The implementation of GST in Malaysia.

   With reference to The Star Newspaper, dated 17 September 2012 from an article titled ‘Why the GST may not be such a bad thing after all’ written by Nicolaos Giannopoulos, the author explains the benefits of GST. However in my point of view, there are two sides to this new tax system.

  

   Goods and services tax (GST) is an indirect tax on expenditure. GST also known as value added tax (VAT) in many countries such as the United Kingdom, France, Denmark, etc. is a consumption tax imposed as a percentage of the value of the good on every level of a product. The amount of tax charged is fixed in every level and is ultimately borne by the end consumer. On the other hand, the current tax systems on goods and services practised in Malaysia are sales tax and service tax which is a single-stage tax levied on goods and services which range between five to ten per cent. 

   As stated in the article, Malaysian consumers are not aware of how much sales tax they pay in the price of the goods they purchased. This statement is agreeable to because unlike GST, sales and services tax varies between products and is charged twice. For example, a person who purchases a can of beer in a restaurant will be charged a service tax of the restaurant on top of a sales tax charged by the manufacturer for a can of beer. If GST is implemented, consumers would only be charged for tax once.

   In addition to that, the proposed GST rate in Malaysia is 4 per cent. Given that the GST rate is lower than the usual 5% to 25% levied in other countries, Malaysian need not worry about major increment of current prices of goods and services because the implementation of GST is Malaysia is to be done slowly and steadily.  However, GST is to be charged on all goods and services unless specifically exempted (negative concept). Therefore, the prices of most goods and services will increase with the implementation of GST. Basic goods are subjected to GST in order to look out for lower and middle income earners. As done by Australia, the Malaysian government has decided to do the same.

   The tax burden of goods and services will wholly be passed down to consumers only. Therefore, consumption by individuals may be affected if the tax rate is high. The relatively low 4% GST rate proposed in Malaysia may be able to offset the tax burden on consumers because the tax is no longer shared between buyers and sellers. On a totally different note, GST rates will also affect production of firms. In Malaysia, the existence of small and medium enterprises (SMEs) are plentiful. GST not only affects big businesses, but also the SMEs. If the price elasticity of demand of goods produced by a firm is elastic, sales of the firm will decrease with the implementation of GST because consumers will alternate to buy goods which are cheaper. Therefore, larger businesses that have the advantage of economies of scale will have the upper hand with the implementation of GST. SMEs in Malaysia may suffer losses as their products are marked down and production will decrease.  However, GST compliance requirement and threshold will be set by the government for businesses with a smaller annual turnover.

   With the implementation of GST, the government will have to bring about income tax and corporate tax cuts. It is suggested that both these tax cuts were positive steps in the Australian economy when GST was implemented in year 2000.   “They gave individuals and incentive to work longer while paying less tax and the business sector was seen as more competitive by international investors because of the lower company tax rate”. This statement is agreeable up to a certain extent because behaviours of individual and firms may not follow as the we assumes. For instance, with lower income tax, an individual may choose to work fewer hours if they are currently content with their earnings. In other words, income tax cuts may also create incentive for individuals to work fewer hours. On a totally different perspective, lower corporate tax will increase competitiveness of Malaysian businesses because the corporate tax imposed in our neighbouring countries is relatively lower. This step will therefore boost confidence of local businesses to compete internationally.

   With reference to the article, Australian exports were subjected to GST and with the removal of wholesale tax, Australian exports were more competitive in the market. Similarly, Malaysian exports will be more price competitive internationally with the removal of wholesale tax. In a microeconomic view, firms and business will then increase production as export sales increase. Generally, higher export revenue will lead to economic growth in Malaysia and will benefit Malaysians. Besides that, the shift from wholesale tax to GST had a temporary adverse effect on the economy. As stated in the article, in Australia, purchases of a particular related good were differed or accelerated to take advantage of reduced prices. However, this effect was only temporary. So, businesses may suffer temporary sales during this time.

   GST is a fairer tax system because it covers a wider range of tax payers instead of the present tax system that collects from individual’s personal savings.   “Only when you spend, you pay GST” as said by the author.

"Malaysia has a 12 million workforce and only 1.2 million paid taxes" (Dato' Sri Haji Mohammad Najib bin Tun Haji Abdul Razak, Star Online, 2011)

   GST certainly broadens the tax base. Besides that, GST also increases funding for Government projects which will benefit Malaysians. With more government revenue collected, the government can focus on providing aid for SMEs, developing better infrastructures, etc. In the long run, nobody will be worse off with the implementation of GST.  

Jessica Chow Ann Kay (1101ah13308)