GST for Dummies

By merely increasing the service tax from 5% to 6% in 2011, the Government need not implement Goods and Services Tax (GST) next year. By the stroke of a pen, the additional revenue from the 1% service tax increase has almost achieve the estimated additional revenue of RM1 billion expected from the first year of implementing the GST.

What is GST?
The GST is a broad-based tax consumption tax. Broad-based means almost every person on the street is taxed when one consumes (buys) goods and services (type of goods and services taxed depending on items the Government decides to be taxed). The argument for GST is that is 'fairer' than income tax- GST is incurred only when one buys goods or services. If you don't buy, you don't get taxed. As opposed to income tax whereby if one has income derived in Malaysia on the tax band the person gets tax as he/ she earns regardless of that person's spending habits. Hence which is fairer- get taxed when you earn or get taxed when you consume goods? The answer is neither. It depends how the GST is implemented- if essential goods are part of the GST list then everyone gets taxed- high-income people, low-income people and no-income people. The next question is then who can weather the GST storm better- the high-income people or the low-income people?

By the way what is 'high income' and what is 'low-income'? These are the questions you'll want to point-blank Najib if he pulls a Badawi-petrol-price-increase-adjust-your-lifestyle act for GST.

On paper, not taking into account social structures, not taking into account the taxable workforce, not taking into account unemployment benefits or anything else, Malaysia looks alright when compared against countries across the globe in terms of tax rates. In fact Malaysia's proposed GST rate of 4% is low.

A common trend amongst countries which has GST implemented is that the GST percentage usually never stayed put- the governments increase the tax rate from time to time (haha- from year to year for certain countries to be exact). Singapore's GST was 3% when it was first implemented; it is now 7%. This October, the New Zealand Government increased its GST to 15% from 12.5%. UK's GST will be increasing from 15% to 17.5% in 2011. GST increase is a global trend. So, don't bet on a decrease in rates once the GST is implemented.

Why GST?
The answer is simple. The Malaysian Government needs more cash to finance its expenditure and petroleum revenue (tax and royalties) are dwindling.

The line graph above (Source: Bank Negara Malaysia)- blue line denotes government revenue; red line is government expenditure and the yellow dotted line is government revenue without petroleum tax and petroleum royalties.  The yellow-dotted line drops consistently below the red line after year 2003 which shows that if the tap turns off right now (no petroleum revenue)- well, we just have to find other ways of financing the cost to run this country. Reading between the lines from what the government says the easiest way to do this is to implement a broad-based consumption tax.

The pie charts below displays how revenue from petroleum tax, corporate tax, individual income tax and service tax are sliced out of the revenue pie over 4 decades (Source: Bank Negara Malaysia). It is interesting to note that corporate tax and personal income tax has grown over 16 fold and 15 fold respectively over the last forty years, contributing to 19% and 10% in 2009 to government revenue respectively. Though dwindling (what I mean is increasing at a less than proportionate rate compared against Government expenditure) petroleum tax is a prominent contributor of income at 17% (2009). The rest is service tax at 2% and stamp duties, excise duties, import/ export duties depicted in the big slice highlighted in yellow (52%- 2009). If you run across the pie charts you would have noticed how corporate tax and personal income tax  have decreased in terms of percentage contribution of the last 40 years- the two components have dropped to more than half.

How much tax can be derived from companies (where corporate taxes decrease by 1% every year) depends on how well the companies are doing. Similarly, the amount of tax collectible from personal income (without an increase in personal income tax rates) generally depends on the number of taxable persons. This number is not big however- only about 2 million people of the total local registered workforce of 12 million pay tax. The Government reckons that somehow the other 10 million people has to start contributing to the national coffers one way or another and GST is a 'good' way to start it off.

However so long the BN Government does not improve its weak enforcement in curbing or reducing corruption in Malaysia, the cost of running the country will always be high, no matter how much money is churned out from the rakyat in terms of taxes and no matter how much Petronas is contributing tax to the Government. Unless there's a big massive protest on the streets, GST will be implemented by the year after next.

It does not take rocket science to guess, that the GST will have a big impact on families earning below RM10,000 per month. The impact will be more significant for families earning below RM5,000 per month. They will find it increasingly difficult to meet ends meet, Bumiputera and non-Bumiputera alike. So much from a racist political party.