PETALING JAYA: The reintroduction of the goods and services tax (GST) will be a positive move, although there should be measures to reduce its impact on the lower income groups and improve its implementation so as not to affect the cash flow of businesses, say economists.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, however, did not expect the GST to be reintroduced in 2022.“From my understanding, if the government decides to go ahead with this, it will take some time, probably around 18 months or so before the GST can go live in terms of policies. The government needs to meet the relevant stakeholders and make sure that the weaknesses in the GST previously can be addressed,” he told StarBiz.
On Tuesday, Prime Minister Datuk Seri Ismail Sabri Yaakob was reported to have indicated the return of the GST to expand the government’s revenue and ease the strain on public subsidies.
Speaking to Nikkei Asia in Tokyo, he said the government was aware of the negative perception on the tax but there were limited options to replenish federal coffers.
Sabri (right) with Nikkei chairman Naotoshi Okada in Tokyo on May 29 - Bernama
The government would formulate ways to educate the public on the importance of the tax and transparency in terms of collection should the GST be reintroduced, he said.
“The government will aim for a rate that is not so high that it burdens the people, but not so low that it defeats the purpose of expanding tax revenue.
“The government is also working on a subsidy rationalisation programme aimed at providing targeted assistance to low and middle-income households and a comprehensive plan will be submitted to the Cabinet for deliberation soon,” he added.
The GST was implemented on April 1, 2015 at a standard rate of 6% and later abolished in 2018.
Mohd Afzanizam noted that there were issues surrounding the input tax credit previously which had affected the cash flow of businesses.
The GST is a well accepted tax regime that can be very effective in collecting taxes, as it promotes transparency, according to Afzanizam.
“Each business along the supply chain of an industry will be responsible to collect taxes and the business will have an incentive to claim its input tax credit to reduce its tax burden,” said Mohd Afzanizam.
However, he also noted that reintroducing the GST in the current inflationary climate would not be a popular move.
“The main issue is inflation and I think to introduce GST would be unwise because it would aggravate the inflationary pressures,” he said.
Ferlito pointed out that the GST, if paired with a lower income tax regime, would help prices to cool down due to the potential effect of lower consumption.
In terms of fiscal sustainability, the reintroduction of the tax would be seen as a positive move in terms of the country’s sovereign credit rating.
“The country’s rating outlook would be better and from the financial markets’ perspective, the reintroduction of the GST would be positive,” he said.
Centre for Market Education CEO Carmelo Ferlito said while the GST should be reintroduced, it should not be solely for the purpose of supporting fiscal revenues.
“The GST should be one of the pillars of a fiscal reform which includes the lowering the income tax and improving enforcement. Secondly, shifting from income tax to consumption tax would mean to nudge in favour of increasing savings – something we need for two reasons: the high household debt issue and because savings are the necessary and sound financial base for investments,” he explained.
Ferlito pointed out that the GST, if paired with a lower income tax regime, would help prices to cool down due to the potential effect of lower consumption.
“However, it is not automatic, as many factors are at play,” he said, adding that revenues from the current sales and service tax were lower compared with the GST.
He also suggested a targeted or multi-layered GST, whereby different rates are applied to categories of goods.
Ferlito has proposed items related to the basic consumption habits of the lower-income population such as rice should be exempted while a low 3% rate be imposed on key development items such education related goods; and 10% on luxury goods.
“To ‘punish’ certain types of consumption would affect the production of the goods involved, bringing harm to the relative value chain and its workers. Therefore, the structure of progressivity should be attentively studied,” he said.
Sunway University economics prof Yeah Kim Leng said most economists are in favour of the GST “as it casts a very wide net, and also importantly, it is a consumption-based tax.”
To address the greater impact of the tax on the lower income groups, he suggested that the government provides GST exemptions on essential items.
Yeah pointed out that additional government revenue is necessary given the need to address some of the long term effects of the pandemic particularly those in the lower income group.
“We are likely to see an increase in government expenditures in the coming years to offset the effects of the pandemic and alleviate the hardship of those in the lower income group,” he said.
However, the current high cost of living situation is less conducive to the reintroduction of the GST, according to Yeah.
“People must be convinced about the need to shift to the GST. There should be commensurate measures to increase government spending, efficiency and also, reduce of leakages and corruption. People will pay higher taxes for better quality services and an efficient government.
“If the GST rate is not set too high, it should not dampen consumer confidence. The key determinants are income growth and favourable job prospects,” he added.