KUALA LUMPUR (Oct 10): The Goods and Services Tax (GST) has been (and still is being) touted by some tax experts and economists as being the most efficient and broad-based tax system. Efficient for the government because all businesses are working for free round-the-clock collecting GST for the government coffers. For the private sector, it is not efficient, as it only means a lot of unpaid and forced labour from the private sector — resources which are better applied in otherwise carrying on more productive business activities.

Invasive and pervasive
In a nutshell, the main grouse against GST as a tax is that it is invasive and pervasive.

Invasive because it goes deep into every nook and cranny of the internal processes of a business. Pervasive because there are inherent GST implications and considerations in every business process and decision. The question “Does this involve a taxable supply of goods or service?” must be asked often and catered for in running a business lest GST provisions are breached. GST casts its net wide and deep.

Examples are:

So why is “invasive and pervasive” a bad thing?

It consumes scarce resources of time and manpower just for compliance with GST laws, resources which otherwise could be used to increase productivity and quality of output. It distracts and detracts from the main purpose of doing business. At every turn, there are GST implications.

Time is better spent on how to run a business more efficiently, more profitably, not how to comply, avoid or deal with tax issues, or resources consumed in employing tax planners to minimise tax.

Broad-based?
Read “Tax everybody, including the poor and lower income who otherwise do not pay income tax”.

Experts with statistics allege “Only 2 million of the workforce pay income tax.”

So what’s wrong with that? Generally, taxation involves taking from the haves, to finance public expenditure to benefit every member of the community, including the have-nots. If there are leakages and blatant tax-dodgers, improve enforcement. Don’t go and widen the tax base to collect from the poor to make up the deficit!

It’s a flat tax
A flat tax is good and feasible for an economy where the minimum income level is fairly high, like Singapore and Norway. Everyone earns reasonably well, and pays a flat rate tax for the goods and services they consume.

Alas, Malaysia is not in that category. The minimum income level in Malaysia is still low.

Flat tax is not equitable and does nothing to help redistribute income. Taxation should be progressive, i.e. the haves should pay tax at higher rates.

GST is “regressive”, i.e. taxing everybody at a flat rate, including the lower-income group who otherwise do not pay any direct tax.

Cost too much to collect the tax
The biggest fallacy about GST is that it is “efficient”. On the contrary, the compliance costs are very high: sophisticated software systems must be installed to ensure proper and full compliance with GST laws, especially in view of its invasive and pervasive attributes, and the non-ceasing tracking of inputs and output credits. It takes software to capture transactions and their GST input and output amounts. Manpower is needed to input, operate and maintain the software system. As a business grows, expands, the kind of software will need to be upgraded to cater to the increased volume and complexity. To state the obvious: software systems do not come cheap.

The constant bookkeeping, data entry, keeping of receipts, documentation, and the filing of returns is detailed, meticulous and continual. All for what? To pay GST!

I have heard, although this is unverified, that during the GST days, small businesses decided to fold because they found the compliance cost, in particular, the cost of software system, prohibitive. I have heard that, given the RM500,000 threshold for businesses for a year, hawkers stopped selling when they hit their monthly limit of about RM40,000. All these point towards a disincentive for enterprise.

If more than a hundred countries have GST in place, it must be good. These countries can’t be all wrong. By not having GST, are we missing out?

I say, do not blindly keep up with the Joneses!

In an economy where income level is high, and income gap between the lowest income strata and middle income level is not as marked as ours, having GST is advisable and feasible.
However, in Malaysia, income disparity is still glaring. There is a large lower-income and lower middle income group (Note: I have not done any research nor collected impressive data: can’t afford the time. I am merely speaking as a local with local knowledge) in Malaysia who are paying no or very little income tax, as is intended by policy. GST will indiscriminately be imposed on them because they consume goods and services.

Don’t worry about the poor, there are exemptions for the goods they consume
Seriously? Rice, flour and basic goods will be exempted, so that should take care of the poor?

Not so fast, amigo. The poor don’t eat white rice or plain flour dough only, they eat nasi lemak, economy rice, nasi bungkus, roti canai — any exemption for those? No, then the poor WILL be taxed. Yes, exemption is given: everybody, not just the poor, gets the exemption.

A lower income family has, say, a monthly income of RM1,000, out of which they spend RM80 on rice (RM4 x 20 kg), so they save RM4.80. But they will spend the rest RM920 on other goods and services which will be subject to GST. They end up only getting RM876 worth of goods and services out of the RM920.

We are export-oriented, remember?
So it would mean there will be a large number of refund cases. Malaysian administration agencies have been notoriously and excruciatingly slow in effecting refunds. This will impact directly the efficacy of our export sector, which is perilous!

“If Singapore has GST, it must be good”
GST is good for Singapore because annually they have got millions of visitors, who will be subject to GST, thus paying their share for use of amenities, services and goods.

As for the residents, their minimum income level is higher than that of Malaysia, and they are compensated by a lower incidence of income tax incidence.

SST
Sales and Service Tax (SST) involves much less of the population as it is levied on persons who import goods or locally manufacture them, and on providers or importers of taxable services in Malaysia. Visitors pay their share through the service tax.

The absence of a general input-output mechanism obviates constant and continuous accounting. The collective aggregate time and resources spent on SST is significantly reduced compared to GST. These resources can be better applied to economically-productive activities to generate more income in the economy.

Yong Siew Chuen has wide experience in Malaysian taxation. She now focuses on tax training and coaching. The views expressed in the article above are entirely her own and do not reflect theedgemarkets.com's stand.