GST is not the demon Harapan says it is

A QUESTION OF BUSINESS | Nobody likes taxes. If you ask the public whether the goods and services tax (GST) should be abolished, the answer will be a loudly resounding and resonating “Yes!” But you need taxes - some of them at least.

It is because taxes are so unpopular that political parties often adopt a populist but shortsighted and backward stance to appeal for votes from the general public by promising to cut them. Such is the case with Pakatan Harapan and GST now.

Independent polls apparently say that bread and butter issues are more important than 1MDB, corruption and theft at the highest levels or kleptocracy, as if these are not important enough issues in themselves. So then to beef up your campaign, bribe the public by giving them what they want - in effect money by reducing taxes.

Never mind that this could potentially be disastrous for the economy and deny the government the money that needs to be spent to uplift the lives of the poor and could put the country back into a regressive system where the salaried get taxed more and more to feed the appetite of a growing nation.

GST has many good points which is why it has been introduced in over 160 countries in the world. It taxes consumption, broadens the tax base, captures those who are not covered by income tax and actually significantly reduces tax evasion in the system.

To understand why the proposed reduction of GST to zero if Harapan came to power is a major mistake, one has to look at the nature of GST and examine whether it is really responsible for the higher cost of living. This is a good websitefor understanding GST.

There are two things about the GST – one, it taxes consumption, and two, it is a value-added tax. Let’s take consumption first. It is well known that there is considerable tax evasion among businesses and businessmen. The introduction of a consumption tax recaptures some of the tax lost through evasion as those who are affluent tend to spend more on consumer items and other things.

People with more money consume more and those who are richer will pay more in GST simply because they spend more. The GST is therefore widely considered a progressive tax because in effect the more affluent you are, the more tax you pay through consumption. If you are poor, you consume less and therefore pay less in GST.

On top of that, Malaysia’s GST tax rate of a uniform 6% is among the lowest in the world, with GSTs more commonly in the range of 20%. Singapore introduced GST at 3% in 1994 and it is currently 7%, 17% higher than Malaysia’s.

Further, Malaysia has a wide range of zero-rating for GST which includes all food items, education and health services. Also, small businesses with a turnover of less than RM500,000 a year don’t have to charge GST.

These reduce the direct impact of GST on the lower-income group. But because of expectations of a general increase in price levels, food prices did increase too when GST was introduced.

The introduction of GST had a one-off effect with prices increasing most in the year of implementation - April 1, 2015, with a full year impact in 2016. That means the price-increase impact of GST is behind us.

Other reasons for continued price increases are likely to be the falling ringgit which declined nearly 19% from the time of implementation of the GST at RM3.7 to end 2016 at RM4.5 to the US dollar, about a fifth. Not all the price increase is because of GST - a major portion is also due to currency depreciation.

If Harapan is looking for the real culprit behind price increases it might well be the ringgit which is more responsible. In any case, any further increase in prices from this year can no longer be blamed on the GST.

Irreparable damage

If Harapan were to put GST at 0% across the board as promised, the prices of food, education and health - the bread and butter for the vast majority of the rakyat - will not move one bit because they are already rated zero. What Harapan will achieve is to make it cheaper for those who can afford to spend lots of money! That cannot be its aim.

Even then, there is the tendency for prices to remain unchanged, a common phenomenon which economists describe as prices being “sticky downwards” even if associated taxes are removed.

Harapan bigwigs must know this but to make an issue of GST and to promise a zero rate for all goods and services implies politicisation of an issue, which brings no benefit to the broad rakyat that they are professing to serve. This is a BN-style election ploy which may well backfire on them if not now then later if they should somehow come into power.

The other big advantage about GST is that it forces businesses to keep good accounts. It is a value-added tax and therefore the business or intermediary pays the tax on only the value he adds, claiming back taxes on the inputs he uses. For this, he has to keep meticulous accounts and it makes it very difficult to have two sets of accounts and cook the books for tax purposes.

Thus, if Customs which collects GST, and the Internal Revenue Department which collects income tax, cooperate - and they are surely doing that now - any under-declaration of business activity will become apparent. As GST involves everyone in the supply chain, it will be quite difficult to hide the true revenue of a business.

The incidence of tax evasion can be significantly reduced, and alongside it corruption as well. A significant GST rate ensures that there is an incentive for businesses to keep good records to claim their input tax credits which can well make the difference between profit and loss.

One more question. If GST is set to zero, where is Harapan going to go to get the RM42 billion expected to be collected in GST this year? Would it not want this tax base to help the rakyat it claims to serve?

The opposition should pick on something else other than GST, for instance wastage of public funds, which is directly impoverishing the rakyat. A competent and honest government can do good things with that additional tax revenue from GST while strengthening its financial position.

Harapan, there is a chance that you might come to power. Show that you are responsible by not making promises you can’t keep, or if you keep them will result in irreparable damage to the country. You are barking up the wrong tree - GST is not the demon you are painting it out to be.

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P GUNASEGARAM says spinning has no place in educating the public - the best messages are those which are honest, accurate and easy to understand, for example, so-and-so stole so much money from us and is, therefore, a thief. E-mail: t.p.guna@gmail.com. - Mkini