GST, the time is right

By Chan Quan Min

The Goods and Services Tax has been on the drawing board close to a decade. An unfortunate victim of political rivalry, the controversial consumption tax made it as far as Parliament in 2009 only to be withdrawn for revaluation. Three years later, with a general election out of the way and a desire to reduce the budget deficit, the time is right for GST to be introduced.

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A national Goods and Services Tax (GST) has been on the drawing board for close to a decade. Yet, the implementation of the consumption tax, extremely common worldwide – GST systems exist in as many as 156 tax jurisdictions – has had a difficult history in this country.

As early as the mid 1980s the Royal Malaysian Customs sent the first team of Malaysian tax experts on a study tour of the European GST system, where it is more aptly called VAT or value-added tax and first implemented as early as 1954.

Back home, while GST was first mentioned in the Budget 2005 speech it was not tabled before Parliament until some time later in Dec 16, 2009.

Opposition to the ‘new tax’ was especially strong. The expanded opposition bloc (post 2008 general election) in Parliament wasted no time in dismissing GST as an unnecessary tax burden on the public.

From then on the GST discussion was unable to divorce itself from national politics. Presumably for political gain, GST has been ruthlessly demonised by the opposition coalition, Pakatan Rakyat.

Amidst the populist statements, several key points about the GST were lost. The most glaring, and as documents from the Customs department of the Ministry of Finance will reveal, the Goods and Service Tax Bill, 2009 was intended as a revenue-neutral replacement to the current sales tax and service tax regime.

This means the government’s intention was reportedly to introduce GST at a rate that would allow the administration to receive the same amount of tax revenue as with the sales tax and service tax combined.

By early 2010 it was clear the Barisan Nasional government had backed down from the implementation of the GST, citing a reassessment and a possible redraft of the bill.

Constant rumours of snap polls in the ensuing years after 2010 made a second tabling of the tax a political minefield. It took another good three years and a general election before talk of GST resurfaced.

An announcement on GST is imminent

The GST got very close to implementation in early-2010 but was later taken back to the drawing board. After that, talk of implementation of a GST became increasingly risky for the ruling government given the damage it could potentially cause so close to the thirteenth general election.

With elections now out of the way and another one not due for another five years at the most, perhaps the time is right for the GST Bill to be tabled before parliament once more.

Of late, there have been clear signals from government officials that the GST could be introduced in the upcoming Budget 2014 announcement on Oct 25.

Official news sources remain coy about the introduction of the GST but the language is unmistakable. The GST has now become a necessity, not an option and now would be the most opportune time to implement it.

During a press conference late August, Ministry of Finance secretary-general Mohd Irwan Serigar Abdullah said the government would work to include GST in the budget this year.

He added fiscal reforms were urgently needed to reduce the country’s debt position to below 55% of gross domestic product (GDP), cut the fiscal deficit to 3% by 2015 and to restore a balanced budget by 2020.

Prime Minister Najib Abdul Razak, meanwhile, has been comparatively less forthcoming:

“GST is not something new. We have been talking about it. But whether or not its in the budget we have to wait until the budget,” he said in a press conference at his office on Aug 29.

If and when the GST is announced, its is understood among tax experts that implementation will not be immediate, as businesses will need a period of a year at least to learn the new tax system and update their accounting systems to accommodate the new regulations.

“Should the announcement on the introduction of GST be made later this year, it will likely be implemented in 2015,” said Tan Eng Yew, Country GST leader at Deloitte Malaysia.

Tan has been running GST seminars for finance professionals for the past several years, in anticipation of the introduction of the controversial tax.

Indeed, major professional services firms such as Deloitte, and to a lesser extent, the private sector has long been gearing up for an eventual implementation of GST. The only question is when.

“I don’t foresee any major hiccups: implementation-wise we are almost there… we are just waiting for the gun to be fired,” said Yeah Kim Leng, chief economist at RAM (formerly Rating Agency Malaysia).

Widening the tax net

GST will come at a time when new revenue streams are urgently needed to help the government with its belt-tightening efforts.

Subsidy rationalisation may have made the headlines over the past month but equally important is the need for a stable, broad-based source of tax income.

The GST fits the bill perfectly. Its reach into the economy will be pervasive as it is a tax on consumption, and all members of society are effectively consumers.

Compared to the sales tax and service tax regime now in force, GST will cover more ground. The current regime does not apply to all goods and services and exemptions are commonplace.

Proponents for GST say the current taxation base is inadequate and places the government at risk of relying too heavily on Petronas dividends as a source of revenue. At last count, close to 40% of fiscal revenue is derived from oil and gas revenue.

In July, the country’s small fiscal revenue base of 24.7% of GDP was cited as a weakness by Fitch Ratings analysts who revised Malaysia’s sovereign credit outlook to negative, in the process embarrassing the  the country’s leadership.

According to publicly available data, only 14% of the workforce currently pay any form of income tax. This small percentage puts Malaysia firmly within the league of developing nations and will need to change should we want to transform into the developed economy we aspire to be by 2020.

4% or 7% or somewhere in between?

A low initial GST rate of 4% was written in to the Goods and Services Tax Bill, 2009 to compensate for the broad reach of the tax system. Currently, the sales tax is levied at 10% and the service tax, 6%. Both have a smaller tax base than the proposed GST.

According to GST experts such as Tan, the tax is widely believed to come in at a low rate, at least in the beginning. “The government has said (in discussions with stakeholders) that this is a replacement tax to start at a very low rate.”

A 4% GST rate would place Malaysia as the lowest GST tax jurisdiction in the region.  Both Singapore and Thailand have a GST rate of 7% and the remaining Asean members a GST rate of 10% or 12%. Brunei and Myanmar are the only two countries in Asean without or not considering a GST.

But the message from government officials has not always been clear on the actual quantum of increase.

“The intention has always been to maintain GST as a revenue-neutral replacement tax, therefore the rate we would recommend to the (Ministry of Finance) would be based on careful study,” said an officer at the GST unit of the Royal Malaysian Customs.

The officer declined to provide a figure for the introductory GST rate, claiming a decision on the matter is still on the cards.

Meanwhile, Idris Jala, minister in the prime minister’s department and CEO of Pemandu went on record to suggest, in his own words, a higher GST rate of 7%. He has since clarified his statements on the tax rate is not to be conflated with government decision-making on the matter.

His calculations at this higher rate predict tax income of RM27 billion per year upon maturity. This hefty sum would certainly go a long way in plugging the budget deficit which in 2012 totaled RM42 billion or 4.5% of GDP.

 Necessary as the tax may be to generate new revenue, GST has other clear functional benefits. The GST system although complex, is far more elegant and equitable than the current sales tax and service tax regime – which it will replace when finally implemented – as this series of four articles on GST will go on later to explain.

Tomorrow:  Nine things you must know about the GST