GST: Not so bad after all

For what it's worth, it must be said that the goods and services tax (GST) proposed by the prime minister will definitely be a ghost to haunt him in his political career.

To tell you the truth, I was somewhat impressed that such an undertaking was even considered, knowing that Barisan Nasional's hold on power is hanging by a thread, retrospectively speaking. Many a ruling government was ruined by such bold attempts.

The GST, in a nutshell, is a tax on goods and services in transaction through the retail end of the supply chain.

That is, it taxes consumers for doing what we do best - consume. In normal circumstances, a retail GST would lead to a marginal rise in prices depending on the rates imposed.

Another unpopular attribute of the GST would be its regressive nature. To be precise, the tax burden is greater on those who spend a subsequently larger proportion of their respective incomes.

For instance, a person earning RM1,000, who would spend a larger proportion of his or her income on food and other necessities, would feel the burden much more than those earning, say, RM5,000.

Bad news for the poor? Not necessarily.

The proposed GST bill seems to account for the shortcomings of similar, existing tax legislations as well as giving a partial solution to our narrow tax base problem.

The first of these would be the fact that the 4 percent GST is set to replace the 10 percent sales tax (imposed at the manufacturing and import levels of production) and the 5 percent retail service tax.

This translates to a degree of ‘burden neutralisation' as the 10 percent manufacturing/import sales tax is roughly equivalent to a 6 percent retail sales tax, leaving an actual burden rate of -2 percent for the proposed GST. This results in a double bonus of cheaper goods and a boost in tax revenue!

Logic defying as it sounds, much of the increase in revenue (touted to be as high as RM1 billion annually) would be due to the higher added value of retail goods over those at the production or distributive levels.

Secondly, no soul in this country could escape the GST. Malaysians have a notorious reputation of income tax evasion.

This, tied with a highly skewed tax regime, likely explains our overdependence on petroleum revenues.

As these revenues dwindle, further burdens will shift towards commercial institutions as well as those on the upper tiers of the tax code. As all Malaysians should bear this civil responsibility, not only is this highly unfair, but we have also let slip those who had profited from the hospitality of this nation.

It doesn't take much thought to conclude that illegal immigrants (1.2 million strong by conservative estimates), being unregistered, do not come under the radar of the LHDN. Fine and diligent people as they are, it is not an excuse to evade the laws of the land.

And who else, more than most, exemplifies the evasion of the rule of law than those who broke them? Rather than shaking down honest taxpayers like criminals, why not tax the real criminals in the black market, those who operate outside of the system?

Simpler alternative to GST

But of course not all is rosy. Even with such a burden-neutral structure, in practice retail sales taxes are administratively cumbersome. There are simply too many commercial retailers to monitor, and the enforcement costs of the new system may erode whatever surplus it generates.

An alternative would be a 5 percent wholesale sales tax which is roughly equivalent - revenue wise - to the planned 4 percent GST. Not only is it cheaper to enforce, given that there are fewer (distribution) firms to monitor, but also as an additional benefit the tax burden reduction is higher at -3 percent!

All in all, the benefits are indeed there, both for alleviating the strain on national accounts, as well as the increased social benefits compared to the current system.

How will Malaysians react? I'm afraid the answer to that question depends on how the spin-doctors conjure it. As for myself, I'm glad the prime minister is still playing a reformer's tune.

For now, at least.

WAN FADZRUL WAN BAHRUM demands to pay his taxes on his own terms. He is a graduate of the Malaysian Multimedia University and is now continuing his studies at Monash University reading economics and finance. He previously worked with Dr Lim Teck Ghee at the Centre for Policy Initiatives, as a research assistant at Monash University and had a brief stint at Deutsche Bank. He is especially interested in public finance and developmental economics. He invites readers with similar views to Wau Bebas.