Is GST Better Than SST?

The World Bank Group lead economist for Malaysia Dr Apurva Sanghi said on Monday (June 13) the goods and services tax (GST) is better than the sales and service tax (SST) because the GST broadens a country's tax base and brings in more revenue.

More than 170 countries around the world have adopted some kind of VAT (value added tax)/GST system, and that's one reason why the GST is more efficient than the SST. On the flip side, GST is regressive because it is a tax on consumption and 60% of the economy depends on consumption.  GST may also increase compliance costs for businesses such as small and medium enterprises (SMEs).

Looking back, Malaysia announced a GST of 6% beginning April 1, 2015 before the SST scheme was re-implemented in the country on Sept 1, 2018 to replace the GST.

On June 8, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said the Ministry of Finance is looking at introducing the Fiscal Responsibility Act by tabling the bill at the Malaysian Parliament’s next session — scheduled to start on July 18 — to boost tax collection, which will be crucial to replenish the nation's coffers to finance the nation’s developmental and longer-term reform plans.

Parti Sosialis Malaysia (PSM) views it (GST) as a move to shift the tax burden from the rich to the poor. Under the neo-liberal ideology, the wealthy will always find ways to pass the burden of financing the nation to the poorer segment of the society. Why not wealth tax, inheritance tax, transaction tax, capitals gains tax and forex tax for the top 1%?

Even if we disregard PSM, there is almost a consensus view that GST is regressive. So, why do we consider it? Because our tax revenue from this indirect tax is doubled from RM20-25 billion to RM40-45 billion (with GST). But what are the pre-conditions for GST? Two conditions come to mind:

1. the nation is considered a developed state not a developing one;
2. the Gini coefficient is 0.30 or below – that’s a measure of relative inequality in a society. We are at 0.4 which is far from the desired outcome. Why is this so? Because the rich 1% (or up to 10%) will not allow for any new taxes that they will have to bear. It is always the ordinary rakyat who must shoulder the burden.

If the above conditions are not met, GST is a tax on the poor and the middle income while the rich may happily agree to it. Can’t we learn from history not to repeat mistakes?

References:

GST better than SST – World Bank, Syafiqah Salim, TheEdge CEO Morning Brief, 14 June 2022

When in crisis, tax the poor instead of the rich; PSM scoffs at Tengku Zafrul, G. Vinod, Focus Malaysia, 9 June 2022

GST better than SST, says expert, Farah Adilla, 3 May 2018, New Straits Times