DAP strategy head Liew Chin Tong’s urging that the goods and services tax (GST) not be reimposed in the coming budget is wrong and is based on the same incorrect premise that the party made in its election campaign for GE14.
Here’s why.
One of the first things that the Harapan government did when it gained power at GE14 in May 2018 was the scrapping of the GST which had been introduced by the previous administration under Datuk Seri Najib Razak, on April 1, 2015.
The DAP campaigned on the platform that GST had raised prices and reduced consumption, but this was the wrong premise. In 2015, the GST was already in effect for three quarters of the year. In 2016, for the full year.
Thus, it could not have been responsible for price increases in 2017 and beyond because the price increase is just a one-off effect. Also, the assertion that it affects adversely the lower and middle-income group is wrong because the GST had a long list of exemptions which included some 200 items considered to be essential, including food and cheaper clothes.
If you were poor you would not have been significantly affected by the GST.
New finance minister then Lim Guan Eng was adamant that this Harapan manifesto promise was fulfilled as soon as possible after coming to power in May 2018 even though there was an immediate and deleterious effect on the financial state of the country because revenues from this tax would be halved to about RM22 billion.
In fact, he went beyond that. He scrapped the entire GST system when the DAP in an explanatory note on the GST in 2017 said it won’t scrap the tax.
Here’s an excerpt from that note.
“Critique: Companies have spent millions if not billions in implementing the GST system. Won’t all this money be wasted if we get rid of the GST?
“Response: We will not get rid of the GST system. All of the items which were not taxed during the SST regime will be ‘zerorised’ i.e. 0% GST tax rate. All of the items which were taxed at the point of production during the SST regime will have the same tax level at the point of production. We will use the existing GST system to collect the SST (sales and services tax) related taxes.”
But Lim went beyond that, scrapping the meticulously prepared GST completely, against the advice of the Customs director-general then in favour of an SST, causing considerable disruption to the system. He could easily have achieved the same effect by keeping the GST, and as the DAP said simply “zero-rise” taxes for exempted goods.
Why he did not do that is a mystery especially since the GST, being a value-added tax, would have resulted in meticulous account-keeping to get refunds for inputs at each stage of the production process. If they fudged their accounts, then their refunds were reduced.
In the long-term what happened is that Lim by rolling back the GST in favour of the SST contributed to tax avoidance and evasion by using an archaic SST which made it easier for businesses to falsify accounts.
Lim was also in a big hurry to not only scrap GST but to make refunds totalling some RM35 billion for GST and income tax, a move that benefited big business and businessmen. Eventually, Petronas had to cough up some RM30 billion in extraordinary dividends to fund this.
The Malaysian GST is an excellent system because it introduces two things - since it taxes value, you only pay the tax for the value you add as a producer and you get refunds from the government for other inputs. And two, it taxes consumption, not all consumption, but non-essential consumption.
The richer you are, the more you consume and therefore it taxes the rich more. And if you are a tax evader it makes it more difficult for you to continue to be so. If you evade tax, some of it is recovered when you consume more than the others. It broadens the tax base.
This article (10 reasons why Pakatan Harapan is wrong on GST) that I wrote back in 2017 gives 10 reasons why the GST is a better tax than the SST.
Liew Chin Tong makes the same mistake saying: “Any sensible government in Malaysia would not waste any political capital on a question that was already resoundingly decided by a general election so clearly. One of the most salient topics in the lead up to and during the 14th general election was GST.”
That’s DAP’s viewpoint but the fact is this - in 2018, GST was no longer responsible for rising prices - other factors such as the depreciation of the ringgit, red tape, corruption and an inefficient economy were more important. If DAP did well because of the GST issue, they did well on a lie, but honestly, I think people wanted a change - GST or not.
It is time to revert to a GST system for the future health of the economy and to tax consumption to recover some money from income tax evasion. But one must worry about the impact it will have on the economy now which is already weakened by the Covid-19 pandemic.
The answer to that is to keep the net collection neutral by having an identical GST to the current list of goods and services under the re-introduced SST. That would cause little problems while giving the flexibility to raise the rates when necessary.
One of the worst things the previous Harapan government did was to get rid of GST, causing a government revenue crunch and to resort to Petronas to raise money. But it can be easily undone in stages, and the time has come to take that first step.
P Gunasegaram says the GST is a great way of taxing those who can afford to consume. Eat at a posh hotel and you not only pay 6% but a 10% service charge on top of that. But a “Mamak” attracts no such charges. He is Editorial Consultant at The Vibes.
