GST, its impact, concern and ways to mitigate

adapted from THE EDGE MALAYSIA

The Goods Service Tax (GST), also known as value added tax, was tabled for first reading in Parliament in Dec 16, 2009. The system has already been implemented in 143 countries. Only three Southeast Asian do not practise this taxation system - Malaysia, Brunei and Myanmar.

The government has said that the introduction of GST is necessary to create an alternative source of revenue. Other possible reasons for implementing GST are:

a) The average birth rate is 2.2, so it is expected that by 2030, 12% of the population will be above 60 years old, double the current number. The current 15% of the working population paying taxes will therefore reduce, putting a greater burden on a smaller group of people. GST is a broad-based tax that distribute the burden of taxation among a larger section of the population based on consumption.

b) GST preserve the incentive to work and encourages enterprise as it is not a progressive income tax. The tax rate does not increase according to income level, it is flat at the determined rate.

c) GST is levied at the production and distribution stages, thereby incorporating a self-policing mechanism that facilitates administration and makes it more difficult to avoid or evade. This further reduces the possibility of revenue loss through understatement of tax evasion.

d) The GST model implemented in Malaysia is not expected to have cascading, or pyramiding, effect as the tax on a particular good depends upon its final value, and not the number of production and distribution channel it passes through. Furthermore, the output tax to be paid will be offset against the input tax, and there is no GST levied over GST.

e) GST is expected to provide a more stable source of revenue as consumption is less affected by economic cycles compared to income tax.

f) GST can be an effective tax on the ‘shadow economy’, as those involved would consume, and thus pay indirect taxes through GST. It is likely that involved in such activities would buy luxury goods, which would be subjected to GST.

h) The government is cutting its operating expenditure for 2010 by 13%. This shows it is aware of the growing deficit that has widened due to the stimulus package. Recently, Fitch rating agency has cut the rating of the ringgit, which may cause imported inflation if it depreciates, and the International Monetary Fund commented that the GST needs to be implemented urgently.



Some Concern about the introduction of GST

Inflation

Based on the data on the introduction of GST in Singapore, Australia, New Zealand and Canada, there is a one-off inflation associated with the implementation of GST.

In Malaysia, it was announced that essential goods and services will be not subject to GST. But fears that GST will spark a chain reaction that will increase the prices of most non-controlled items should not be dismissed. We have seen numerous examples of when there is an increase in a certain commodity, it sparks a price rise in most goods and services. For example, when the petrol price increased to RM2.70, prices of most goods, foods and services were hiked. But after the petrol price dropped, there has not been a substantial correction in the prices of goods, food and services.

The relevant ministries are powerless to mitigate the situation and curb the necessary inflation. A recent example is on the removal of the subsidy on white bread resulting in price increase of one loaf of bread by 20 to 30 cents. The Deputy Domestic Trade, Cooperative & Consumer Affairs Minister can only comment that the price adjustment was not necessary, urge traders to practice corporate social responsibility and call on the consumers to execute their power in hand. All these statements will not effectively curb excessive profiteering and traders taking opportunity to increase the price of goods and service. The public would want to know how the government intends to avoid the similar predicament when GST is introduced.

Impact on the people in the street

Generally, the public is concerned that the introduction of GST will hit their wallets directly.

In an initial assessment, as the GST is expected to be lower than service tax, the bill for a restaurant meal will be 1% lower as the service tax rate is 5% and GST is 4%. For other services liable to service tax, a GST rate lower than service tax should result in a slight decrease in charges if the cost of the other components in providing the service remain the same.

On goods that attract sales tax, the current rate seems higher than the proposed GST, hence there might be a reduction if there is no further adjustment. Current rates are as follows;
• Fruits, certain foodstuff and building materials (5%)
• General goods, including motor vehicle (10%)
• Liquor and alcoholic drinks (20%)
• Cigarette and cheroots (25%)

For hawkers - even though they do not have a turnover of RM500,000 yearly, so are not required collect GST - the material procured, for example, noodles, fish balls, processed meat, chicken, equipments for the stall may be subjected to GST, resulting in price hike. But without detailed knowledge or mapping, or even information on the duties charged, the people are uncertain whether the prices of goods and services will remain stagnant, increase or decrease.


Lack of information and confusion on GST

Many articles on the GST have appeared in the media, some negative, some positive. But the piecemeal release of information is creating great concern among the people and in the business sector. For example;

1. Will the authorities furnish an extensive list of item that will be charged GST, and what will be exempted?
2. If a product – like rice or chicken - is exempted, does the exemption apply across the board regardless of the form of the product? For example, is cooked rice or cut, frozen or marinated chicken also exempted?
3. What is the difference between exempt and zero-rated GST?
4. Will there be any reduction in personal and corporate tax?
5. What changes will be made to the sales and service tax?
6. There is a perception that as GST is a multistage tax, it would result in higher effective tax rate than 4%. As GST is very technical, most people are unaware how it will impact them.
7. When will the GST rate be reviewed?

Recent media statement on its impact did not improve opinion on the introduction of GST. It is reported that under the sales and services tax system, the burden on the poor is 2.38%, but under the GST it will be 2.17%. For the higher income group, the tax burden will be reduced from 13% to 2.74%, according to the Finance Ministry. The overall savings for households will be between RM14.52 and RM346.92 yearly. This clearly contradicts other statement from politicians, and the public perception, that the GST will be inflationary. But as no further details are provided on how the savings are arrived at, public sentiment remains negative on GST.

Impact on businesses

The implementation of GST is expected to impact business in the following manner:

a) Compliance costs are expected to be incurred as there is requirement to track the input tax and output tax to determine refund or tax to be submitted. Even though some Malaysian companies are already paying sales tax or service tax, there was no input tax to be monitored and accounted for to offset against output tax.

b) Business process and procurement need to be mapped out, especially with respect to suppliers and promotional items. For example, a new car attract GST, but items provided for free during promotion - like sports rims or a GPS system – may not be eligible for an input tax claim. Likewise the corporate souvenirs and hampers given out by businesses may bot be eligible.

The procurement department should start detailing the sales tax or the existing tax paid for their items used a raw material. As the GST is expected to be lower than most current indirect tax, there should be some potential cost savings. This is also to avoid being overcharged by supplier that intends to add the GST over the existing price of its supplies after sales tax, there should be some potential cost saving.

c) Human resource factor: New staff may need to be employed to ensure a business is compliant and conversant with the GST requirement. As most staff have not been exposed to GST, training needs to be conducted.

d) Accounting system and account payable: The business would require an appropriate accounting system to keep track of the GST amounts. Most systems could be upgraded, and it is important to notify software vendors to test run the data to avoid any potential complication.


e) Cash flow management: Businesses should be aware that output GST may have to be settled before settlement of sales invoices by customer. Meanwhile, payables on which input tax has been claimed but remains unpaid after six months have to be accounted as output tax and are to be reclaimed as input tax only after payment is made. Businesses are concerned about the timeliness of the refund process as delays would results in a higher working capital cost.
In addition, businesses that have thin margins are worried about the speed of the refund for input tax, especially if the business is mainly exported-oriented and procures its raw material locally.

Readiness of the authorities system

The business community, NGO and charity organization are concerned about the ability of the authorities to implement GST smoothly. Australia, for example, had to bring in foreign experts to help in rollout of GST. It would be undermine investor confidence if the GST is not implemented in a structured manner with minimal hiccup.

Burdening the poor and those economically vulnerable: Some 32% of the household in Malaysia have an income under RM2,000 per month. The introduction of GST without the necessary revamp of subsidies will result in a heavier financial burden on poor and low-income families. Families with an income below RM2,000 a month do not have to pay personal income tax. With GST, things that are not basic necessities - toys, processed food, can food, packet drinks, and so on – could increase existing inflationary pressures. The ongoing restructuring of the subsidy will also create the tension, discomfort and dissatisfaction as people eligible for subsidy could unintentionally be left out as the government establishes and tries to refine its method of distribution.

The Possibility of another flip-flop

The GST was supposed to be implemented before the 13th general election but was postponed. There is a general opinion that if the economic condition does not improve, or the negative sentiments against the establishment of GST are severe, it will not be introduced. As such, most businesses are not going full swing into starting until they are very sure GST will be happen.

Usage of the revenue collected

Revenue collected from GST is expected to be about RM13billion, compared to the budgeted indirect tax collection of RM12billion. Though GST will enable the Government to reduce the deficit or create an alternative source of revenue, the massive wastage, corruption and abuses that occur have diminished public confidence in the benefits of providing the government with an additional source of revenue. The Port Klang Free Zone financial fiasco, issues highlighted in auditor-general report, the lack of transparency in the Naza land deal and the collapse of a new building in Terengganu has put the spotlight on the government’s ineffectiveness in curbing potential abuses and leakages. So creating a new source of revenue would not resolve the government’s problem or provide the confidence that this new source of revenue will be put to good use.


(This is first part of a two-part series)