Goods & Services Tax (GST); Why Malaysia Needs It

This article is specifically written to address the recent statement by Malaysia’s Leader of Opposition, Datuk Seri Anwar Ibrahim that the opposition pact, Pakatan Rakyat may resort to protest if a new taxation regime, Goods and Services Tax (GST) is to be introduced in Budget 2014, later this month.

This new form of tax in Malaysia has drawn much attention from many quarters, particularly experts and politicians regarding the pros and cons that may be contributed if this tax is to be implemented. The idea of GST in Malaysia has emerged even in 1990s, but discussions and public outcry have put off the implementation until this very moment.

Even in Japan recently, public outcry was evident when its hawkish Prime Minister, Shinzo Abe announced that the consumption tax will be revised from 5% to 8% as part of his “Abenomics”; a slew of measures to help Japan recover from economic slowdown and deflation.

 GST has been touted by many as one of the best ways to sustain the nation’s financial stability. But then again, what is GST?

GST or also known as value-added tax (VAT) taxes on consumption. This means, the more you consume, the more you will have to pay. GST can be classified under the cluster of indirect taxes and if it is to be implemented in Malaysia, the jurisdiction to collect this tax will be under the Royal Customs Department. Globally, around 146 nations are noted for implementing GST as one of the tax regimes. The percentage of GST varies amongst countries, from as little as 5% to as high as 50%.

Why is GST important?

1    (1)    The non-inclusive taxation system

Malaysia’s current personal income tax needs more scrutiny in order to enhance its efficiency. Through the de facto taxation system, only 1.7 million Malaysians out of the 13 million people workforce are registered to pay the personal income tax. Approximately, only around 1 million Malaysians, however, are actually paying the tax as the rest are excluded through various tax deductions. This essentially means that a miniscule 3.51% of the entire population is contributing to income tax which plays a major role in raising the direct taxes contribution. This clearly indicates that, the current tax regime is simply narrow-based and unsustainable in the long run. Taxes play a significant role in providing financial means for the nation’s development.

Thus, apart from direct tax, indirect taxes collections have also to be boosted for better revenue generation. Statistics has shown that indirect taxes contribution has fallen in 2011 (17.6%) and further in 2012 (17.2%). This indicates the pressing need for GST implementation. Moreover, Malaysia’s highest individual income tax bracket of 26% compared to the highest tax bracket in the corporate tax rate of 25 % compels the spark of debates on the efficacy of our tax regime. Many pushes for reduction in personal income tax to increase the population’s disposable income. This is understandable and can be achieved if GST is implemented. The government will be forced to reduce the personal income tax rate as high individual income tax and GST, together will be financial burden on the citizens.

2    (2)    Over-dependence on natural resources

Contributions to the government’s coffer have largely depended on natural resources-based industries, namely the timber and oil and gas (O&G) extraction sectors. Especially, after the inception of PETRONAS in 1974, the state-owned petroleum company, the national revenue has been largely derived from the profits of this establishment (which is also famously noted as one of the New Seven Sisters). Official statistics have shown that around 40% of annual PETRONAS’s revenue is used for the nation’s expenditures. Such high dependence on hydro-carbon receipts cannot be justified and the revenue should be put to a better use. 

Taking Scandinavian countries like Norway and also the world’s second biggest oil producer, the Saudi Arabia as examples, a huge percentage of their oil revenue is channelled into their sovereign wealth funds (SWFs). These funds are later used to invest domestically and internationally to generate more profit. As a result, Norway’s and Saudi Arabia’s sovereign wealth funds are amongst the biggest in the world. Technically, huge proportion of oil revenue is funnelled into these SWFs to establish financial backing for future generations. It is a common knowledge that these now-bountiful resources are doomed for depletion. Natural resources should not only be limited for the current generation’s use but also for the upcoming ones’.

As for Malaysia, there is a fund called “Kumpulan Wang Amanah Negara” in which small proportions of oil revenue is channelled into. Hitherto, PETRONAS has only contributed around 100 million per year compared to its tens of billions of profit. It is only starting from two years back, PETRONAS has voluntarily agreed to increase its contribution to RM 1billion per annum. Yet, by comparing this miniscule amount to its mass profit, definitely more proportion can and should be contributed to the fund. If this is made possible, Malaysia’s SWF could emerge as one of the world’s biggest fund and will be ultimately beneficial in long term.

3    (3)    Budget deficit

Malaysia has been registering budget deficits for the past 16 consecutive years, starting from the 1997 East Asian financial crisis. The nation’s expenditure has always been higher than its revenue for this duration and has caused the government to borrow from many sources. This has translated into high amount of national debt-to-GDP which currently stands around 53%, nearing the minimum threshold of 55%. If the national debt-to-GDP hikes above the threshold, it will send alarming warning to many quarters, regarding Malaysia’s risk in controlling debt. Such situation might even cause the Big Three ratings agencies to reduce Malaysia’s investment ratings. This later will force reduction in foreign investment.

Thus, in order to combat budget deficit which currently stands at 4.5%, the government needs to generate more revenue and the introduction of GST is very much timely. GST is capable in generating more revenue to the government’s coffer and this has been proven by many economists, both domestically and internationally.

How GST functions?

            I opine, to solve this state of problem, the Goods and Services Tax (GST) has to be implemented. Currently, Malaysia is in use of another tax regime, Sales and Services Tax (SST). To the uninitiated, there are clear distinctions between GST and SST.

For example, Sales and Services Tax (SST) are taxed on every stage of sale. Let’s say, in the case of a bread loaf (just an example as Malaysia does not produce wheat, the raw material for bread), the wheat producer, the bakery, the bread wholesaler and lastly, the consumer will be paying the sales tax.

However, in GST, only the end-user; the consumer will be the one paying the tax.

Then, wouldn’t this mean the government’s revenue will be reduced if only the end-user is paying the tax? No! This is because GST is broad-based and will cover almost all goods except for zero-rated goods (essential items such as rice, sugar, etc.). Thus, it paves way for more revenue generation.

            With the implementation of GST, more Malaysians are entitled to pay taxes indirectly. This way of taxation is just and capable of eliminating “free-rider” mentality amongst the Malaysian masses. In comparison with the current system, GST paves way for a broad-based taxation system. However, due to misconceptions and rumour-mongering amongst the uninitiated, the disapprovals for GST implementation have grown louder. Thus, an independent laboratory analysing on the impacts of GST should be established, encompassing local and foreign experts for broader views and opinions.

Through this laboratory, the best percentage of GST should be decided together with its impact on the economy as well as the consumers. It should be noted that while there are countries imposing up to 50% of GST, nations like Canada only imposes 5%. A well desired and accepted rate should be on average if compared with our current sales tax of 10% and service tax of 6%. And at the same time, the rate should not burn a hole in the consumers’ pockets. Keeping that in check, essential items should be exempted to protect the lower-income group.

Only after well-preparation and research into the manners of implementation, the public should be educated through various feasible and friendly means like social media, on the growing necessity of GST. After all, the longevity and success of this tax regime depends on the public acceptance.

            Hypothetically, it is becoming more apparent that our taxation system is in need of a revamp. A transition to the Goods and Services Tax will boost the national revenue, better if this attempt is coupled with continuous rationalisation of subsidies and improving leakages in the government’s finance due to corruption and red-tape. A well-planned roll-out of GST shall project better revenue-generation in the government’s financial “assessment card”.

P/S: It has to be noted GST can also cause rise in goods’ prices. But, whether this will cause severe inflation or otherwise, largely depends on the Government’s manner of implementation.