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Taxing Thoughts

‘Abiding Times’, theSun, 4 December 2009

THE debate within and outside Parliament about the proposed Goods and Services Tax (GST) has progressed rather quickly since last week: both in terms of volume and quality. Few seem to be arguing against it philosophically: the sticking point is the timeline. Having worked in four tax jurisdictions, I also see no reason why we shouldn’t implement GST in this country, so long as there is a commensurate reduction, simplification and flattening of income tax, in addition to replacing the 10 percent tax on manufacturers.

Firstly, as it is a tax on consumption it will capture those who ought to, but aren’t, paying income taxes, such as the super-rich who have found ways to evade income taxes. It would generate revenue from tourists and visiting Malaysians normally resident abroad, such as students or the increasing number of ‘brain drainers’, and also enable illegal immigrants to be covered by the tax regime. Nevertheless, the poor can still be shielded through either the exemption of certain goods (such as rice) or the implementation of localised subsidies (fiscal decentralisation being a prerequisite) until we reach a sufficiently high-income status.

“Under a GST system, there is less room for evasion and manipulation.”

It would also probably be easier and cheaper to administer than the current system that we have. When I filled in my tax form for last year, I was staggered by the boxes for special rebates and discounts that one may or may not be eligible for depending on certain criteria. It must take quite a few bureaucrats to check that these forms are properly filled out! (At least in the UK, the reimbursements or shortfalls are calculated for you at the end of the year, and the onus is on you to check that they are correct.) Under a GST system, the shops and providers of services themselves crunch most of the statistics and there is less room for evasion and manipulation.

However, critics of GST cite the present leakages, hidden taxes and distortions that exist in the present regime. Surely, they say, these should be addressed first? Of course they should be addressed, but the benefits of moving to GST may still be significant if done sooner rather than later.

Besides, progress is being made on the distortions. Earlier this week, we saw that the government plans to remove the subsidy on sugar. Because of this long-standing subsidy, a generation of Malaysians have become sweet tooths with the result that over 43 percent of Malaysian adults are overweight or obese, creating heavy burdens in government hospitals. Logically, many health NGOs want the subsidy removed to alter consumer behaviour. (Of course, the other side of the equation is the amount the taxpayer spends on government hospitals, not to mention the morality of having healthy Malaysians paying for the unhealthy lifestyle choices of some of their countrymen.) In the future, instead of subsidies, variations in the amount of GST levied on goods could be invoked instead—with less distortions to their market price than outright subsidies.

In the meantime, there is another subsidy which is resulting in undesirable consequences, and that is petrol. Several friends fell ill this week as a result of the heat and smog and yet there is little incentive for us to buy environmentally-friendly vehicles. Even with the rebate on hybrid cars, the triple whammy of petrol subsidies (for now), protectionism (which one day, we are told, will end) and inadequate public transport will ensure an increase in noxious gases in our cities.

It was, therefore, excellent that the government responded favourably to pressure from vintage car owners to scrap the mandatory inspections of older cars in the National Automotive Policy: although they may pollute more, the fact is many people can’t afford the cleaner cars they prefer due to market distortions, and it’s rather insulting to vintage car owners to suggest that they won’t keep their cars in tip-top condition.

As in the sugar subsidy removal, this is the way forward: government listening to the views of voluntary (and multiracial) groups who have things other than race to harp on about. Although I’m sure someone will try and turn GST into a racial issue …