Breaking the tax taboo
When the Finance Minister tabled Budget 2013 and reduced personal income tax rate by 1%, some quarters have asked if this brings us one step closer to the GST.
EVER grumbled about having to pay the RM50 government tax for your credit card each year? Well, the good news is there will be no more such tax if the proposed GST (goods and services tax) is implemented. And you will pay GST on the credit card only if your bank charges you for the card.
“These days, banks are offering credits cards for free and giving waivers on annual subscription. If the card is free, there will be no GST on it,” says Customs Department director-general Datuk Khazali Ahmad in an interview.
He stresses that key sectors like the financial services, public transport, healthcare, education and residential housing will be exempt from GST.
This essentially means that education, medical care, bus and train tickets as well as highway tolls will still be just as affordable as today. Thus, the lower income groups will not be burdened by the GST.
When it comes to insurance, Khazali says, if it is a life policy (including education, investmentlinked and endowment), no GST will be imposed. But if it is a general insurance policy for medical, fire, motor, burglary, then the normal GST rate (proposed at 4%) will apply.
Despite the GST being a fairer, more effective and transparent taxation system and one that has been successfully implemented in 146 countries, it has not been easy to push the idea through in Malaysia.
In fact, the government has been talking about the GST for more than two decades now (even when Datuk Seri Anwar Ibrahim was the Finance Minister in the 1990s).
In December 2009, the GST bill was tabled in parliament for first reading but it was withdrawn on April 19 this year for amendments.
The Finance Ministry on its website has asked the public for views and feedback on the proposed GST.
With public awareness still very low on how GST works, it might be years before it actually comes to fruition.
People are still not aware that their basic needs will be protected under the proposed GST regime because essential food items like rice, meat, fish, seafood, chicken, vegetables, cooking oil and salt will be “zero-rated”, which means there will no GST imposed.
Critical services like schools, financial services, hospitals, roads and public transport will be “GSTexempt”, which means the consumer will be exempted from paying GST on them.
And if you buy a flight ticket to a destination abroad, you will not have to pay GST.
“You will be charged GST only on goods and services (which are not zero or exempt-rated) that you consume in the country – what you consume outside the country will not be subject to a local GST. A flight ticket abroad and overseas travel is consumption outside Malaysia, so you don’t pay GST here on it,” says Khazali.
The GST is a consumption-based tax where the tax is borne by the person who consumes the goods or services.
Ultimately, it should reduce business costs because manufacturers, distributors and suppliers are able to claim back the GST they paid on goods and services acquired for the purpose of their business.
And these businesses are supposed
People find it hard to accept the GST even though it benefits them because ‘tax’ is never a popular subject. — DATUK KHAZALI AHMAD
to pass those savings down to the consumer, which should result in lower prices.
Khazali says people find it hard to accept the GST even though it benefits them because “tax” is never a popular subject.
“Generally, nobody likes to be taxed or, rather, the word “tax” is taboo to many.
“However, governments all over the world need to impose tax to get the revenue to provide their citizens with their social needs, employment, security and so forth.”
Educating consumers on the GST, he admits, is not easy because the moment you say that GST is a form of tax, “you will be faced with a wall of resistance”.
“So we have to explain the GST and its benefits to the people continuously to avoid or eliminate whatever misconception they have about it,” he adds.
Khazali also notes that most people do not know that the GST actually replaces the current sales and services tax which they have already been paying on a lot of goods and services because it is embedded in the price of what they buy.
Under the current system, by the time the goods reach the consumers, the sales tax that is paid at the manufacturers level would have cascaded at each level of the distribution and the supply chain, and this results in a higher price.
But with the GST, since businesses at every stage are able to get a refund on the GST paid on the goods and services acquired or used for the purpose of their business, this will eliminate the cascading effect suffered under the current sales and services taxes.
And because of this, an immediate reduction in prices should be seen for goods and services where people have all along been paying an embedded sales tax.
He also stresses that the government has repeatedly emphasised that the people will have to understand the GST first before the government actually implements it.
“The public should not have any fear over GST. It is a form of consumption tax which has been implemented in nearly 150 countries in the world, whether developed or developing, so there must be something good about it. “
He says the GST is also supposed to result in cheaper prices for imported goods. At present, unless exempted, imported goods are subject to an import duty and sales tax.
With the GST replacing the sales tax (5% to 10%), imported goods will still be subject to an import duty and a GST; but because the proposed GST rate is lower than the existing sales tax, consumers should be paying less.
Before implementing the GST too, he says, the government will also educate businesses on the need to pass down the savings they get from the GST refund, and set up a mechanism to stop businesses from trying to profiteer from it.
For him, the GST is a good thing because it will reduce business costs, lead to more competitive pricing, make exports more competitive because exports will be zero-rated (meaning no GST), increase gross domestic production and reduce grey economy activities.
Khazali also believes there might be a change in consumption pattern with the GST because the GST works on the affordability concept.
“Consumers have to decide which goods or services to buy. They pay GST only when the goods or services are consumed. So they may divert more of their expenses towards essential goods and services rather than on luxury goods.”
Khazali also points out that if the GST is implemented here at the proposed rate of 4%, it will be the lowest rate in the region.
Indonesia, Thailand, Cambodia, Vietnam and Laos charge a 10% GST rate, Philippines 12% and Singapore 7%.
But what is to stop the government from hiking the rate after it has been implemented?
Khazali cites past experiences, saying Malaysia increased its sales tax rate only once from 5% in 1972 (year of implementation) to 10% in 1983 and service tax rate too increased only once, from 5% in 1975 (year of implementation) to 6% in 2011.
There are still nuts and bolts to sort out with implementing the GST here, including tabling a new bill for it, putting an anti-profiteering mechanism in place, getting public understanding and acceptance on it. For now, it looks like it is still quite a long journey away.