Budget 2022 – Please consider very carefully before bringing back the GST

The GST is inherently regressive.

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Published in Business Today, Asia News Today and Astro Awani, image by Astro Awani.

In the run-up to Budget 2022, the call for the Goods and Services Tax (GST) to be reintroduced has been getting more strident. It’s understandable why mainstream economists are touting the GST as the solution to our fiscal conundrum – much like an elixir or remedy for a disease. In fact, a former Prime Minister, known for his technocratic aptitude, and the one who introduced the GST in the first place has even gone so far as to claim that the GST is the country’s salvation.

The GST is very appealing because it’s broad-based, flexible in scope and adaptable (e.g., easily integrated with types of similar tax systems like the digital service tax or DST), uniform and flat-rated.

Unlike the GST, the Sales and Services Tax (SST) is a bit more cumbersome as it involves a single tier/stage which makes for a complex and convoluted “cascading” (i.e., imposition on the costs of business without input credits) effect.

This is because the SST represents a combination of multiple single tiers – with its own sales or service tax imposed at different rates.

This means that the SST doesn’t allow for effective scrutiny and monitoring of the whole spectrum of supply chain transactions.

Under the GST, the “cascading” effect is reversed and the taxation process throughout the supply chain is simplified.

For example, to state a truism – an item is simply taxed at the same rate of X%. At the same time, the GST can be claimed back at each stage of the supply chain transaction – except for the consumer/end-user. If the GST is zero-rated (i.e., not paid by the consumer/end-user), refunds are in order. 

The implication is that businesses would then be able to maintain or even lower production and sales costs. On the contrary, under the SST, costs of business would be passed on to the consumer, where applicable.

In the final analysis, it’s about the simplicity of the GST (with all its logical and practical implications) versus the complexity of the SST (with all its logical and practical implications).

GST, therefore, is held up as the effective tool to combat transfer pricing, i.e., supplies and sales of goods and services within the same group of companies, e.g., a conglomerate, that isn’t according to market prices.

And, by extension and inclusion, vertical integration also, i.e., extending ownership and management of the production and business streams (e.g., up- and mid-) along the supply chain.

Vertical integration results in tax leakages (via tax avoidance) under the SST since tax is paid at a single stage but “cascaded” along the way (i.e., the costs are passed on along the supply chain).

This encourages transfer pricing in order to take advantage of economies of scale (i.e., costs reduction because of increased production capacity across the supply chain) as well as the tax arbitrage (i.e., the differential rates between sales and service taxes).

However, as argued in an EMIR Research article, “Budget 2022 & 12MP – debt ceiling, windfall & capital gains” (October 13, 2021), introducing the GST at a time when private spending and consumption is uneven and only slowly picking up momentum could lead to rising wealth and income inequality, especially if it’s set against tax cuts across the board.

This is simply because it means the poor and the B40 would be effectively subsidising M40 and T20 tax cuts.

To repeat here, the GST is inherently regressive, i.e., it disproportionately affects the lower-income households who have to pay a higher consumption tax payable as a percentage of income or “GSTI” (for a detailed analysis, see “Implementing Goods and Services Tax in Malaysia” by Dr Lim Kim Hwa & Ooi Pei Qi, Penang Institute, 2013).

Even if there are no tax cuts (income and corporate), reintroducing the GST would still be un-progressive even at an initial lower rate of, say, 2%. The lower income would still be subsidising for the better off, i.e., for the lower rate(!)

And also because of the multiplier factor – which is to say, the scope of the GST (i.e., the number of goods rated) would multiply the consumption tax burden on the lower income.

But wouldn’t the unconditional cash transfer (UCT), therefore, come into place to mitigate that burden – by topping up the income of those in the Poverty Line Income (PLI)?

UCT is a laudable policy initiative. Better still is a Jobs Guarantee (JG) – that rises with the growth of the minimum wage (in the private sector).

Nonetheless, at the end of the day, because of the (disproportionate) tax burden in the first place, the poor and B40 would still be in effect subsidising themselves but with a UCT – and this is critical – that’s less than a regular income.

That is, it’d not only be progressive but more impactful if the UCT is then “upgraded” into becoming a universal basic income (UBI) of a minimum RM1,000 per month.

Only then would the threshold that netts down (i.e., equals) the difference between the UCT and GSTI, i.e., what is paid out and received back in return, would be one and above.

In short, the UCT ought to exceed the GSTI – which isn’t the case at the moment.

Again, a JG is far better than a UBI. A JG combined with UCT would reduce the number of households qualifying for the latter – even where the newer methodology of PLI RM2,208 is employed.

The GST might also derail recovery from the transitory inflation that’s currently in force. This is unlike a situation where the GST is already entrenched and part of the costs of doing business and transactions.

While core inflation remains low, certain items, for example, with reference to food items persists as can be seen in the updated menus (the phenomenon of sticky price).

Unlike the Singapore dollar which is strong and highly stable (driven primarily by the “slope” set within the “width” as anchored in the “mid-point” – the triple monetary policy band settings), our RM isn’t, and subject to “swings” from time to time. Coupled this with our balance of payments (BOP) for food imports which is in a persistently strong deficit.

In other words, GST regardless of the rate adds to the (transitory) inflationary pressure at a time when we should be aiming for the opposite by reducing taxes, i.e., in order to increase purchasing power so as to stimulate greater aggregate demand.  

Then too, Singapore – a long-time practitioner of GST – is now seriously mulling the introduction of wealth taxes (“Singapore studying how to expand wealth tax system as it relooks fiscal strategies: Lawrence Wong”, Channelnewsasia, October 15, 2021).

There’s also the perennial issue of GST refunds delay – which affect the cashflow of the micro-small-and-medium-sized enterprises (MSMEs) – mired already in debt just to stay afloat. The verification process can be very time-consuming, among others.

At the end of the day, the GST could be conceived as an ideological bias towards less reliance on government debt or borrowings as expressed in a low(er) debt-to-gross domestic product (GDP) ratio that’s concomitant with a fiscal consolidation strategy that’s skewed towards the stereotypical 3%++ fiscal deficit.

Of course, this is all counter-productive.

Thinning the bond markets is neither desirable nor realistic.

It’s not desirable and realistic because the bond markets need risk-free safe investment haven that are the RM-denominated bonds (near-zero risk of default).

It’s not desirable and realistic also because the bond market is one avenue in which our Employees Provident Fund (EPF) can rebuild the accounts of those whose savings have been depleted through the i-Sinar, i-Lestari and i-Citra schemes – through special/exclusive and higher coupon rates. 

In the finally analysis, the GST is the one tax that is the most politicised, ever.

On the one hand, it’s been used by one side as a tangible symbol of higher cost of living.

On the other hand, it’s been used by the other side to divide and rule the rakyat – by portraying it in ethnic terms.

In front of the Chinese, it’s said that the Malays would now pay their fair share of the tax burden. In front of the Malays, it’s said that the (greedy) Chinese would no longer be able to avoid and evade paying their fair share of the tax burden.

Of course, the politicisation of the GST in purely terms of ethnic propaganda is divisive and corrosive of efforts at nation-building and strengthening inter-ethnic relations.

Maybe this is just one more reason why we aren’t ready for the reintroduction of the GST.

Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.

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