic Product (GDP). Given the massive exemptions from the proposed GST, it is fair to adopt the base of one-third. So, at today's GDP of RM1,001 billion, a GST of five per cent will raise RM16.5 billion in tax revenue. This may seem a lot of money. But offset that against the RM15.3 billion from the sales and service taxes (SST) that will be repealed upon the introduction of the GST, and administration costs to the GST, at five per cent, will be revenue-neutral. The authorities have alluded to a possible reduction of personal and corporate income tax rates to make the GST more palatable to the public. Personal and corporate income taxes did come down in Singapore upon the introduction of the GST. If individual and corporate tax rates do fall or the government exempts from all income tax those who earn less than RM100,000, then the combined effect will categorically dispel any notion that the GST is a money machine for the government. So where's the beef? The proposed GST model is superior to the existing SST for four reasons. FIRST, the GST eliminates the cascading and compounding effects of the SST. While the SST is charged at each stage of the supply chain, raising the final cost to

the public, and thereby distorting production, the proposed GST model allows for reimbursement of taxes on inputs by businesses. The GST, therefore, will reduce the overall cost of doing business. SECOND, unlike the SST, the GST model offers relief for exports. THIRD, the imposition of the GST at multiple stages of the supply chain will overcome issues related to transfer pricing. A corporation that pays a lower GST because of an understated transfer pricing can only claim reimbursement for that lower amount. FOURTH, as the GST is imposed at multi-stages of the supply chain, it will encourage vertical integration across the supply chain. Such vertical integration will enhance production efficiency. The GST will be a transparent tax-collection instrument as there are minimal classification issues and the tax will be shown on the invoice. This transparency, too, will enhance tax compliance. Japan's three per cent rise in VAT to eight per cent scheduled for next year is expected to reduce its GDP by over one per cent. However, the impact on our GDP would be negligible as, at five per cent, the GST is revenue-neutral. A GST often results in a once-only spike in inflation. That increase usually tapers off as the government contracts the money supply in the economy through the revenue it collects from GST, causing the rate of growth of the general price level to decline. However, at a five per cent revenue-neutral GST, the impact on the consumer price index will be negligible, if at all. There will even be a reduction in taxes (elimination of SST and exemption from GST) in 60 per cent of the CPI components, such as clothing and footwear, communications, transport and utilities. Notwithstanding this, much communications blitz has to be done to gain a wider public acceptance of the GST and to ease misperceived fears of hardship as a result of its implementation. As the GST is widely expected to be introduced in 2015, time is still on the government's side. Cash handouts under Bantuan Rakyat 1Malaysia may also help placate any misgivings among the public about the GST. If past experience is anything to go by, every tax or price increase creates its own ripple on general inflation, largely through profiteering. So although they are exempted items, expect your roti canai and teh tarik prices to go up upon implementation of the GST!
Prof Datuk Dr John Antony Xavier is the Graduate School of Business, Universiti Kebangsaan Malaysia

New Straits Times, 8 October 2013