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发表于 1-6-2018 05:40 PM
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On May 16, Malaysia's Finance Ministry announced that the country's goods and services tax (GST) will be reduced from 6 per cent to zero from June 1. This decision, driven more by populist politics than by sound economics, could have serious implications for Malaysia's fiscal position and economic future. It will also limit the ability of the new Pakatan Harapan government to push ahead with what seems otherwise a progressive and inclusive agenda.
Malaysia was a late adopter of the GST, which came into force in the country only in April 2015, by which time more than 160 countries already had it. Although long delayed - Malaysia had originally planned to introduce the tax in 2011, but was thwarted by political resistance - it was a pragmatic and far-sighted move.
The GST (also known as the value-added tax or VAT) has long been regarded by economists as the most comprehensive, transparent, fair and efficient form of consumption tax. In the case of Malaysia, the International Monetary Fund (IMF), the World Bank and the developed nations' group Organisation for Economic Cooperation and Development endorsed the case for the GST.
The case was compelling. Malaysia has traditionally been heavily dependent on oil-related revenues, which accounted for 40 per cent of total revenues in 2009. But oil prices have been extremely volatile, going from US$145 a barrel in July 2008 to US$30 by the end of that year, then back to more than US$100 in October 2010 and down again to US$32 in early 2016.
If Malaysia is to build a sustainable fiscal position and maintain public spending at reasonable levels, it needs to diversify its sources of revenue.
Moreover, Malaysia's direct tax base is narrow. Less than 15 per cent of working-age Malaysians pay income tax. Malaysia has about 1.7 million undocumented foreign workers who also pay no tax, as well as some 350,000 residents who commute to Singapore to work.
Malaysia set its GST at 6 per cent, which is one of the lowest rates in the world and the second lowest in Asean, after Myanmar's. To protect the poor, it also exempted or zero-rated many essentials, including basic food items, medicine, public transport, the cheapest grade of petrol and diesel.
Despite its incomplete coverage, the GST has worked well for Malaysia. In 2017, it accounted for about 18 per cent of revenue or 3 per cent of gross domestic product (GDP), compared with 8 per cent of revenue or 1.6 per cent of GDP delivered by the sales and service tax (SST) in 2014, the last year of its operation. It had been in force since the 1970s.
Malaysia's government has indicated that it wants to revert to the SST, but has not said when it will do so. Whenever it is, the result will be a loss of revenue to the tune of RM 25 billion (S$8.5 billion) to RM30 billion per year. This is because the GST is far superior at generating revenue than the archaic SST. BETTER THAN SST
There are two main reasons for this. First, the GST is more broad-based, being levied on value-added at multiple stages of the supply chain. The more narrowly-based sales tax is levied at a single stage, while the service tax is charged at the point of sale of a few selected services.
The GST is also more efficient, with fewer leakages. It is self-policing because it enables businesses to claim input credits, which will require compliance along the entire chain of businesses to which it applies, and which can be easily cross-checked by the tax authorities. The SST can be more easily evaded - for example, by companies under-declaring their sales.
So far the Malaysian government has not come up with any alternative way of replacing the revenue that will be lost by the abolition of the GST. This would have negative implications for Malaysia's fiscal position as well as national debt, which Finance Minister Lim Guan Eng says exceeds RM 1 trillion, or 80 per cent of GDP. Credit rating agencies Moody's and Fitch have already warned that the abolition of GST will be "credit negative" for Malaysia.
In an attempt to reassure investors, Ms Zeti Akhtar Aziz, Malaysia's former central bank governor who is on the new government's council of economic advisers, told about 180 fund managers at a meeting in Kuala Lumpur on May 15 that Malaysia's fiscal position would be improved by controlling expenditure.
"There will be a re-prioritising of projects, efforts to increase efficiency of the government and efforts to reduce wastage of the public sector," she said.
However, leaving aside the fact that Malaysia could do all this even without abolishing the GST, the cutbacks in expenditure will hurt Malaysia's economy by lowering economic activity and creating unnecessary job losses. This is why the IMF and the World Bank, among other institutions, have always recommended that Malaysia should improve its fiscal position through revenue increases rather than expenditure cuts. In fact, in its 2018 review of Malaysia's economy, the IMF had recommended that to secure its fiscal position, Malaysia needs to raise its GST rate and eliminate exemptions. COSTS OF ABOLITION
The costs to Malaysia from the abolition of GST will not be confined to the revenue losses arising each year from the difference in the tax yield from the GST compared with the SST.
The losses will also extend to the forgone projects that would have been financed by the higher revenues that the GST generated, and which Malaysia would no longer be able to afford. These would include schools, hospitals, roads and other public services as well as programmes to subsidise the poor, such as the 1Malaysia People's Shop (KR1M), a chain of stores selling necessities at prices 30 to 50 per cent lower than regular stores.
Malaysia might also have to raise user charges for its MRT and LRT transit rail systems, which have been kept low thanks partly to the additional revenue from the GST.
While today's relatively high oil prices, at close to US$80 per barrel, will provide Malaysia with some fiscal cushion in the short term, oil-based revenues are, as seen in the last decade, fickle and volatile. Malaysia cannot depend on them for the long term. After the GST is abolished, the government will eventually need to come up with new taxes - either on income or capital gains, or higher user charges. The negative impact on the economy of these taxes should also be factored into the cost of abolishing the GST.
As part of the justification for the abolition, the Malaysian government suggested that the cost of living would fall. However, it is far from clear that this would happen if the SST replaces the GST.
First, many essential goods and services are not subject to GST, so their prices are unlikely to fall.
Second, as the SST does not permit businesses to claim input credits, they would pass embedded taxes down the supply chain. The final seller would add a margin to prices that already have taxes embedded (a phenomenon called tax cascading) - all of which would eventually be passed on to the end consumer. So there will be many goods and services for which the consumer will have to pay more, not less, with the SST compared with the GST. OPTICAL ILLUSION
One reason for the perception that the GST raises living costs is an optical illusion: GST is transparent and clearly stated in invoices, whereas the SST is hidden to consumers. While they actually pay it, many of them don't realise they are doing so.
Another reason - and here, consumers' complaints are justified - is that some unscrupulous businesses raised prices when the GST was introduced by more than their additional tax liability, blaming the GST for the increase.
Malaysia had put in place a Price Control and Anti-Profiteering Act before it introduced the GST, which was aimed at preventing such abuses. Under the Act, consumers had the right to complain about unjustified price hikes, but many didn't know about the Act, which was also not properly enforced. The price increases that occurred were not caused by the GST, but by profiteering - which could happen with the SST as well, which, if it is 10 per cent as before, will be higher than the GST. GST AS SCAPEGOAT
Unfortunately, the GST also became a scapegoat for other issues such as the financial scandals relating to, for example, the palm oil producer Felda Global Ventures and 1MDB. In some voters' minds, the issues came to be linked: the GST was viewed as a means to recoup revenues that were lost to Malaysia because of mismanagement and corruption. What was essentially an economically sound tax became tainted and politicised.
It was not easy for Malaysia to enact the GST, which took years of political persuasion. Putting the enabling tax administration in place was also a painstaking exercise. Businesses too went through a difficult period setting up systems and processes to comply with the new tax. But once in place, the GST has delivered for Malaysia as no other tax has done. It was one of the best fiscal measures the country has ever enacted.
Abolishing it is relatively easy. But now comes the hard part: The new government has the unenviable task of managing Malaysia's finances without the GST - and without an alternative revenue measure that can match it. |
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