One year later, GST successful but still unpopular

First published 14 March 2016 in the now defunct Malaysian Insider

BY SHERIDAN MAHAVERA

The goods and services tax (GST) has been as successful as it is unpopular, say analysts, nearly a year after the consumption tax’s introduction.

But at its core, the tax is also about the nation’s priorities – whether it cares more about foreign investors or its most vulnerable people.

It is successful, say analysts, because it is a much more stable source of revenue for the government given the collapse of oil prices.

The first nine months of GST gave Putrajaya RM27 billion, said Customs Department deputy director Datuk Subromaniam Tholasy. For the full 12 months, it is expected to yield RM36 billion in revenue.

Next year, the GST was expected to contribute RM39 billion to the government, said Subromaniam.

The GST has also forced businesses which have avoided paying taxes to register themselves.

The tax is still unpopular as seen in the constant brickbats hurled at ministers who defend it and how the poor and vulnerable are now made to also pay taxes.

This was why the tax was more than just about government revenue, said Institut Rakyat’s Ginie Lim.

The tax was pushed by the International Monetary Fund (IMF) and adopting it improved the country’s international credit ratings.

A country’s credit rating determined whether a country could access global banks which loaned to governments, said Lim, who is the think-tank’s assistant research director.

“So by having GST the government seems more interested in pleasing the lenders instead of focusing on socio-economic justice, such as helping the poor and vulnerable, who have trouble coping with this extra tax burden,” she said.

Benefits

One reason the tax is popular with international investors is that it is a transparent system compared with income and corporate tax regimes, says Alan Chung of tax consulting firm Grant Thorton.

Multinational corporations today considered corporate tax as an additional cost to their operations when deciding where to invest and open a branch, said Chung, who is Grant Thorton executive director.

“Moving from a focus on corporate tax to a broad-based consumption tax makes the country more attractive,” Chung told The Malaysian Insider.

“Investors also like countries with cleaner and more transparent tax systems,” he said, as they want certainty and no hidden taxes.

Recent government data, said another Grant Thorton senior official Lorraine Parkin, showed that foreign direct investment in 2015 remained robust.

“Research by the IMF indicates that a country which moves towards a GST or consumption tax regime, it drives growth for that country,” said Parkin, who is Grant Thorton indirect tax division chief for Asia-Pacific.

GST also forced companies avoiding paying taxes on their earnings, or known as the “hidden market”, to register with Putrajaya and this added another source of income, said Chung.

Subromaniam said in the past year, about 300,000 companies which had never filed taxes registered with Putrajaya.

The GST’s efficiency is another reason it is popular with governments. Instead of using huge resources going out to collect taxes from the public, the task was passed on to businesses, said Chung.

“Which is why the government spends less money collecting RM1 in GST compared with collecting RM1 in income tax,” said Chung.

Costs   

The flip side was that the GST was an admission that the government has failed to make income tax collection more efficient, said Lim.

“It also reflects a failure to manage the country’s finances during the good times as seen in the wastage in the auditor-general’s reports.”

Institut Rakyat’s research into the impact of GST throughout the past year challenges Putrajaya’s oft-repeated mantra that the tax would not burden the poor because items, such as food, were zero-rated.

Statistics Department data showed that the inflation rate for those earning below RM3,000 a month was higher than the national average, said Lim.

In August last year, the inflation rate for those earning below RM3,000 a month was 3.2% compared with the national rate of 3.1%. In January, it was 3.6% for the under-RM3,000 and 3.5% nationally.

“The GST, along with the drop in the ringgit and profiteering, has contributed to a rise in the cost of living,” said Lim.

The impact on the working class could be due to the fact that the small businesses from where they tended to shop have had to increase prices because they themselves were being charged GST.

“But these small businesses don’t make enough in annual turnover to claim the tax back from the government. So they get taxed by their bigger suppliers, who can claim GST refunds from the government but they can’t pass on the tax to consumers.”

As consumers struggle with this new tax, their confidence to spend decreases and this starts a vicious cycle.

“Consumers spend less, so businesses get less income. Businesses are forced to cut back on expansion and this leads to their workers not getting salary raises, which also makes them spend less,” said Lim.

So while Putrajaya may achieve its aim of creating another source of revenue through the GST, the tax is dampening another goal – to make private consumption a big driver of the economy.

All of this could have been avoided had the government been prudent in the first place, said Lim.

“The question is if the government had improved income tax collection and had practised good governance in the past, would we need the GST?” – March 14, 2016.