History of Goods and Service Tax in Malaysia Essay

1. Introduction of GST Goods and service assessation receipts were first deliberated in 2005 with the intention to introducing it in 1st January 2007. How forever, it was withdrawn in the fol slumping year. In 2009, GST was revived with a proposed rate of 4% to replace current gross measureationation appraise of 10% and assistance Tax of 5% in a bid to diversify national tax revenues. However, the idea of GST palliate end up floating around as it has now been officially deferred.2. Concept of GSTGoods and servicing Tax (GST), also known as Value Added Tax (VAT), is a broad con core groupption tax. The purpose of the introduction of GST is to spread the burden which borne by consumer in some grouchy atomic number 18as into a wide range of goods and run with a set down tax rate. Thus, governments r levelue income leave behind eventually increase to en open the provided education and budget domination to the inelegant, other than just relying on oil and income t ax revenues.GST is a multi-stage tax as it is levied on the value added created at the various stages in the momentproductiondistri furtherion chain of the product to which the tax is applicable. This tax building helps to avoid the cascading effect embedded in current Sales Tax and Service Tax (SST) which are single-stage tax.It adopts a credit offset utensil whereby tax charged on supplies (called egressput tax) made by a taxable business may be net off against tax paid on stimuluss (called input tax) to production. Only the battle is remitted to the tax authority. Neverthe little, the live of GST is actually borne by final customers. However, not all supplies are beat rated supply, which are subject to proposed rate of 4%.Malaysian government has proclaimed that some 40 items, mostly essential consumables and commodities provide be drop of GST, that is, either the items are exempted or given a energy-rating. The notwithstanding difference is that input tax credits muckle be claimed by registered suppliers of zero rated supplies but not the exempted suppliers. Thus, lower income groups are protected.Furthermore, GST is a form of confirming tax as it is not a statutory obligation of a person to pay the tax unless certain GST taxable goods and services are consumed.Besides, the Malaysian government has indicated that Mandatory GST registration for suppliers allow be ground on a threshold of sales. Current indications are that the threshold will be set at RM500, 000.00 per year.Thus, with the introduction of GST, government is able to dislodge the reliance on direct tax to indirect tax for sources of revenue income to maintain its competitiveness as well as sustain long growth of the country.3. Fate of GST in MalaysiaThe passage of GST in Malaysia has not been an favorable sailing. As mentioned preceding(prenominal), the idea of GST was first announced in 2005. However, it was shelved in 2006. Again, subsequently the GST bill tabled in 2009, the second and third reading for GST is now be deferred again.Over-reliance on the direct tax and depleting petroleum are actually the major concern of government that contributes to the fraud of GST. Furthermore, the government is of the opinion that Sales and Service Tax (SST) has reached its threshold. To increase it the countrys exports uncompetitive. Under SST, exporters were incurring as much as RM1.4 billion each year. Therefore, the only expressive style is to institute GST. GST is considered an frank and comprehensive system of taxation that minimizes evasion and ensures a broader revenue stream.3.1 Judgments from Macro-economic sen termntBy replacing the Sales and Service Tax with GST, the government is able to diversifies its sources of taxation to avoid be dependent on some(prenominal) particular tax creation and the stability of tax revenue is ensured. As revenue from imports and taxes from the in bodiedd arena may fluctuate, GST will not fluctuate, th itherby pitch in a steady and sustainable revenue stream that is locally generated.However, the immediate outcry is that GST will earn the general price take aim goes up. However, empirical study in China indicates that GST carrying out did not cause any inflation. Furthermore, public do not thrust to be over-worried of the incessant inflation as recent research also manoeuver out that GST may bring about a one-time increase in address of living, but the impact on inflation is low. Mean part, according to the Ministry of Finance, Consumer Price index number is going to reduce 0.1% due to the lower GST rate. This can be further supported by studies that indicate prices did not increase significantly in the beginning and after the introduction of GST. Thereby it is actualise that imposition of GST will only cause one time increase in general prices but would not necessarily lead to inflation which is continuous increase in the average of price over the time. Furthermore, a study done by Malaysian government also shows that households could enjoy annual savings of amid RM14.50 and RM347 under SST system and GST system respectively.Additionally, it is indicated that the business sphere of influence could expect contribute annual savings of some RM4billion under the GST regime, while exporters would save RM1.4billion annually under a zero-rate system. Also, GST improve export competitiveness due to zero-rated and throw out tourism because of the refund of GST.However, recent study argues that Malaysia can enjoy this raft competitive returns only when at that place is no delay in input tax refund that cause increase in price of exports.Furthermore, there are more arguments against the indirect tax reform in underdeveloped countries. A country like Malaysia with presence of a substantial casual sector, substituting VAT for border taxes is likely to deter the growth and development of the rescue as a whole as VAT cogency drives firms from the o rb sector into the shadow of liberal economy. Many studies have indicated that ontogenesis countries consists of a precise(prenominal) large size of informal economy. Informal economy is defined as the segment of the economy that escapes the tax net it and so includes both the shadow economy and agriculture. Also, they argue that the imposition of VAT may also retard the development of markets, especially in the rural areas.As mentioned, imposition of GST diversifies governments revenue sources and increase income. However, a former study of GST in Mexico indicated that tax revenue increase might not be as large as suggested by standard publications due to the increase of the informal sector, shrinking the tax base. Furthermore, as a developing country, Malaysia may not benefit from the implementing GST due to the high administrative cost.Meanwhile, as GST was deferred, road shows, seminars and public education campaign are still universe held by the authorities ever since the first announcement of GST in order to create awareness amongst the public about the oncoming tax transition. On the contrary, in the same time, GST opponents have been expressing negative by starting time an anti-GST task force to dissents against the implementation. Sentiment is that Malaysia is ranked more corrupt than ever and people are cynical that imposing GST will only be another avenue for corruption.From the discussion above, it can be seen that imposition of GST can improve collection of revenue in a more comprehensive, vapourous and effective manner. Furthermore, more savings for households and corporate sectors can be expect with the substitution of SST with GST.Government has been paying effort in educating the public, however, hesitated in implementing the GST several(prenominal) times because of the lack of infrastructure to effectively collect the taxes. Furthermore, Malaysia is currently in a developing stage. There are still many informal sectors like agricul ture sector and goods that are exempted from this system. Besides, the corruption issues in the country have yet to be addressed. It sees that the government involve more time to get ready for the implementation of GST and, thus GST might be utilise later rather than in the beginning.3.2 Judgments from Micro-economic aspect(i) Corporate aspectGST is tax stack away on behalf of government. Given the claimable input tax feature, GST is deemed not to be a business cost. However, GST will place a burden on the corporate sector (especially Small and Medium Enterprises), which will be responsible for amass the new tax. SMEs may face the enigma of cash flow obstruction due to the payment of GST upfront. Also the employment of qualified internal ply with the necessary experience can be quite costly. To add on to the problem, software programs would need to be revised to take into account the GST grammatical constituent hence adding on to the cost of operating a business. As come together by studies, the conformation cost of SMEs is substantially higher than larger firms. Thus, GST compliance is four times more regressive to SMEs as compared to large firms.Again, representatives of the corporate sector have already expressed fears that corruption and bureaucratic maladroitness could raise the cost of administering the tax, thereby increasing companies operating costs.Furthermore, with regards to the threshold limit, quite a smallish done by The Associated Chinese Chambers of Commerce & Industry of Malaysia (ACCIM) ,with a small samples of 2000 people, has indicated that a threshold of RM5 million above is the most pleasing level instead of RM500,000. Extra compliance cost has a very high possibility of causing them to have substantial amount of revenue forgone. pull down the neighbor country of Malaysia, Singapore, has a threshold limit of SGD$1 million. Shockingly, 80% of the respondents indicated that their computer systems are not ready to cater for the regime of GST.All of the reasons above clearly show that GST compliance is a very big issue to the corporate sectors, especially SMEs. High compliance costs that will be incurred for new software purchasing, staff training and low threshold limit have make them react very negatively towards the proposed GST. Thereby, it takes time for government to allay the fear of the corporate sectors and address the compliance cost issue. Thus, GST might be implemented later rather than sooner.(ii) single aspectPublic are very reluctant to accept the implementation of GST. Some of them even formed a group representing the public to protest and express their non-approval for the introduction of the proposed GST with the contention of GST will feed the rich and thirst the slimy. Also, they are worried that those unscrupulous traders might take advantage of the GST to unnecessarily increase prices and pass this down to the final consumer.Actually, government has been consumption time crea ting public awareness about the GST. However, the effort does not seem to be enough that most of the people do not actually realize that the lower income groups are protected as most of the introductory necessities are actually zero-rated and tax exempted. Consumers have a choice to a certain extent whether to pay the tax should they decide to consume any of the non-essential goods and services.When it comes to exempting basic essentials from GST, however, there are arguments against list for political popularity. This is because too many exemptions can nullify the purpose of GST as a broad revenue base.Again, the bureaucratic culture in Malaysia further erodes the confidence of public towards GST.To sum up all the reasons above, given political sensitivity of the GST and the difficulty of lordly the reactions of the public and the corporate sector, the government might want to ensure that there is a long gap in between for the introduction of GST even though GST can be beneficial to the country. Besides, the Malaysian government needs time to establish computerization system and trained personnel for the tax transition.However, the budget deficit and depleting natural resources leave the federal government with little choice. Furthermore, the authorities has tautnessed that SST has reached its threshold, GST is the best option for the tax reform. Thus, given the reasons above and efforts of government create public awareness of GST, it might seen that GST is already in the pipeline and the current deferment was actually to allow the authorities to have more public awareness program and to give the corporate sector more time to get ready for the tax transition.4. Equity of GSTAs indicated by government, GST provides equitable treatments as lower income groups are protected by zero-rated and exempted mechanisms. This method has been argued as simplistic as it ignores a number of measurable facts.First, empirical research indicates that there are significan t difference in the pattern of expenditure between the vile and rich. Engels law point out that the share of expenditure on food and clothing is very high for the poorest households. According to the estimates of Hossain, VAT can be made less regressive with zero-rating of commodities that are consumed more by the poor households. Zero-rating basic-commodities protecting the poor and also the rich, since they also buy these commodities. In other words, zero-rating is an expensive way of protecting the poor since much of the protection is wasted on the rich.Second, the fountain for imposing VAT as has long been known a coherent VAT is likely to increase the price of many goods essential to the poor (Ahmad Stern 1987). Research on Bangladesh shows that a uniform VAT that disregards the differences in expenditure spending of the rich and the poor is significantly regressive as the poor suffer 2 to 3.5 percent loss in their income while the rich benefits from much(prenominal) reform . Because the poor may consume a comparatively small amount of such products, it is undoubtly true that much of the benefits of such exemptions will go to the non-poor.Third, before the introduction of GST, the price of all commodities in fact has already incorporated an indirect tax component that is the tax charged on inputs for production. Therefore, no commodities will increase in price to the effective extent of GST.Moreover, proponents of the tax reform have neglected the presence of a large informal economy in Malaysia. According to Emran and Stiglitz, the dramatic swap in favor of VAT as the main instrument for revenue rising in developing countries which have a large informal sector is misguided both on efficiency and legality grounds. Even a uniform broad-based VAT may be more modernised than more nominally progressive taxes (such as the personal income tax) that in answer burden only a limited group of wage-earners. This can be happen, for instance, informal sector p roducers that produce a close substitute of the formal GST-liable commodity will get high profit without bearing tax while formal sector producer may get lower profit and bearing tax. Therefore, informal sectors of a Malaysia might distort the equity treatment of GST amongst the corporate sectors. A further consequence is that the tax base of the GST is eroded and either less revenue is available for national expenditure priorities, or higher rate of GST is required.Thus, the equity of GST still remains a question. The actual impact of a broad-based GST needs to be estimated by econometric model in order to answer the major arguments of broad-based GST.4. ConclusionGST has been proposed by government to reduce the reliance on direct tax and the petroleum revenue. Also, it was planned to replace current SST. With a broader base for goods and services being subject to GST, the revenue for the government is expected to be higher. However, the implementation GST is being deferred again due to the political sensitivity and the negative reaction of the public. Furthermore, the missing of infrastructure to effectively collect the taxes, negative responses by the corporate sectors and protests against GST by the public contributes further to the deferment of GST.However, it does not mean GST going to be shelved forever as Deputy Director of Customs, Subromaniam Tholasy, has made a clear statement that the implementation of GST has only been deferred, not cancelled. Also, the officials have been keen to stress that both consumers and businesses are likely to make savings under the GST. Thus, it is plain that the GST already is in the pipeline. However, many things have to be done for the imposition of GST, thus GST might be implemented later rather than sooner due to the substantial time and cost incurred by the corporate sector and government in the preparation for the transition. Also, equity of GST still remains an issue.In order to make the implementation of GST to be successful, the government should start an all-inclusive education and public awareness drive now to explain how the tax works and its impact on prices. Also, the government should address its major problem which is corruption to regain the confidence of public. Also, they has to take into consideration of the neglected factors such as informal sector and reconsider the equity issue in order to make the implementation of GST to be equitable and efficient.