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The political intensity in Malaysia has reached its highest point now than ever especially when the ruling Government for the first time faces majority popular votes against them. Hence, certain political figures have irresponsibly used tax matter as a tool to gain political mileage against the ruling Government so as to capitalise on the current vulnerable political landscape
Is Tax Evil?
Tax is a concept often misunderstood by many. If you remember watching the TV series Robin Hood, taxes by the King of England is painted as an evil deed. Taxes by right should not be evil. The determination of whether tax is evil or not lies with the methods of its implementation. The Muslims have taken taxes as their 4th pillar of Islam which is called Zakat. In simple terms, taxes means to carve out a portion of the wealth from the people for the sake of redistributing the wealth back to the general population. It is an act of wealth redistribution. Whether or not the redistribution results in giving back cash (such as BR1M) to the poor or building the nation (such as MRT projects), the basic point is that, the taxes should benefit the population as a whole.
Having said that, I must admit that certain political figures have irresponsibly used tax matter as a tool to gain political mileage against the ruling Government so as to capitalise on the current vulnerable political landscape. To the folks in the ‘Kampungs’, they have been brainwashed to view tax negatively. Do they not realise that the very notion of taxing for the sake of building the nation is indeed noble? Why is tax a hot issue now? Could it be because of politics? After all, the political intensity in Malaysia has reached its highest point now than ever especially when the ruling Government (‘Barisan Nasional a.k.a BN’) for the first time faces majority popular votes against them (in the 2013 General Election) although parliamentary seats majority fall within their control.
The biggest decisions made today by the BN Government from an economic perspective would be Goods and Services Tax (‘GST’), rationalisation of subsidies and disposable income boost to the poor via BR1M. I do not intend to discuss all but GST.
Why Malaysia Needs More Tax Income?
Based on my introduction above, readers must always remind themselves 2 basic points: 1. Taxes exist with noble purposes; and 2. the susceptibility of political propaganda being used to misrepresent taxes is very high at the moment. Therefore, one must put aside all political preferences, hatred and even ignorance in order to have an objective understanding of what GST is all about. Firstly, what is the state of the nation that warrants GST to be considered? Malaysia has in the past undergone many recessions. We had very high unemployment in 1986. We were badly dragged into the Asian Financial Crisis in 1997. We were also dragged again unnecessarily into a recession as a result of the American Subprime Crisis in 2008. It seems that we will, undeniably, face some form of recession every decade or so.
Every time this (recession) happens, we use significant portion of our coffers (I am not referring to the Bank Negara reserve) to return the economy back to normal. For example, the 1997 crisis resulted in Malaysia denying monetary aid from International Monetary Funds (‘IMF’) as Malaysia decided to use its own coffers to manage the failing banking industry via the formation of Pengurusan Danaharta Nasional Berhad. Many nations, like our neighbours in ASEAN, fell under the trap of being plunged into modern day slavery once they are indebted to global economic hitmen such as the World Bank and IMF. Their national policies are controlled by foreign forces and their economic trade is restricted to rules and regulations otherwise not imposed onto them. Some nations even went into bankruptcy as evident in South America.
Do we want Malaysia to suffer the same fate as these unfortunate nations? Of course not. Then why is GST relevant for this? Well, GST allows broader tax base that can accumulate such necessary reserves of funds to manage the country when we face recessions. To be prepared is necessary because once we are plunged into modern day slavery with the economic hitmen, there is little chance of redemption. As the Malay proverb says, “Sediakan payung sebelum hujan” (Prepare the umbrella before it rains).
I mentioned GST allows broader tax base. What does that mean and how does it work? I will save this for later paragraphs. For now, let us further examine what other reasons that warrant us to accept GST. Malaysia is a developing nation. A developing nation requires significant amount of investments as capital. Whether or not we will get the investments from foreign entities is besides the point. We must first be comfortable that we have invested enough to the nation in order for it to grow. In fact, if we ourselves have not invested enough, foreign investors will not come in. Huge amount of funds is required to build the nation from all angles.
We still need to abolish poverty. There are many areas not yet facilitated with proper electricity, water, schools, transportation and other basic needs. There are many infrastructure developments required to ensure that the country continuously upgrade itself in order to achieve the ‘developed nation’ status in 2020. Building expressways needs money. Building Medium Rail Transport (‘MRT’) needs money. Building High Speed Broad Band (‘HSBB’) needs money. Building economic regions such as East Coast Economic Corridor and Iskandar Region needs money. If we don’t have money (for Government spending), we will not be able to build all these (nation development). If we do not build all these (nation development), we will be backwards like some of the African nations that got independence well ahead of us (Malaysia). GST allows higher revenues to be collected to fund all these projects.
Why GST Then?
A simple mind would ask, “We already have existing taxes. Why do we need a new tax?” GST is not an additional tax system. It is a tax system that will replace the existing one (Sales and Services Tax). It allows a more efficient way of collecting tax that will allow higher revenues for the Government to develop the nation. I would like to extract some paragraphs from my previous article so that a better comprehension of GST from the perspective of Y.A.B. Dato’ Seri Najib’s 2015 Budget can be digested (below):
In 2015, Malaysia is expected to collect RM235.2 billion revenues, that is RM10 billion higher than RM225 billion expected to be collected in 2014. Out of this, only RM23 billion is expected to be collected from Goods and Services Tax ('GST') that is only going to produce a net increase of approximately RM5.6 billion from the previous consumption based taxes collection of RM17 billion under the Sales and Services Tax (and other consumption taxes, if any). RM4.9 billion out of the net increase of RM5.6 billion shall be channelled back to the people via BR1M programme to help boost the disposable income of the low income earners.
As a response to the opinions collated from the general public, the Government is declaring more goods and services to be at zero rated GST. Amongst them are fruits, bread, coffee, tea, noodles, reading materials, some 2,900 different brands of medication for 30 critical illnesses and, the much awaited decision, RON95 petrol, diesel and Liquid Petroleum Gas ('LPG'). 944 of the goods and services that are in the Consumer Price Index ('CPI') basket are affected by the GST but the question is, 'Are they negatively or positively affected?' 56% of the goods and services will experience an average price reduction of 4.1%. This includes food, medication, electrical items, textile, polymer goods, diapers and many more. On the flip side, 43% of goods and services will experience a price increase at an average of 5.8%. The Government will soon release a list of items that will have their prices increased.
In many precedent cases of GST implementation in other countries, the logical balancer for an increased or broadening of consumer taxes is a reduction in personal income taxes. For the Year of Assessment 2015 onwards, the personal income tax of 26% will be reduced to 24%. In addition, to attract more investments, corporation tax will be reduced from 25% to 24% and SME's will enjoy a tax reduction from 20% to 19%. This will simultaneously allow expansion of consumer spending from the improved disposable income and the increase in economic activity via influx of entrepreneurship movement. Both shall contribute to an expansionary economic projection. To facilitate the implementation of GST, RM100 million will be allocated for GST training sessions, RM150 million worth of accounting software grants will be given to the SMEs and a tax relief for all expenses relating to the accounting system and ICT developed for GST purposes.
What can we gathered from the extraction above? First, GST replaces old tax regime. Second, GST will allow higher revenue being collected by the Government. In the case of 2015, an additional RM5.6 billion collection. Third, GST should only result in majority of goods and services experiencing fall in prices (instead of otherwise). Fourth, the surplus collection can be used to develop the nation although for 2015, the Prime Minister chose to help low income earners to enhance their disposable income via BR1M. In a nutshell, it is for the people. Because the subject matter of tax itself is very negative, I believe certain political figures have used it to their advantage to paint a very bleak outlook for the ‘rakyat’ (people). A lay man would also ask, “Isn’t taking more tax resulting in more burden to the ‘rakyat’"? A very good question indeed. Answering this question will simultaneously answer the question, “Why GST then?”
GST is a consumption tax, which means, you only pay taxes when you use products and services. Generally, poor people consume less products and services than rich people. If GST is implemented, rich people will be paying more taxes than poor people.
GST is a consumption tax, which means, you only pay taxes when you use products and services. Generally, poor people consume less products and services than rich people. If GST is implemented, rich people will be paying more taxes than poor people. Furthermore, many of those products and services consumed by poor people will carry zero GST as mentioned in the extract above. It sounds unfair that the rich gets taxed more but it is equitable as it allows redistribution of wealth from the rich to the poor. This concept is undeniably in contradiction to the capitalist world of democratic nations. However, one must carefully think whether or not a pure capitalist concept is appropriate for one’s nation?
A nation like Malaysia where we still face huge economic disparity between its people, a pure capitalist approach will make things worse. At the same time, applying a full socialist approach is also not good as it does not allow for continuous improvement in our quest to achieve economic prosperity. A moderate hybrid approach is necessary. Hence GST. Some Scandinavian nations apply a more socialist approach whereby huge income taxes are applied in order to collect revenues to develop the nation. In that case, the burden will be too much for the rich even when they do not consume much. Australia for example is a democratic country that applies the hybrid approach. Malaysia will be reducing its income tax rates as well as corporation tax rates to balance the introduction of GST.
As mentioned earlier, GST will result in a bigger collection of revenues as compared to the outgoing Sales and Services Tax. This is because GST is a broad base tax given that it is applied to a broader pool of goods and services. GST is also an efficient tax regime. There have been many cases of people avoiding taxes. There is only a handful of people paying income taxes and corporates have so many ways of devising tax avoidance schemes. Sales and Services Tax only targets selected items and are not broad enough to ensure sufficient collection. Custom Duties and Import Taxes are negatively impacted by corruption and black market activities such as smuggling activities as well as official briberies (as evident in the case of Port Klang Free Zone Customs scandal).
Of course these are reasons that any nation or any tax regime can conveniently use to justify any inefficiencies. However, GST has the mechanism and structure to avoid most of these inefficiencies. All transactions in any trading of goods and services will be required to apply GST. When taxes are imposed at each transaction level, which is the case with GST, it provides a more refined net/filter to capture taxes as opposed to other tax regimes that use summation or pooling/batching of transactions. A more transparent and rigid approach is necessary to ensure that the system is efficient. When the approach and system is efficient, all we need to do is ensure the implementation is also done efficiently – this we shall only comment maybe a year from now?
Why Not Capital Gains Tax (‘CGT’)?
Some parties suggested that CGT would be a better option to increase the Government’s revenue instead of GST. Well, I fail to comprehend why. Perhaps if a proper calculation is done hypothetically using the currently available data, you can determine whether it can indeed result in more revenues. Here are my thoughts on why CGT should not be the replacement source of revenue for GST:
1. Broad Base Tax Argument: CGT only applies to a few selected items such as properties and shares whereas GST is a broad base consumption tax with some exempted items like financial products, insurance, transportation and education. The magnitude of tax collection will be lower under CGT given the less product and services coverage. The Government has already quantified that implementing GST will only result in a net increase in collection of RM5.6 billion when compared to the old Sales and Services Tax. I doubt that CGT is able to produce a higher net increase.2. Revenue Stability Argument: The stability of the collection under CGT is less than GST as CGT is based on non-frequent transactions relative to the transactions under GST. How often do people buy clothes compared to buying a house? Catch my drift? You will have to wait until the purchaser of a house to sell their property in, say, year 3, before you are able to tax him/her. This will mean that the Malaysian Budget will be crippled for 3 years, hypothetically.3. Economic Growth Argument: The items that CGT is applied on are capital in nature whereas GST is applied on consumed items. Capital items are items that can generate further income and thus, boost the economy further. Why would you want to penalise such item unnecessarily well above whatever CGT that we already have now? Properties can earn rental income and shares can earn dividend income. Share trading is also a crucial activity that helps boost the economy as it allows monetary capital inflow into the country or within the country to areas that can further grow the economy. Having CGT on capital markets will only increase the cost of capital or the cost of financing – in other words, increase the cost of doing business in Malaysia - an economic contraction - very bad. GST on the other hand allows income taxes and corporation taxes to be reduced. This will attract more investments and will encourage consumer spending – both are good ingredients of a growing economy. Any university student who are studying Macroeconomics 101 will say that that is supportable by the Neo-Classical economic concepts by intellectuals such as Keynes.4. Fair Distribution of Burden Argument: GST is also about redistributing the burden of tax to a fairer audience. We already know that only 6% of the Malaysian population pays tax that is benefited by the remaining 97%. GST will allow modernisation of the tax system to ensure that those who used to evade tax can no longer do so as they are taxed at the point of consumption rather than via subsequent declaration. CGT is the opposite of all these. As mentioned earlier, GST will allow lower income taxes as a means to redistribute that burden.5. Value Chain Argument: Taxes under GST work on net basis. For example, a factory purchases raw materials for a price that includes 6% GST. The factory then sells the manufactured products to wholesalers at prices that cover the raw material costs as well as a profit margin. The prices to wholesalers will also include a 6% GST. When reporting to the Government (via the Royal Customs), the factory shall pay to the Government the net amount of 6% charged to wholesalers less the 6% already paid for the raw materials. This way, the factory can claim back taxes that have been paid for the raw materials. Likewise, the same will apply when the same product is sold by the wholesalers to the retailers. The retailers will pay to the Government a net of 6% charged to end consumers less the 6% already paid to the wholesalers. Mechanistically, since each 6% GST at each stop in the value chain is claimable, the final impact to the final consumer should only be a one time tax of 6%. For CGT, taxes are charged to the property owners when the properties are sold. The buyer of the property cannot claim the tax as a deduction; hence he/she will ensure that the cost of the property will be fully passed down in the next selling price to the next buyer in the value chain when the property is resold. So mathematically in a simplistic manner, assuming that there are 3 levels in the value chain, CGT works on Cost x 106% X 106% X 106% whereas GST works on Cost x 100% x 100% x 106%.
So What is Next?
Well, just embrace GST I guess? There is no point for everybody trying to be professors in Applied Science majoring in Taxation and minoring in Political Science. The Government has plenty of experts working at the Economic Planning Unit ('EPU') and the Ministry of Finance. Let them do their work. God willing, our country will be able to achieve high income nation and a ‘Developed Country’ status by 2020. Amin.
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1 comments:
well said!
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