The Government has been considering introducing the Goods and Services Tax (GST).
No doubt there are strong reasons to do so, as the Government’s hands are tied because of our narrow tax base. Roughly only 15% of the population pays income tax.
However, holistically, I am not convinced about GST.
In feudal times, you pay taxes in return for protection from the king. Even now, we have heard of protection money by gangsters.
In a democratic country i.e. a government of the people, by the people, for the people, taxation is an income distribution tool as well as a capacity building tool.
You tax those who have the money, or the means and skills and opportunity to make money, and use it, (not to give it to the poor; Robin Hood style), but to provide for government infrastructure development and economic framework to allow for more money to be made. A virtuous cycle.
Historically taxation is largely based on income. i.e. the higher your income, the more tax you pay.
This applies to both individual as well as corporate income/profits.
To me it balances things up, mitigate income disparity and promote inclusiveness, social justice and peace.
In the 1980s some smart guy, probably a rich one decided that it was not that fair. Why should I have to pay more than 50% of my hard earn money to the Government who then squandered it on big government and welfare programmes? Why should I be penalised for being hardworking and smart?
Why should I be discouraged to work harder to generate more profit and hence more growth for the country?
More growth for the country would mean that more people will have the opportunity to make money.
So they convince governments worldwide to slash corporate tax and income tax drastically so much so that corporate tax is on the average of 20% to 30% compared to 40% to 60% 30 years ago.
This is based on the belief that big corporations will provide job opportunities to more people who will then pay taxes and thus, less people are dependent on government handouts.
But you know what, despite economic growth, income disparity has grown and this is more so in low income tax regime countries than higher ones — the US, Singapore. Hong Kong versus Australia, Scandinavia and Europe.
Latest figures indicate that despite the surge in corporate profits and huge cash reserves, corporate America is not hiring people.
HSBC, Europe’s biggest bank, despite increase in profit by 58% to US$4.15bil from US$2.63bil for three months (i.e US$12bil a year) finds this insufficient and the bank wants to cut cost and shed thousands of jobs.
With lower corporate and income tax, the Government needs to look elsewhere to boost revenue.
Those same rich people came out with another brilliant idea. Instead of income tax, have a consumption tax like VAT or GST. The more you consume, the more you pay.
A fair system, no? After all the rich will consume more so he pays more taxes. He will eat out more. He will buy more expensive cars and buy a Rolex instead of a Casio watch so he pays more tax than a poor guy.
However, most GST has a tourist escape clause i.e. only residents pay GST. Tourists can claim refunds. And since the rich travel more, they will just buy their Rolex in another country and don’t have to pay tax on their Rolex while the poor still have to pay the GST for his Casio.
Thus, GST will dampen domestic consumption, an engine of economic growth.
The government has argued that the impact of GST is not that high as it is essentially to replace the current sales and service tax.
That consumption tax, like the GST, is a regressive tax — a more pronounced effect on lower income earners, meaning that the tax consumes a much higher proportion of their income, compared to those earning large incomes.
And the irony is that in its argument that Malaysian households actually end up paying less tax under GST than the current Sales and Service Tax (SST), the case for GST to increase revenue and tax base falls apart.
I am also not convinced at all that lower production cost due to abolishment of SST will be passed on to consumers.
Claims that there will be a price reduction instead of increase is based on the assumption that businesses fully pass down their savings when sales tax and service tax are abolished.
Hello! This is Malaysia when a 20 sen increase in price of sugar translates to an immediate increase in price of a cup of coffee by 20 sen. You do not need one kilo of sugar to make one cup of coffee.
Consumerism in Malaysia is exceedingly weak, protest against price increase or higher wages are seen as a threat to national security. Even the Anti-Profiteering Act will be toothless as enforcement is dismal. We cannot even enforce 17 million traffic summons.
I was a credit clerk in my early days at a bank.
Part of my job is to collate audited accounts from companies that applied for credit facilities.
My boss always reminded me to make sure that I got the correct accounts. He used to say, some companies have four sets of accounts — one for the bank, one for the tax, one for himself and one for the wife.
So how sure are we that businesses that collect GST will remit them to the government?
