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Unless
our economic performance becomes particularly vibrant,
which is unlikely given the depressed global economy
forecast, it will be increasingly difficult to maintain
our current level of budget deficit and move towards a
balanced one without a new tax.
GST
has become the favoured name for what is also known as a
VAT or value-added tax. VAT has been defined as a
“broad-based tax levied at multiple stages of production
with – crucially – taxes on inputs credited against
taxes on output. That is, while sellers are required to
charge tax on their sales, they can also claim a credit
for taxes they have been charged on their inputs.
The
advantage is that revenue is secured by being collected
throughout the process of production (unlike a retail
sales tax) but without distorting production decisions.”
Whilst
GST shares certain characteristics, no two systems are the
same. Malaysia, among the few economies yet to have a VAT/GST
system, has the advantage and benefit, therefore, of
looking at the variety of systems of many countries and
picking those features and procedures that are appropriate
to its socio-economic environment.
The
key challenges to the Government are:
Balancing
the conflict between the need to make it simple and to
cater for social needs;
The
more social needs are catered for, the more complex the
tax becomes; and
The
more complex the tax becomes, the more costly it is for
the Government to administer and for businesses to comply
with it.
Among
other important considerations are knowing precisely what
is to be taxed, including setting the right threshold, the
applicable tax rate, the need to create public awareness
and education and in particular, to secure “buy-ins”
from the business community, and addressing the
transitional issues in migrating from the existing regime.
An
interesting question is “who really pays the GST?”
i.e. who really bears the burden of the tax in the sense
of having their disposable income reduced. This would
exclude traders and companies legally charged with paying
over the tax they collected.
If
an item costs RM1 before GST and the seller charges a 15%
GST and sells it for RM1.15, then the buyer actually pays
the tax. If the seller sells it for RM1 after adding GST
at 15%, then he has lowered his price and the consumer is
spared the burden of GST.
The
seller could lower his price partially requiring the
consumer to bear the remainder of the tax. In reality,
what happens will depend on the relative responsiveness of
sellers and consumers to price changes. This complex
situation tends to lead to the conventional expedient view
that the tax is fully shifted from seller to the final
consumer.
In
most advanced economies, the introduction of GST would be
accompanied by significant cuts in personal income tax as
a means to reduce the income tax burden. This is because
the share of tax revenue from personal income tax is
higher than corporate tax. In Denmark, the ratio is 52%
against 6%.
In
Malaysia the ratio is reversed. As only three million of
the working population pay income tax, the remaining would
not benefit from any reduction in direct income tax but
would face GST in most of their everyday purchases.
GST
could result in inflationary pressures, since some
businesses may not understand the tax and treat the
upfront tax as their costs and thus a reason to increase
prices. Some may indulge in profiteering, taking advantage
of the imposition of GST to increase prices.
The
challenge is to police the implementation process to
control inflationary pressures and this is not an easy
task since there are many parties involved.
The
implementation of GST in the final analysis must involve
the political process. No responsible government can
ignore the inherent regressive nature of the tax and that
it will hit the lower income group most, an impact that
will be exacerbated where there is an inflationary spiral
of prices.
Source
: Malaysia Star - Malaysia, dated 19/01/2008
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