GST is payment for 'free dinners'

 

But if the government cannot cut expenditure because it has to give "free dinners" every five years, Woo quipped, then it is basically imposing such taxes to make people "pay for their dinners" after the election is over.

Himanshu Bhatt, fz.com

Slowly but surely, across the nation the jitters are rising as the days inch closer towards Oct 25 – when the Prime Minister is expected to announce a new Goods and Services Tax (GST) while tabling Budget 2014.

 

Many quarters are of course very worried about the burden of double or multiple taxes with the introduction of such a tax. There are also concerns that businesses will increase their prices and thereby create a spiral inflation effect.

 

Certainly, the burden will be biggest on the poor.

 

According to a study by the Penang Institute, the GST is expected to raise RM7.5 billion from households alone.

 

Assuming that the tax rate would be 7%, each household would end up paying RM104 per month on average.

 

This is based on the latest Household Expenditure Survey which says that the average household pays 4.41% of expenditure or 2.6% of income.

 

But there are wider implications, including inflation spiking by 3.86%.

 

Whatever the rate is, there is going to be a secondary impact, the study shows.

 

Dr Lim Kim Hwa, a fellow with the institute and a fellow in Finance and Financial Reporting at the University of Cambridge, recently said that passing on costs to consumers is a very likely consequence of the GST.

 

"It's the secondary impact, where people start passing the amount by charging more," he told a forum on the GST organised by the Penang Institute here, recently.

 

"After the implementation of the GST we expect there will be a sustained period of high inflation."

 

One important element is commercial property, Lim pointed out.

 

While residential properties will not be subjected to GST, nothing has been said of commercial properties.

 

"And that has implications," he said. For example, when owners add GST to rentals, it would definitely increase the cost of doing business in Malaysia.

 

Companies not prepared for GST

 

While there is speculation that the GST rate will be around 7%, it is possible that a lower 4% would be set, Lim said.

 

It is also possible that the rate would be multi-tiered, or as high as 20% but on very limited items. There is also the possibility that there will be different rates for west Malaysia and Sabah and Sarawak.  

 

Whatever it may be, despite the introduction of the GST being brought up since 2009, it seems that many businesses are not prepared for it.

 

For example, people do not know the rate or the items to be subjected to the tax.

 

The Finance Ministry has done an impact study, says Lim, but despite written requests for a copy has not yet revealed it.

 

"There is a degree of consultation and transparency needed on the part of the government," Lim said.

 

One danger of the lack of preparedness on the part of companies is corruption among officials.

 

According to Prof Datuk Dr Woo Wing Thye, the executive director of the Penang Institute, if firms are not ready, then tax collection officers would have to make an "estimate" of what each firm's value-added profit is.

 

This is the profit made by a company after deducting cost from the total sales made.

 

Unless the government has fool-proof means of computing one's costs, it would have to rely on making an estimate.

 

Here is where the situation becomes vulnerable to bargaining and possibly side-payments, Woo cautioned.

 

Compounding the issue is the question of whether the GST's implementation would be outsourced, just as had been done for the Automative Enforcement System (AES), before it was announced that the system would be taken over by a government company.

 

Why is the GST being imposed?

 

A government resorts to a tax like this when the budget deficit is very high, said Woo.

 

It is something that is opted for when we spend more than what we earn.

 

The high expenditure could be due to poor management, lack of openness in tenders and contracts, and also public money spent for political purposes.

 

One example of increase in government expenditure is the Bumiputra Economic Empowerment Programme, announced by Prime Minister Datuk Seri Najib Razak last month.

 

In a simple way, consider this. What would you do when you spend more than what you earn?

 

One option is to try to earn more and get a subsidy from somebody, like a foreign party. The other option is to try to cut expenditure.

 

"So the government has a choice of either raising taxes or cutting expenditure... The question is how much of each? More expenditure cut or more tax increase?

 

Woo noted that in Malaysia's case, expenditure has gone the way it has been going before, but revenue has fallen tremendously since around 2000.

 

So the one pending measure is to raise taxes.  

 

'Bill' for free dinners has come

 

Woo pointed out that when the Penang government implemented the open tender system starting in 2008, it was found that the very same state projects that had been implemented before open tenders were in place, could now be done at around 60% to 70% of what they cost previously.

 

That means the state is seeing 30% savings for projects right away.

 

In a similar scenario if the open tender system were to be practised at federal level, it can be envisaged that government development expenditure could be cut by 30% without any decrease in the quality of services, Woo says.

 

"And that would be much more than what the budget deficit is," he adds, stressing that besides improving efficiency, the government can then also cut expenditure while leaving taxes alone.

 

But if the government cannot cut expenditure because it has to give "free dinners" every five years, Woo quipped, then it is basically imposing such taxes to make people "pay for their dinners" after the election is over.

 

"So I'm afraid the bill for all those free dinners has come now."