The goods and services tax (GST) will ultimately need to be reintroduced to boost Malaysia’s revenue, according to Sunway University professor of economics Prof. Yeah Kim Leng. The tax base is broadened, with a stronger focus on consumption over income tax and combined with increased government spending efficiency, it will put in place a growth-based taxation system, said Dr Yeah, a member of an advisory body to Finance Minister.
The revenue generated through Malaysia’s current taxation system was insufficient to keep up with government spending. With increased government expenditure for health, education and social protection (to care for the ageing population), GST is seen as a solution.
Source: https://ms.wikipedia.org
In February, Economy Minister acknowledged that the government may implement the GST “when the time is right”. The tax was abolished in 2018 by the Pakatan Harapan government three years after it was introduced at a 6% rate.
GST is a tax on the value added at each stage of the production distribution chain and is generically known worldwide as Value Added Tax (VAT). GST has been prescribed as a panacea for all economies facing revenue shortfalls by the World Bank and the International Monetary Fund (IMF). About 160 countries have adopted the GST or some variation of it.
This experiment could not be replicated in Malaysia. With the bulk of the population spending a higher proportion of their income on consumption and only 15 per cent of the 14.6 million workers paying income tax, a GST accompanied by a reduction in personal income tax hit poorer consumers with a “double whammy”. They paid more taxes via consumption (thanks to the broader base of the GST relative to the limited base of the then prevailing SST), but enjoyed no benefits from the lowered income taxation since they were outside the income tax net to begin with.
On the other hand, richer consumers probably enjoyed a “double dividend” — lower consumption taxes as a proportion of total income (since consumption expenditure as a proportion of income typically falls as income increases) and greater relief from income taxes.
For Malaysia GST was not revenue neutral and it was never intended to be. The purpose of the exercise was to generate much-needed revenue. It covered 60 per cent of all the goods and services in the basket of goods used to compute the CPI. Thus, while the abolition of the SST resulted in an estimated loss of revenue of RM17.1 billion (in 2014), the GST brought in revenue of RM27 billion in the first nine months of its implementation in April 2015. In 2016, the GST generated RM38.5 billion, and RM44 billion in 2017. This implies consumers forked out RM27 billion more for goods and services in 2017 than they did in 2014. Thus, it is not hard to see that the GST did impact the general price level.
It must be added that there are enough examples of countries that have rescinded the GST soon after introducing it. At least four countries abolished the GST — Malta, Grenada, Ghana and Belize (British Honduras).
Hong Kong is an example of an economy that decided against implementing the GST, after six months of debate from July 2006 to December 2006. There is some evidence to suggest that even China may be contemplating replacing the GST with a Retail Sales Tax.
If Malaysia plans to re-introduce GST in the future, the following points might be noted.
(i) It must introduce a revenue-neutral GST initially;
(ii) It is important to set the sales threshold for registration for GST high enough so that small businesses will not be affected. An annual sales turnover of RM2.5 million (or more) would be more appropriate than the RM500,000 level set in 2015.
(iii) GST is appropriate when the bulk of the population earns incomes high enough to be taxed via income tax. Only then will concessions on the income tax side reduce the bite of the tax on the consumption side.
(iv) It follows from (iii) that Malaysia is then considered a developed nation, which hopefully is by 2026; and
(v) The inequality within our system needs to be addressed – not a Gini coefficient of 0.4 but something below 0.35, at least.
So, ultimately GST may need to be re-introduced but the conditions are not yet conducive for the next 3-5 years.
References:
Ultimately, we must bring back GST, says economist, Tsubasa Nair, FreeMalaysiaToday, 1April 2023
Why the GST failed, Dr Suresh P.P. Narayanan, New Straits Times, 12 August 2018
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