Najib's maiden budget take 2: GST

According to his maiden budget speech, Najib mentioned that the study for Goods and Services Tax is in its final stage. GST has wide implications and I hope he can have consult the relevant stakeholders.

During Badawi’s administration, I attended a GST seminar organized by an Australian consultant and he mentioned that the people in the banking industry was not adequately consulted hence proposed GST implementation was in question. Banking industry itself has very different products from consumer market. The question was answered a few weeks after the seminar.

In a nut shell, GST works like this:

Supplier A sold his products to supplier B for RM100 and assuming 3% GST applies, he will bill supplier B RM103.

Supplier B has a policy to earn 9% on his selling price hence the cost to consumers will be RM110 (RM10 margin on RM110 selling price gives you 9% margin) plus 3% GST i.e. RM3.30 will be added onto the bill, making it RM113.30.

Supplier A collects RM3 from B and pays to the IRB within a specific period, like 2 months from date of invoice while B would pay IRB RM3.30 and claim back RM3.00. The end result is IRB getting RM3.30, 3% on the ultimate selling price of RM110. Consumers pay the whole RM3.30.

The above is a very simple illustration. In real life, goods and services pass through many parties before arriving at hands of ultimate consumers.

The implications could be summarized as follows:

1) A wider tax collection basis.

Presently the Malaysian tax structure provide that people earning below RM3,000 a month can be exempted from tax owing to the series of relief and scale tax rates.

With GST, everybody would be taxed regardless of income level, as long as he or she spends money.

Proponents of NEP claim that majority of the poor are Malays hence the consequence is that those who previously not been paying tax, might be caught.

1 of the key function of taxation is to re-distribute income from the rich to the poor to create equity hence application of GST might implicate the poor inadvertently.

2) Greater compliance cost for Malaysian business.

Collecting taxes and remitting them to IRB would result in a lot of work for businesses previously not accustomed to such routine. Given the state of less than prefect accounting work and processes of many Malaysian SMIs, retailers and other small businesses, it would be extremely taxing.

GST also give a lot of problem if businesses have billed customers who later defaulted on their payments. Businesses would have to pay IRB within 2 months but if the customers defaulted and the debt is sitting in the accounts for a year or more.....

How easy or difficult is it for the business to claim back the GST from government? Some of us might be familiar with the speed of IRB refunds and cashflow is the bloodline of all businesses.

Businesses might consider increasing their selling price to generate cash buffers as amount of losses arising from bad debts may increase and I need not tell you who might end up bearing it.

A solution to this is that smaller businesses with turnover below certain threshold are exempted from GST. Then again, this would result in government created unfair competition between businesses of different sizes.


3) What kind of goods and services should we impose GST?

Medical services are already expensive. Should we penalize the poor even more by having GST on these items?

Another key issue is whether medical services should be “exempted” or “zero rated”.

Exempted means the entire item is exempted from GST from supplier A to B to consumer.

Zero rated means GST would be collected from supplier B by supplier A by when supplier B bills consumer, it cannot collect GST from consumer.

As a result, supplier B might be tempted to include 3% GST as his cost and selling price to consumer might end up even higher. The Australian consultant told me the initial GST draft included medical services as zero rated, rather than exempted item luckily it was spotted as one of the key controversies. I have no way to verify the consultant’s claim. (Hell, I even forgotten his name!)

4) Would there be adequate compensation for tax payers?

Would we see further lowering of corporate and income taxes and increase in personal relief? The recent trend suggests the government is planning to do so but is the quantum of compensation adequate?

However, Malaysians are taxed elsewhere whether it is by the IPP, toll concessionaires, privatized and not transparent companies such as Indah Water, Alam Flora etc.

Their rates are quite high, not open to scrutiny, by extension a government-linked monopoly and people would wonder whether the benefits and cost of these parties can justify shifting from public sector management and ownership.

I believe moving these services back to local authorities and having local authority election itself would bring down the cost of living and bring up the quality of service.

GST could result in higher tax revenue but by looking at the annual horror stories by Auditor General, I wonder do we need to collect more tax or manage our expenditure first?