The Prime Minister Datuk Seri Najib Razak recently announced that the government would be introducing Goods and Services Tax (GST). The GST bill which will be tabled at the end of December 2009 parliamentary session is planned to be implemented towards the end of 2011 or early 2012.

What is GST?

GST is a broad based consumption tax charged at the point of purchase for goods and services. This means, if the Malaysian government decides to impose GST in the next 18 months, a value added tax of 4% will be collected on most goods and services transactions in Malaysia. What this means to your pocket is that for every RM100 spent on goods or services, RM4 will be collected by the Inland Revenue Board, making the total price to the consumer after GST implementation, RM104. This is regardless if you are a single mother raising 6 children or a wealthy family living in an urban area.

Historically, Value Added Tax (VAT) or GST was invented by French economist, Maurice Laure in 1954. It was first introduced to large businesses and later to all business segments. In France, it is one of the best sources of government funding, accounting for 45% of taxation revenue. Due to its collection effectiveness, it was unsurprising that many countries such as Australia, Canada, United Kingdom, Hong Kong, Singapore, New Zealand and member states of the European Union then followed suit.

Why implement GST?

Based on the recent Prime Minister Datuk Seri Najib Razak’s announcement, GST is intended to replace the current sales tax at 5%. In Australia, when the Howard Government introduced GST on 1 July 2000, it replaced the federal ‘sales tax’ and a number of states and territory government taxes such as banking taxes and stamp duty. The streamlining of various indirect tax mechanisms into GST was seen as a step forward in simplifying the developed country’s taxation system.

Both sales tax and GST are consumption based taxes; the main difference is that sales tax is charged on certain classes of locally manufactured goods and similar goods imported unless specifically exempted by order of the Ministry of Finance whilst GST is broader based at the point of exchange. In Canada, when GST replaced the hidden 13.5% ‘Manufacturers’ Sales Tax’ in 1991, although controversial, was seen as a way to spur growth in the manufacturing sector.

The existences of illegal immigrants whom are not registered with the Inland Revenue Board and various tax evasion schemes have created a ‘shadow economy’ and tax leaks, making tax collections expensive to administer. Then there is an issue, evidenced in the Budget 2010 recently announced on 23 October 2009 of the country’s heavy reliance on petroleum taxes to fund its operations and development initiatives. GST solves this issue as its flat rate and broad based nature ensures that every one pays taxes and provides a stable revenue stream for the government.

Is the timing right?

Perhaps the main opponent is the social effects of GST due to its ‘regressive’ nature. It is perceived to cause more pinch to lower and middle income earners as the tax takes up a larger proportion of their household income compared to higher income earners. In Australia for example, when GST was first introduced in 2000, people rushed to the supermarkets to purchase goods in which they perceived to be more expensive after GST implementation. As a result, discretionary spending decreased immediately after GST implementation to the point that during the first fiscal quarter of 2001, the Australian economy recorded negative growth for the first time in more than 10 years . It is argued that given the current economic downturn, GST would contradict the Malaysian government’s efforts to spur domestic consumption and economic growth.

Malaysia has done considerably well to emerge stronger from the 1997 Asian financial crisis, managing the current economic challenges via releasing fiscal injections from its Economic Stimulus Packages and now focusing on its broader objectives of achieving the status of a developed nation by 2020. The World Bank’s main standard for classifying economies is gross national income (GNI) per capita. Based on its GNI per capita, every economy is classified as low income, middle income (subdivided into lower middle and upper middle), or high income. As at 1 July 2009, Malaysia is categorized as ‘upper middle income’ and this classification is in effect until 1 July 2010. As the Malaysian economy climbs steadily to high income levels, the upcoming challenge is to avoid the ‘middle-income trap’. At present, Malaysian middle income earners is argued to be paying tax at the highest marginal tax rates.

A matter of implementation

The question is then; can we still achieve a ‘high income’ nation status, escape the ‘middle income trap’ and achieve a ‘developed country’ status by 2020? Would GST be the bane or boon to socio-economic development?

The answer is very simple. If the additional estimated RM1billion of GST revenue collection is to be well spent on the country’s development initiatives such as improving the Malaysian transportation, education and healthcare systems and targeted value added activities; and GST legislation drafted with targeted exemptions on high value items such as food, healthcare and education, it could potentially be a boon that will catalyze the country’s socio-economic development. Otherwise, it will be a bane impeding nation building that would erode Malaysians’ purchasing power and have most of us stuck at middle income levels.

GST could either be an opportunity or threat. It is what we make of it!

 

Amin is a  Associate Researcher with Malaysia Think Tank. He is completing his Masters degree at Universiti Putra Malaysia. He represented Malaysia in ASEAN Youth Development Programme.  Amin is also an alumnus of Cato University 2008.

* "Opinions expressed in this article are the personal views of the writer and should not be attributed to SEDAR institute or any organization he is connected with."

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