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This article first appeared in The Edge Malaysia Weekly on July 22, 2019 - July 28, 2019

BOTH Finance Minister Lim Guan Eng and his predecessor, Datuk Seri Najib Razak, have claimed to be vindicated by the 484-page report released by the bipartisan Public Accounts Committee (PAC) last week — close to a year after news of individual and institutional taxpayers being denied as much as RM19.4 billion in Goods and Services Tax (GST) refunds first surfaced last August.

Who is right depends on whom one asks. What is certain, though, is excess GST collection was used by the previous administration instead of being refunded to eligible claimants. Some observers liken the episode to an employer withholding salaries until the final day, or worse, deducting Employees Provident Fund contributions from salaries but only depositing the sum with the provident fund months later.

But we digress. There is a bigger underlying issue at hand that the current administration is still sweating over.

As it turns out, the case of the “stolen or not stolen” GST cash boils down to a shortfall in operational cash flow.

The clear lack of cash flow to comfortably cover all operating expenses in the last two years under the previous administration is why all Malaysians who have had to pay GST at one point need to pay attention to the real underlying issue at hand by filtering out all the noise surrounding whether cash was stolen or misdirected and who jumped the gun.

While the former prime minister told the PAC that “when [the current government] cancelled GST and gave a tax holiday, that is when your problem started, that is the real cause of the problem”, he also said “it is a cash flow problem because of the demands by other services in a government that we need to settle and also development expenditures”. Najib also mentioned the finance minister’s prerogative to decide what is priority in terms of cash flow if, for instance, there was a pressing need for government spending on the people’s welfare, including payment for projects and services.

Yet, details in the PAC report show that the cash flow issues began in early 2017 — well before the three-month sales tax holiday when the 6% GST was zero-rated on June 1 last year.

The shortfall in the amount transferred for refunds versus the amounts requested for refunds started in December 2016 and was happening every month from February 2017, a table in the PAC report detailing the Customs Department’s requests for fund transfers from the Consolidated Revenue Account to the GST Trust Fund, or GST refund account, from April 1, 2015, to May 31, 2018, shows.

Based on the difference between the amounts requested by the Customs Department and what it was given, the shortfall of funds needed for GST refunds was RM12.8 billion in 2017 and RM6.49 billion as at end-May 2018.

The RM12.8 billion refund shortfall in 2017 was 5.8% of total government revenue of RM220.4 billion, of which RM44.29 billion was from GST receipts. The RM12.8 billion was enough to cover 56% of the RM22.8 billion needed for pension and gratuities or 46% of debt service charges that year.

A statement by former Treasury secretary-general Tan Sri Mohd Irwan Serigar Abdullah that is flagged in the PAC report is telling: “If collection is insufficient to support spending, then certain payments have to be delayed. The most important thing is operating expenditure … if there is excess, then we will decide on refunds, whether it is GST or IRB (for income tax) and so on” — even if GST claims submitted were complete and fulfilled all procedures required to get a refund.

Apart from the RM19.4 billion GST claims from 121,429 companies and individual registrants — which reportedly include Petronas, Shell and Tenaga Nasional — the Inland Revenue Board (IRB) in August last year said RM16.046 billion in tax refunds was owed to 1,653,786 companies, individuals, societies and foundations due to insufficient funds as at May 31, 2018. About 51% of the claims were four to six years old while 38% more were at least two years old.

 

Why not borrow to refund?

Malaysia may not have a ceiling on how much debt the government is allowed to guarantee just yet, but there is already a rule that says the government cannot borrow to fund operating expenditure (opex).

That prudential rule may not have mattered if not for the fact that since 2008, the country has been spending more than 95% of its annual revenue on opex. Between 2008 and 2018, opex grew at a 10-year compound annual growth rate of 4.2% a year — outpacing the average 3.8% rate revenue had grown over the same period.

In fact, since 2012, there has been barely 1% of government revenue left after paying salaries, pension, debt service charges, subsidies and other operating expenses.

The so-called current balance — basically the amount of revenue left after paying for opex — fell from a high of RM21.07 billion in 1997 when Malaysia last had a budget surplus to as little as RM1.04 billion in 2014 — incidentally, the year before the country introduced the GST from April 1, 2015. Except for 2010, the current balance has been below RM3 billion a year since 2009.

The thin current balance of only RM2.71 billion in 2017 may well have been another reason GST refunds could not be allowed as it would lower the reported net GST receipts, which, in turn, would also lower overall government revenue.

Paying the RM12.8 billion GST refunds owed in 2017 could expand the fiscal deficit of 3% in 2017 to a four-year high of about 4%, back-of-the-envelope calculations show. That would reverse the fiscal consolidation track record that Malaysia has been telling investors and sovereign rating analysts even as the country continued to pile on debt. In early 2016, the government had already transferred RM21.9 billion civil service housing loans off the balance sheet so as to keep direct government debt at below the self-imposed 55% to gross domestic product ceiling.

As emoluments, pension and gratuities and debt service charges already accounted for 59% of total government revenue in 2017, giving up RM12.8 billion in cash flow could mean cutting spending on areas like supplies and services to at least a 10-year low. Subsidies would have also needed to be lowered.

 

Why tapping Petronas was a no-go

That Brent crude oil prices had tumbled below US$30 a barrel in January 2016 and had largely remained below the US$60-mark until October 2017 probably made it hard to justify tapping Petronas for more dividends.

Moreover, GST was touted by Najib as “the savior of the nation’s economy” that cushioned the fall in government revenue when oil prices were low in 2015 and 2016 — even though the implementation of GST was announced during the tabling of Budget 2014 in late October 2013 when oil prices were still above US$100 a barrel.

Keeping up appearances meant scant room to suggest net GST revenue of RM41.2 billion in 2016 and RM44.3 billion in 2017 had been overstated. However, guesstimates based on preliminary figures show that these were overstated possibly by 20% annually.

Even so, GST collection would still have been more than the “old” SST collection of RM17 billion in 2014 and RM22 billion estimated for the “new” SST for 2019. The flexibility to boost the government’s operating cash flow is likely even greater with gross GST receipts at RM59.2 billion in 2016 and RM60.9 billion in 2017.

The current administration, however, is justifying the RM30 billion special dividends from Petronas for 2019 as a one-off move to settle a debt owed to the people and businesses by the previous administration.

When tabling Budget 2019 last November, some breathing room was created when RM9.7 billion worth of expenses — including payments to Prasarana Malaysia Bhd for light rail transit construction — were reclassified from operating expenses to development expenses. Borrowings can be taken to fund development expenditure. For 2019, the current balance is projected to be RM1.96 billion and the fiscal deficit, RM52.08 billion, or 3.4% of GDP.

The reclassification may well also be justified. With only four months until the tabling of Budget 2020 on Oct 11, the pressure is on for the current administration to show it can do well without GST receipts by plugging leakages and getting the most bang for the buck.

 

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