Abolishing GST is Harapan’s first major mistake

Opinion  |  P Gunasegaram
Published:  |  Modified:

A QUESTION OF BUSINESS | The first major mistake the new Pakatan Harapan government will make is the zero-rating of the goods and services tax, or GST, on June 1 ahead of its complete abolition at a future date.

This is in fulfilment of an election promise in its manifesto but the intention to ease the burden on most people can still be done without dismantling the GST.

There is much that is good in the GST and going back to the old sales and service tax (SST) system will cause major problems to businesses in Malaysia which are just getting used to the new system.

The removal of GST will impact most people very little - because most essentials are already zero-rated anyway - and benefit most those who are much better off, those who evade taxes and those who spend a lot of their money on non-essentials and consumption. It may even lead to price increases through profiteering.

According to Council of Eminent Persons chairperson Daim Zainuddin, the amount of tax collected via GST is about RM44 billion. If the old SST is re-imposed, then the tax collected is RM30 billion which effectively gives a shortfall of RM14 billion in revenue to be made up. Presumably, these are the latest available figures.

The important thing to note is that Malaysians are not getting a complete break from GST but a replacement of GST with the old SST and in the process getting a tax holiday from the time GST is zero-rated to when the SST is re-imposed - in about two to three months, according to Daim.

Malaysians will collectively get a tax break of RM14 billion a year, not the full RM44 billion.

The two to three month tax holiday will provide more gains but only to those who consume and it will cause a significant distortion in the marketplace for consumables as people rush to buy them ahead of the re-introduction of the SST.

There will be production and supply bottlenecks and an unusual surge in consumer spending which may help to push economic growth up this year but will crimp growth next year when there will be no more impact from this one-off event.

All these are needless problems. It is not necessary to dismantle the GST. It can be kept but tweaked to give the desired amount of tax breaks to the public with no disruption whatsoever. And what’s more, the GST can also be tweaked such that the lower income group gets more of the benefits. It may be more difficult to do this with the SST.

For instance, if all clothing, footwear and accessories now attract a GST of 6%, a selective GST can be imposed such that those items which cost less than, say, RM50 per item are zero-rated. That’s a direct benefit to the lower-income group. Those who buy Hermès Birkin handbags which cost more than most cars, for instance, will not get this break.

This can be done throughout by identifying products which need to be zero-rated for maximum benefit to the lower and middle-income groups. An example - zero-rate GST for cars costing below RM60,000 and progressively increasing the GST for cars that cost more.

By that means, it is possible to keep the GST but tweak the zero-rated list for maximum benefit to the lower and middle-income groups to the tune of RM14 billion which cannot be done by the implementation of...

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