E-payments tax — an alternative to SST and GST?

 

Can we abolish the sales and service tax (SST), abandon the goods and services tax (GST) and end personal income tax for everyone other than the very rich without slashing government spending?

The answer is yes if we use an e-payments tax instead of conventional consumption and income taxes.

An e-payments tax is a small charge on all electronic payments, for goods, services, fees and payments of every type, at the point of the electronic transaction.

This includes pay-wave, credit and charge cards, debit cards and ATMs, e-money and e-wallets and normal bank payments and e-checking accounts online. Cash payments would be exempt.

The current value of these transactions is RM1.4 trillion according to Bank Negara data, which gives us the baseline to estimate the revenue from an e-payments tax.

A 1% tax would raise RM14.3 billion which would be enough to end individual income-tax for everyone below the T20 threshold and still leave RM8 billion to RM9 billion for extra spending on health, education and social protection.

A 2.25% e-payments tax, added to existing SST, can raise the same revenue as reintroducing GST but would add unnecessary complexity into an otherwise beautiful world of low-tax simplicity.

Instead, a simple 3% e-payments tax would raise RM43 billion, enough for zero income tax below T20 levels and full abolition of SST, currently targeted to be raised from 6% to 8%. In fact any e-payment tax over 2.5% can replace SST fully.

At 5% an e-payment tax would raise RM71.6 billion now and RM85.9 billion by 2030 but would then begin to be a burden unless it was offset by lower taxes elsewhere or progresses to this level over five years or so.

Possible uses for this extra income are endless and include increasing spending on health, education and social protection, building a national sovereign wealth fund for long-term pension reform, reducing other taxes including zero income tax for everyone below the T20 threshold or paying the principal or servicing costs of national debt.

An e-payments tax also overcomes many drawbacks of implementing income taxes and conventional consumption taxes such as SST and GST.

Simply paying a small tax on everything removes complex regulations, exemptions and multiple tax rates.

This makes life simple for taxpayers, tax authorities and businesses, especially micro, small and medium enterprises (MSMEs) and reduces tax evasion and avoidance.

The compliance, auditing, reporting systems and management costs of SST and GST are also removed and the collection burden is simplified through e-payments systems.

The Inland Revenue Board (LHDN) collects the tax directly from a small number of financial companies rather than millions of individuals and firms.

Cross-border transactions are also easier and the environment for investors and trade is improved with single, low-rate taxes.

Malaysia would become a low-tax haven for foreign investors, leap-frogging regional and international competitors for foreign direct investment.

E-payments taxes also meet many of the criteria for best-practice tax design and are more efficient, effective, certain, convenient, simple and stable.

They are broad-based and low-rate which minimises market distortions and tax evasion.

They have a simple structure which enhances compliance, cuts collection costs, eases the administrative burden and allows robust enforcement.

In terms of equality and equity a single tax for every e-payment is regressive because the same rate is levied irrespective of income.

Nonetheless it is less regressive than alternatives and those who pay cash do not pay the tax.

Any unfairness can be remedied through redistribution using the Central Data Hub (Padu).

It is never too early to end the Groundhog Day debate on “SST vs GST” and look forward to the next budget especially when tax changes which are better than SST, GST and income taxes are a possibility.

Discussions on introducing an e-payments tax should start now. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.