Income tax cut expected to pave way for GST, say experts

KUALA LUMPUR, Sept 29 — The one percentage point reduction in income tax proposed in Budget 2013 tabled yesterday suggests that the government is preparing to introduce the consumption-based goods and services tax (GST) as a substitute for income tax, say economists and tax experts.

The Najib administration had put off the implementation of GST despite warnings that its revenue base was too narrow and analysts said that the income tax reduction is a signal that the government is a step closer to the introduction of the controversial new tax.

In the Budget 2013 proposals, individual income tax rates will be reduced by one percentage point for each grouped annual income tax exceeding RM2,500 to RM50,000, removing 170,000 taxpayers from the tax roll and giving other citizens savings on their tax bill.

Veerinderjeet Singh, chairman of tax advisory firm Taxand Malaysia, said Najib’s speech on the income tax cut could be viewed positively as it implies the system would be restructured and the nation is in transition towards GST.

“I read it positively as it wasn’t explicit but a hint that they are slowly re-engineering the system,” he said.

The prime minister said during his speech that the government was in the process of transitioning from a tax system based on income to one that is “fairer”.

Yeah said the government was spending within reasonable limits. — Picture courtesy of www.theborneopost.com

Veerinderjeet noted however that the one per cent income tax cut which would reduce the number of taxpayers could complicate matters for any GST implementation as people could get used to the idea of paying less tax and question why they would have to pay the GST.

He said the government should have announced an intention to review the entire tax system.

RAM Holdings chief economist Yeah Kim Leng said the income tax cut “sets the stage for the government to strengthen case for GST as government needs to find alternative sources of revenue.”

Economists were also relieved that while expectations were high for large numbers of “goodies” to be dispensed in the last budget before the general election, the government had managed to not go overboard.

In Budget 2013, the deficit is projected to be reduced to 4 per cent from 4.5 per cent this year.

“The government is spending within reasonable limits and has been quite prudent,” said Yeah.

He cautioned however that the planned deficit target was very much dependent on the country’s GDP growth and the outlook for the global economy was still uncertain.

UOB Economic Treasury Research said that given expectation of more incentives ahead of the upcoming general election, the announced budget deficit for 2013 is below most forecasts, including UOB’s own 4.2 per cent estimate.

It added that the lower than expected deficit was a show of commitment to its previously stated target of reducing the deficit to three per cent by 2015.

Many economists have said that Malaysia has some of the weakest financials in Asia and needs to shore up its revenue base and one of the ways was via the GST.

Proponents of GST also say that it is a fairer tax as it is more broad-based and gets more people to contribute to the country’s tax coffers as it based on consumption and not income.

Only 1.7 million Malaysians currently pay income tax out of a workforce of 12 million.

Critics of the GST say however that the government should not impose any new taxes until it manages to eliminate revenue leakages that come from inefficiency and corruption.