10 reasons why Pakatan Harapan is wrong on GST

A QUESTION OF BUSINESS | There may be many things wrong with BN’s economic and budgetary policies but the goods and services tax, or GST, is not one of them. For Pakatan Harapan to demonise the GST as one of the major causes of the rising cost of living that affects the general populace is not accurate - the declining ringgit is the major one.

Here’s what Harapan reportedly said about the GST in its alternative budget: “On the issue of GST, we differ starkly from Umno-BN. Pakatan Harapan is committed to eliminating GST via zero-rating, but we will keep its reporting system.

“We aim to revert to pre-GST numbers on the matter of consumption tax. In effect, this means that we will see a revenue shortfall of RM25.50 billion. Pakatan Harapan sees this policy as an absolute necessity in times of economic stagnation and consumer hardship.”

Effectively it means going back to the old system of a sales and service tax (SST) which does not encompass all the items that GST does and which has little or no record keeping required because it is not a value-added tax. The point we are making becomes obvious later.

Here are 10 reasons why such a step is retrograde. Let’s go through each of these factors one-by-one.

1. It won’t make essential goods cheaper. Almost all major essential goods - those that matter to the lower-income group - are already zero-rated. Thus, if Harapan zero-rated the others as well it will be sparing the higher-income group which consumes more non-essential goods. Prices of essentials will pretty much remain the same.

2. It no longer has an impact on inflation. The rakyat have already bitten the bullet. The GST was introduced on April 1, 2015. In 2016, the full impact of rising prices as a result of GST was already felt. Thus there will be no further price increases as a result of GST from this year on. Also, prices are very resistant to downward movements - sticky downwards. If GST is made zero, it does not mean prices will fall - businesses may just decide to keep their extra margins where that is possible.

3. It widens the tax base by taxing consumption. GST is a value-added tax which taxes only the value-added at each stage in the production of goods and services. Thus, it has the capacity to widen the tax base instead of taxing only income. For the government, this means diversification of revenue sources.

4. It catches into the tax net those who don’t pay tax but still consume heavily. Since it is a tax on consumption, it taxes more the people who can consume - in that sense it is a progressive tax as it taxes people with higher income who bypass the tax net either through tax evasion, which is illegal, or tax avoidance, which uses legal means to pay less tax. Think Donald Trump for instance who hardly pays any personal taxes for example although a major consumer. There must be many Malaysian examples - how about a RM100 million plus diamond ring for instance? GST recovers over RM6 million from that.

5. It forces good record-keeping. For a person or company to get back rebates for the cost of his inputs in the production of goods and services, he needs to keep meticulous records. That means somewhere out there is a greater likelihood of a true set of accounts for companies and individuals. Going up or down the value chain can unveil those who keep bad accounts.

6. It discourages tax avoidance and evasion. The process of keeping a good set of audited accounts in itself discourages tax evasion and avoidance because it makes it that much more difficult to falsify accounts and pay lesser taxes. 

7. It enables cross-checking of data by sharing information between government departments. With the GST, which is collected by Customs, it is possible to cross-check data for companies and individuals with those submitted for income tax purposes to the Inland Revenue Department. That process again discourages tax evasion and enables detection of under-declared income.

8. It checks money laundering. With better records kept of sales and production activities, it becomes more and more difficult to clean dirty money by laundering it through what appears to a be legitimate operations. That’s because the front company will have to show where it obtains its supplies, etc.

9. It enables keeping up with international developments in the tax area. More than 140 countries have some form of value-added tax although few if any have the long list of zero-rated items that Malaysia has. Although that makes Malaysia’s GST more complicated, it ensures it keeps up with international best practices in the tax arena.

10. It enables tax cooperation between countries. Because it has a value-added tax much like many other countries around the world, it makes it easier for Malaysia to cooperate with tax agencies of other countries to detect tax evasion. Multi-national companies are notorious for parking profits in areas which have low tax for instance. Tax cooperation can help to reduce such instances of tax evasion.

High cost of living

On top of all this, GST makes it possible to increase government revenue in an equitable way. Tax professionals everywhere recognise a value-added tax such as the GST as a valid tool to diversify the tax base while taxing more those who can afford to spend by basing the tax on consumption, which is an equitable taxation system.

No doubt much of the Harapan rhetoric against BN focuses on the rising cost of living, but they are barking up the wrong tree when they look at GST. Reputedly, the GST has been postponed numerous times in Malaysia because of pressure by businesses and those who evade taxes.

Finally, it was introduced, with a lot of pain. It will be totally retrograde to effectively roll back the GST - Harapan will paradoxically be helping the more affluent, among them crooked businessmen, money launderers and tax evaders. Surely that’s not what they want to do!

Instead, focus attention on what really matters - the high cost of living, poor wage increases and the continued gap between rich and poor. Focus on why the ringgit is weak - directly causing high prices, especially over the last two years. How do you bring confidence back into the ringgit? Is there a kleptocracy premium on the ringgit?

What mix of economic and labour policies will bring improved productivity while at the same time encourage an equitable distribution between labour and the providers of capital? And what will make labour more productive? What changes in education are needed to bring that about? These are some of the key, if more mundane, questions that need to be answered.

Sometimes playing politics in the battle to secure voter attention obscures what is really relevant and important to the rakyat and the country.

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P GUNASEGARAM says that politics, along with other things, has hit a new low in Malaysia. E-mail: t.p.guna@gmail.com.- Mkini