Abolishing GST is Harapan’s first major mistake

A QUESTION OF BUSINESS | The first major mistake the new Pakatan Harapan government will make is the zero-rating of the goods and services tax, or GST, on June 1 ahead of its complete abolition at a future date.

This is in fulfilment of an election promise in its manifesto but the intention to ease the burden on most people can still be done without dismantling the GST.

There is much that is good in the GST and going back to the old sales and service tax (SST) system will cause major problems to businesses in Malaysia which are just getting used to the new system.

The removal of GST will impact most people very little - because most essentials are already zero-rated anyway - and benefit most those who are much better off, those who evade taxes and those who spend a lot of their money on non-essentials and consumption. It may even lead to price increases through profiteering.

According to Council of Eminent Persons chairperson Daim Zainuddin, the amount of tax collected via GST is about RM44 billion. If the old SST is re-imposed, then the tax collected is RM30 billion which effectively gives a shortfall of RM14 billion in revenue to be made up. Presumably, these are the latest available figures.

The important thing to note is that Malaysians are not getting a complete break from GST but a replacement of GST with the old SST and in the process getting a tax holiday from the time GST is zero-rated to when the SST is re-imposed - in about two to three months, according to Daim.

Malaysians will collectively get a tax break of RM14 billion a year, not the full RM44 billion.

The two to three month tax holiday will provide more gains but only to those who consume and it will cause a significant distortion in the marketplace for consumables as people rush to buy them ahead of the re-introduction of the SST.

There will be production and supply bottlenecks and an unusual surge in consumer spending which may help to push economic growth up this year but will crimp growth next year when there will be no more impact from this one-off event.

All these are needless problems. It is not necessary to dismantle the GST. It can be kept but tweaked to give the desired amount of tax breaks to the public with no disruption whatsoever. And what’s more, the GST can also be tweaked such that the lower income group gets more of the benefits. It may be more difficult to do this with the SST.

For instance, if all clothing, footwear and accessories now attract a GST of 6%, a selective GST can be imposed such that those items which cost less than, say, RM50 per item are zero-rated. That’s a direct benefit to the lower-income group. Those who buy Hermès Birkin handbags which cost more than most cars, for instance, will not get this break.

This can be done throughout by identifying products which need to be zero-rated for maximum benefit to the lower and middle-income groups. An example - zero-rate GST for cars costing below RM60,000 and progressively increasing the GST for cars that cost more.

By that means, it is possible to keep the GST but tweak the zero-rated list for maximum benefit to the lower and middle-income groups to the tune of RM14 billion which cannot be done by the implementation of the SST of old.

Keep the substance, not the form

Yes, it is too late to stop the zero-rating of GST on June 1. But there is no reason why over the next two to three months, mechanisms can't be put in place to allow the GST to be tweaked for the benefit of the lower-income group instead of a blanket and regressive SST. The public will accept this with proper explanation and education for it is an unquestionably superior system now used by over 160 countries in the world.

Think of all the problems that will be avoided when everyone who has set up their systems to account for GST don’t have to change it. Think of all the profiteering that can be avoided by maintaining GST for you can be sure that when the SST is re-imposed, there is bound to be another round of price increases because of profiteering.

Remember, the GST was imposed on April 1, 2015. Therefore the biggest impact on prices happened in that year. By 2016, most of the price increases were not due to GST but probably because of currency depreciation and profiteering.

By 2017, the GST was no longer responsible for price increases but was being blamed for it for political expediency by Harapan - GST was used as a convenient bogeyman for the elections.

There are many benefits to the GST.  It deters tax evasion. Because it is a value-added tax, businesses have to keep good accounts to claim rebates on inputs used in production and only pay tax on the value-added. That goes a long way in detecting tax evasion if the Customs and Inland Revenue Departments cooperate and share information on companies.

The GST taxes consumption and, therefore, it taxes more those who can afford to consume, typically in the richer bracket. Even if there is tax evasion - and by most accounts, there is considerable tax evasion in Malaysia especially by businesses as salaried employees have little leeway for this - there is a way to tax them via the consumption route.

The GST broadens the tax base and brings more people into the tax net based on an easily measurable item - consumption. Consume less and you pay less tax, consume more and you pay more tax. That is fair and equitable.

Doing away with GST completely will most likely see no drop in prices because the SST will be reimposed and there will be the inevitable profiteering which cannot be eliminated. In fact, prices may even rise because of profiteering. It is not a means to control inflation. Therefore, the intended effect of bringing down prices will not be obtained.

If the SST of old is brought back “as is”, the major beneficiaries will be those who can afford to consume - the higher income group. This new government will effectively be handing over on a platter money to those who have lots of it with no drop in the general level of prices.

But if good sense prevails over political expediency, then the GST together will all its benefits can be maintained and can be tweaked to ensure that most of that RM14 billion goes to those who really need it.

The new Harapan government must realise that it’s more important to keep the substance of a promise than its form.

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P GUNASEGARAM hopes this government will be different from the last and puts good sense above political expediency at all times. E-mail him at: t.p.guna@gmail.com - Mkini