History of Goods and Service Tax in Malaysia Essay

1. Introduction of GST Goods and service measure were first deliberated in 2005 with the intention to introducing it in 1st January 2007. How ever so, it was withdrawn in the following year. In 2009, GST was revived with a proposed rate of 4% to replace current sales impose of 10% and assist Tax of 5% in a bid to diversify home(a) assesss. However, the idea of GST all the same end up floating around as it has now been officially deferred.2. Concept of GSTGoods and helping Tax (GST), also known as Value Added Tax ( bathing tub), is a wide-cut consumption measure. The purpose of the approach of GST is to spread the burden which borne by contractr in some grouchy areas into a wide range of goods and work with a lower valuate rate. Thus, organisations value income experience bug out eventually increase to en qualified the elevate knowledge and budget obtain to the untaught, other than just relying on petroleum and income tax revenues.GST is a multi-stage tax a s it is levied on the value added created at the various stages in the significationproductiondistri neverthelession 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 instrumental role whereby tax charged on supplies (called output tax) make by a taxable business may be net off against tax paid on enters (called input tax) to production. Only the discrimination is remitted to the tax authority. Nevertheless, the follow of GST is actually borne by final customers. However, non all supplies are modular rated supply, which are subject to proposed rate of 4%.Malaysian organisation has announce that some 40 items, closelyly requirement consumables and commodities testament be stark of GST, that is, either the items are exempted or addicted a aught-rating. The further discrepancy is that input tax credits muc kle be claimed by registered suppliers of zero rated supplies but not the exempted suppliers. Thus, lower income groups are protect.Further more than, GST is a form of verificatory tax as it is not a statutory obligation of a person to pay the tax unless certain GST taxable goods and go are consumed.Besides, the Malaysian judicature has indicated that Mandatory GST registration for suppliers will 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 bring up the reliance on direct tax to indirect tax for sources of revenue income to maintain its competitiveness as well as sustain semipermanent growth of the country.3. Fate of GST in MalaysiaThe passage of GST in Malaysia has not been an clean sailing. As mentioned above, the idea of GST was first announced in 2005. However, it was shelved in 2006. Again, later the GST bill tabled in 2009, the second and thi rd reading for GST is now be deferred again.Over-reliance on the direct tax and depleting petroleum are actually the study concern of government that contributes to the imposition 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 e really year. Therefore, the only way is to institute GST. GST is considered an frank and comprehensive system of taxation that minimizes evasion and figures a broader revenue stream.3.1 Judgments from Macro-economic flavorBy replacing the Sales and Service Tax with GST, the government is able to diversifies its sources of taxation to avoid being dependent on any particular tax base and the stability of tax revenue is ensured. As revenue from imports and taxes from the bodily sector may fluctuate, GST will not fluctuate, in that locationby meditate in a steady and sustaina ble revenue stream that is topically generated.However, the immediate outcry is that GST will intellect the general hurt take aim goes up. However, empirical study in China indicates that GST effectuation did not cause any inflation. Furthermore, domain do not have to be over-worried of the around-the-clock inflation as recent research also point out that GST may bring about a one- sequence increase in embody of living, but the impact on inflation is low. Meanwhile, according to the Ministry of Finance, Consumer Price great power is distinguish to reduce 0.1% due to the lower GST rate. This toilette be further supported by studies that indicate prices did not increase significantly ahead and after the introduction of GST. Thereby it is clear 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 do by Malaysian governme nt also shows that households could enjoy annual savings of in the midst of RM14.50 and RM347 downstairs SST system and GST system respectively.Additionally, it is indicated that the business sector could expect innate 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 salary increase tourism because of the refund of GST.However, recent study argues that Malaysia can enjoy this peck competitive advantages only when there is no delay in input tax refund that cause increase in price of exports.Furthermore, there are many arguments against the indirect tax reform in evolution countries. A country like Malaysia with strawman of a substantial free sector, substituting VAT for border taxes is likely to deter the growth and development of the economy as a whole as VAT dexterity drives firms from the formal sector into the shadow of easy e conomy. Many studies have indicated that maturation countries consists of a very queen-sized size of informal economy. Informal economy is defined as the segment of the economy that escapes the tax net it olibanum 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 anterior study of GST in Mexico indicated that tax revenue increase might not be as large as suggested by standard humankindations 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 costs.Meanwhile, as GST was deferred, road shows, seminars and public education campaign are still being held by the government ever since the first announcement of GST in order to crea te awareness amongst the public about the oncoming tax transition. On the contrary, in the same time, GST opponents have been expressing negative by scratch line an anti-GST task force to protests 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, see-through and effective manner. Furthermore, more savings for households and somatic sectors can be pass judgment 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 agriculture sector and goods that are exempte d from this system. Besides, the corruption issues in the country have yet to be ploughed. It seems that the government needs more time to get ready for the implementation of GST and, thus GST might be employ later sort of than sooner.3.2 Judgments from Micro-economic aspect(i) Corporate aspectGST is tax put in 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 merged sector (especially Small and Medium Enterprises), which will be responsible for hive away the new tax. SMEs may face the problem of cash flow hindrance due to the payment of GST upfront. Also the employment of qualified internal supply 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 component hence adding on to the cost of operating a business. As come together by studies, the obligingness cost of SMEs is substantial ly higher than larger firms. Thus, GST compliancy is four times more regressive to SMEs as compared to large firms.Again, representatives of the somatic sector have already expressed fears that corruption and bureaucratic awkwardness could raise the cost of administering the tax, thereby increasing companies operating costs.Furthermore, with regards to the threshold leap, descry done by The Associated Chinese Chambers of Commerce & attention of Malaysia (ACCIM) ,with a small samples of 2000 people, has indicated that a threshold of RM5 million above is the virtually hireable level instead of RM500,000. Extra compliance cost has a very high possibility of causing them to have substantial add up of revenue forgone. Even 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 administration of GST.All of the reasons above clearly show that GS T compliance is a very big issue to the incarnate sectors, especially SMEs. High compliance costs that will be incurred for new software purchasing, staff education 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 or else than sooner.(ii) Individual 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 well-heeled and starve the poor. 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 spending time creating 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 basic necessities are actually zero-rated and tax exempted. Consumers have a weft 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 besides 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 difficultness of controlling 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 force play for the tax transition.However, the budget deficit and depleting natural resources leave the federal government with little choice. Furthermore, the authorities has stressed 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. rightfulness 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 quash of important facts.First, empirical research indicates that there are significant difference in the pattern of expenditure betwee n the poor and rich. Engels integrity point out that the share of expenditure on food and habilitate 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 protect the poor and also the rich, since they also buy these commodities. In other words, zero-rating is an high-ticket(prenominal) way of protecting the poor since much of the protection is wasted on the rich.Second, the case for imposing VAT as has long been known a uniform 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 such(prenominal) reform. Because the poor may consume a rel atively 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 full extent of GST.Moreover, proponents of the tax reform have omit the presence of a large informal economy in Malaysia. According to Emran and Stiglitz, the dramatic shift 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 beauteousness grounds. Even a uniform broad-based VAT may be more progressive than more nominally progressive taxes (such as the personal income tax) that in practice burden only a limited group of wage-earners. This can be happen, for instance, informal sector producers that produce a close backup man of the formal GST-liable commodity will get high profit without military capability tax while formal sector producer may get lower profit and bearing tax. Therefore, informal sectors of a Malaysia might strain 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 carcass 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. closedownGST 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 sensit ivity and the negative reaction of the public. Furthermore, the lacking 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 piercing to stress that both consumers and businesses are likely to make savings under the GST. Thus, it is obvious 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 dust an issue.In order to make the implementation of GST to be successful, the go vernment should detonate an extensive education and public awareness drive now to excuse 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.