The Introduction of Goods and Services Tax in Malaysia: A Policy Analysis
The idea of introducing a flat consumption based Goods and Services Tax (GST) in Malaysia has been floated since 1989. It now seems as though this may become a reality in the 2014 Budget, with implementation beginning within 18 to 24 months at an initial rate of 4 % on the supply chain. The plan to overhaul the tax system has begun to gain momentum as the government
deals with an increasingly weak economic outlook, combined with global uncertainty.
While not at the emergency levels of many advanced Western European economies, Malaysia has not run a structural budget surplus since the Asian Financial Crisis hit in 1997. Federal government debt as a percentage of Gross Domestic Product (GDP) currently sits at 55.4 %. For the time being, this is manageable, but it is the government’s ability to reign this spending in, as well as lack of budgetary reform that has led ratings agency Fitch to
downgrade Malaysia’s credit outlook to negative this year.
The government’s recent 20 sen cut to the fuel subsidy and increasing speculation of a GST framework to be included in the upcoming budget can be seen as evidence that they are trying to remedy both structural and cyclical economic challenges. Furthermore, for far too long there has been an overdependence on the revenue generated from oil and gas dividends, which
currently account for over a third of total government revenues.
A GST offers a single unified system where the tax burden is equally shared between the services and manufacturing industries, whilst simultaneously broadening the tax base. This will help to minimise tax exemptions as well as the compounding effects of pyramiding tax, tax erosion, transfer pricing and value shifting. In the current economic climate, it will also ensure a level of stability, as a GST is less susceptible to the fluctuations inherent in
As evidenced in other countries that have introduced a GST or value-added tax (VAT) at varying rates, this system offers one of the most simplistic mechanisms available for calculating receipts that in turn will lead to greater compliance of the code. Issues surrounding the regressive nature of the GST and how it could disproportionately affect low-income households need to be addressed in its design so as not to put further financial stress on the 56 % of Malaysian households whose monthly income is RM3000 or less. The current inefficient system also needs to be restructured so as to give a greater level of transparency to the public, as well as reduce tax avoidance.
The following policy paper gives a snapshot of the current tax system in Malaysia and analyses what effect a GST may have on the economy. It also shows how similar tax reforms have been realized in other countries and offers policy recommendations for the implementation process of such a reform.
CPPS Policy Recommendations
The implementation of a GST should be incorporated into the larger objective of achieving fiscal sustainability. There remains room for improvement for the effective implementation of GST. Both short and long term policy recommendations with regards to economic growth, inflation and equity development are provided.
Recommendation 1. Introduce initial GST rate at 5 %.
The differences in the cost of consumption behaviour adjustment for a 4 % and 5 % GST are expected to be small given that the introductory rate is still lower than the existing SST. Assuming that the actual date of GST falls within 2015, a 5 % GST is more optimal if the budget deficit is to be realistically reduced to 3 % of GDP.
Recommendation 2. Enforce display of GST charges on price tag.
All items that are chargeable by GST should display the actual amount of tax payable on the price tag. Items that are zero-rated or exempted from GST should also carry price tags that describe the corresponding tax category.
Recommendation 3. Raise awareness on exemption list and stop expanding the list.
Awareness on exempted items should be raised through effective communication. Consumers should also be educated on what to do should they fall victim to price manipulation. On the other hand, the government should remain steadfast with the list of goods and services that are exempted from GST. Arbitrary expansion of the list will only limit the revenue generated from the GST, thus increasing the frequency of having to revise the GST rate upwards.
Recommendation 4. A one-off cash assistance worth RM500 should be given to households earning less than RM3, 000 (40% of total households) and it should be in the form of voucher rather than direct cash handouts.
Given that average monthly spending by the poorest income group is RM570, a one-off cash assistance payment worth RM500 is sufficient to help the most vulnerable households smooth out sudden changes due to the introduction of the GST. This assistance should only be given out to households earning less than RM3, 000, because they are not eligible to pay personal income tax. It is fair to limit financial aid to households falling below the threshold. Cash assistance is recommended to be carried out via vouchers that are redeemable through participating hypermarkets that have been identified to act as price setters by the government. Price-fixing is also less of an issue since these hypermarkets will be monitored by relevant agencies.
Recommendation 5. Strengthen cooperation with local consumer society to fight profiteering activities.
Individual consumers who are the victim of profiteering activities are less likely to take action against irresponsible traders. The government should promote the establishment of a local consumer association to increase the effectiveness in gathering reports of price abuse and strengthening the capacity of enforcement agencies to carry out their duties. Local households are also better informed of price changes than agencies at the national level.
Recommendation 6. Commit to a 5-year timeline and review GST with the possibility of raising the rate by 2020.
The government should commit to a 5-year timeline when introducing the GST at 5 %. The government should restrict itself from arbitrarily increasing the GST rate within the 5-year period. This allows for price stability and better consumption planning. Committing to a time schedule with a review of the GST at the end of the 5-year period increases the credibility of the government to enforce its deficit-reduction plan. This timeline also serve to avoid inconsistencies due to myopic political gains or possible changes in the political structure that may jeopardize public financial health over the long run.
Recommendation 7. Enhance communication on the importance of reducing the budget deficit to raise public acceptance of the issue. Invest revenue gains in public health services and education to improve productivity.
Consistencies in communication are important to gain public acceptance on the implementation of the GST. Issues like leakages and a lack of transparency in public expenditure should be resolved more enthusiastically in order to build credibility in the government’s fiscal adjustment plans. In the long run, income growth is key to generate tax revenue and the government should reinvest revenue gains from the GST in improving the quality of public health services, promoting equal access to education and bridging the divide of access to information technology.