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Experts: Gst Is Great But Fix Problems Before Reintroduction

10/06/2022 12:48 PM

By Nina Muslim

KUALA LUMPUR, June 10 (Bernama) – With the twin shocks of increased spending and economic downturn, no thanks to the COVID-19 pandemic, Malaysia is in sore need of funds to replenish its depleted coffers.

The government thinks the answer is Goods and Services Tax (GST), a very unpopular consumption tax introduced in 2015 that generated RM44 billion in 2017. Economists agree for the most part but say improvements and corrections must be done first before its second outing.

“We are good at coming up with a new scheme or new approach or a new system, but quite miserable when it comes to maintaining it,” said Associate Professor Ahmed Razman Abdul Latiff, economic analyst at Putra Business School.


Assoc. Prof. Ahmed Razman Abdul Latiff, economic analyst at Putra Business School. --supplied photo

When COVID-19 pandemic hit, Malaysia lost an average RM2.4 billion daily during the first Movement Control Order (MCO) in 2020. The economy contracted 5.6 per cent, while unemployment reached an all-time high at 5.3 per cent.

In an interview with Nikkei on May 31, Prime Minister Datuk Seri Ismail Sabri Yaakob said the government was considering reintroducing the GST to make up for the losses.

“We lost RM20 billion (about US$4.6 billion) in annual revenue when we abolished the GST," he was quoted as saying. He later clarified that the GST will not be implemented anytime soon.

Government officials confirmed no tax will be introduced until the economy has recovered. Along with inflation in Malaysia, due to residual effects of the pandemic, Russia’s invasion of Ukraine and climate change, most experts agree that introducing the GST now may be too much for the people and could instead trigger a recession while the economy is struggling to revive.

Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz told reporters the government was still studying various tax systems, including whether to improve the current Sales and Services Tax (SST) or reintroduce the GST later and if so, how. 

He added it would take nine months to implement a new tax system once Parliament approves.


Illustrative photo. --fotoBERNAMA (2022) COPYRIGHT RESERVED

Fulfilling a campaign promise, the Pakatan Harapan (PH) coalition government repealed the GST in 2018 and replaced it with the SST, which remained in place despite the fall of PH in March 2020. The SST generated RM26.7 billion in 2020 and RM27.9 billion in 2021 in revenues.

The GST is a consumption tax and levied on most transactions in the production process – applying to about 60 per cent of goods and services under the Consumer Price Index compared to 38 per cent under the SST.

Consumer and manufacturing groups have welcomed the news of the possible return of the GST, saying the system is more efficient and fair than the current SST. Business groups have previously voiced support for the reimplementation of the GST when the PH government fell in 2020.

 

INEFFICIENCY

Correctly implemented, economists agree that the GST is a more efficient and fair tax system, providing  much-needed funds for governments by increasing the number of revenue sources. It also has the advantage of having been previously introduced, which means transition to the GST system will be relatively easier and faster. 

“Given that each business indirectly becomes a tax collecting agent, they are incentivised by the ability to claim all those input taxes (refunds),” said Mohd Afzanizam Abdul Rashid, Bank Islam Chief Economist.


Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam. --fotoBERNAMA (2022) COPYRIGHT RESERVED

However, the key phrase is correct implementation. Economists told Bernama the first implementation of GST was problematic as many manufacturers, producers and suppliers in the supply chain did not receive refunds as required under the system.

“When (manufacturers and producers) didn’t receive refunded money from the government, they faced higher costs and they had to increase their prices to cover this deficit in cash,” said Ahmed Razman.

It then resulted in a cascading effect of tax on tax, which is the opposite of what the GST was supposed to do. Each party along the line is supposed to receive a refund within 14 days when the goods or services are transferred to the next chain with the final consumer paying for the GST rate.

In 2019, news came out that the government had failed to return the Input Tax Credit (ITC) monies to parties along the supply chain. The government refunded RM9.5 billion to 76,002 GST registrants in 2019. By July 2020, the Ministry of Finance had paid RM1.264 billion to 4,316 businesses with more expected to be paid out by year end.


Illustrative photo. -- fotoBERNAMA (2022) COPYRIGHT RESERVED

Experts said the government needed to ensure all the mechanisms were in place, including ensuring businesses could cater to the new system, before rolling out the GST system, although not all were confident the government would be able to iron out all wrinkles. 

But once the issues have been fixed, Afzanizam said the GST would help address the shadow economy, that is, unregistered businesses, which will then improve the government’s ability to administer and to manage the economy, and to improve the ability to collect more revenues.

“And then the ability to support the economy during economic shocks, like the one that we experienced during the pandemic, where the government had to step up (with) a huge amount of spending, would be improved,” he said.

 

TAXES FOR ALL

One of the reasons it is unpopular among the small and medium-income groups is the regressive nature of the tax, that is, it affects the rich and poor alike. Since the tax could apply to every transaction regardless of an individual’s socioeconomic status, it could place undue burden on poor households. 

Economists say this means certain exemptions and other steps should accompany the implementation of the GST, specifically to reduce the burden on poor households and individuals.


Prof. Yeah Kim Leng, professor of economics at Sunway University

Sunway University economics professor Yeah Kim Leng said as GST is a consumption tax – which means those who buy more, especially non-essential luxury items like lobster, will have to pay more for the privilege – exemptions should be limited to as few items as possible.

 “We faced (this problem) before when lobster was exempted from GST. I think cheese, among others should not be exempted.

“I think that's why it's good to bear in mind the principle that we should limit the exemptions to as few items as possible. I think that principle should continue in terms of designing a system that is robust and can be sustainable,” he said.

He said if some of the GST is found to impact negatively on the low-income group, the government could then make up for it, not by scrapping the GST, but by using other methods such as cash transfers and subsidies.


Illustrative photo. --fotoBERNAMA (2022) COPYRIGHT RESERVED

As the GST and its exemptions affect and benefit the rich and poor alike, Ahmed Razman suggested the government introduce a taxation system that targets the wealthy. 

“We can introduce the capital gains tax, especially those trading in the stock exchange. At the moment, if you're buying shares at RM1, and suddenly you’re selling at RM10 making a RM9 profit, there is no tax imposed there.

“So rather than imposing taxes on every population, probably there's a better mechanism to target those who actually have the excess wealth. But of course, it is more complicated than GST,” he said.

 

Edited by Salbiah Said

 

--BERNAMA

 

 


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