GST

The government has announced recently for the GST to be implemented by stages starting from mid 2011. In fact, the first bill has already been tabled in the parliament and it appeared that the government is really serious this time in pushing the GST to replace SST. Any subsequent reversal on rolling out of GST or further delay is very unlikely and will be a slap on the government’s face if they were to do so.

Although this idea of implementing GST has already been floating since the early 90s, it did not take its course until it was mentioned in the 2005 budget speech albeit being delayed indefinitely after that. However, many Malaysians do not understand the mechanism of GST apart from hearing that generally, such tax will increase the price of many goods and services. Is such comment really unwarranted for? Let’s explore how this GST works in a very layman manner.

Currently, many prescribed goods and services in Malaysia are subject to sales or service tax and such tax will in return become a cost of doing business on the manufacturer or service provider. Reasonably, such cost will be embedded into the selling price and transferred to the purchasers. If those goods or services are consumed by another manufacturer or service provider, the cost will then be transferred further until it stops on the consumer. In other words, the SST cost will generate a cascading effect on the price of goods and services until the end consumer.

However, under the GST regime, GST will be imposed on almost all goods and services (instead of prescribed goods and services which mean it has a wider coverage) at the flat rate of 4% (SST rate ranges from 5% to 10%). The important element of GST is the availability of input tax credit for manufacturers / service providers which impose GST (i.e. GST collector). Specifically, all GST paid by the GST collector will become an input tax credit which will be set off against GST collected before remitting it to the government. This is the part where the government keeps harping on when they talk about GST and how it reduces the cost of doing business … to a GST collector. It was also mentioned in the MSM that the government has conducted a study which concluded that the net effect of GST will be only around 2.xx% to the general price of goods and services. Sounds too good to be true but will it turn out to be so?

The first part of the preceding paragraph mentioned that GST will be imposed on more goods and services compared to the SST regime. Although the GST rate will be lower than before, the net effect of this is difficult to quantify. However, with regards to the input tax credit which is supposed to reduce the cost of doing business, one would then ask whether the GST collector will voluntarily reduce its selling price as a result of cost reduction in ensuring the overall GST effect on the consumer would be as estimated by the government. In this respect, I believe the government is lacking in understanding how the Malaysian economy works and whether we should just copy a tax system from other countries blindly without considering the way they regulate businesses which is different from us. Let’s not kid ourselves. Unlike many other countries, many sectors in our economy are not experiencing perfect competition and in most circumstance, oligopolies, cartels and price controls exist. Due to such circumstance, it is not surprising to note that the economy is slow when it comes to downward price adjustment as such adjustment will generally be made on consensus by all members within the cartels or oligopolies. Without a near perfectly competing economy, it is very unlikely that the GST collectors will voluntarily reduce its selling price; probably maintain or even increase price and together with the GST, will send the economy to spiraling inflation. Such circumstance is less likely to happen in other countries where anti trust or anti competition rules exist and other regulatory measures to prevent monopolies and oligopolies by certain parties. The downward price adjustment may probably come much later, if it ever happen, which by then, the damage is already done to the economy when everyone keep pricing higher to make up for the higher cost without settling to an equilibrium level.

Following the above, one will now start asking what is the government is trying to achieve by introducing GST and having the economy exposed to inflation (and probably the potential loss in general election). Obviously, the smart consultants surrounding the PM sold this GST idea on the premise that it is able to make more people to pay tax instead of relying heavily on the current bunch of salary earning citizens. Unfortunately, the government failed (or is it refused to admit) that no matter what sort of tax they may want to force it on those businesses, as long as these businesses are belonging to cartels or oligopolies and having the liberty to raise prices to recover any taxes imposed them, it is the salary earning consumer who are bearing the tax burden in the end, one way or another.