COMMENT The avoidance of taxes is the only intellectual pursuit that carries any reward. - John Maynard Keynes

Pakatan Rakyat today unveiled its shadow budget in anticipation of the federal 2014 Budget. One important area that warrants serious attention is the implementation of the proposed goods and services tax (GST).

In the last 20 years or so, GST (or in some countries, value-added tax, VAT) has been implemented in developed and developing countries to broaden the tax base and increase government revenue.

The official website of the Royal Malaysian Customs Department states that as of 2010, a total of 146 countries have implemented GST/VAT.

anti gst protest 231013 kajang 01Malaysia is expected to generate revenue of RM20.5 billion (with a GST of four percent, with the exemption of basic necessities such as rice, flour, cooking oil, education, public healthcare, etc).

This will be a 36 percent increase in revenue, compared to the existing sales tax and service tax, which the GST is meant to replace. Thus, the GST is expected to account for approximately 13-14 percent of the total tax revenue if implemented, as compared to 9.9 percent in 2012 with the sales tax and service tax.

However, the key question is: what are the risks involved when the GST is implemented by a government that is not managed effectively and efficiently?

Historically, two key risks emerge when a country tries to implement GST without first having effective processes and policies in place for better governance.

Firstly, the potential for fraudulent practices may arise among businesses and government officers, and secondly, the potential for failure due to lack of proper planning.

Potential for fraudulent practices

In essence, the mechanism of the GST is such that products and services are taxed at each stage of the supply chain, resulting in an input and output tax. The input tax incurs on business purchases and expenses (relevant to manufacturers or retailers), while the output tax is the tax charged to the buyer.

For businesses (consumers generally have no input tax), the difference between the output tax and the input tax is the amount paid to the government.

However, if the input tax exceeds the output tax, then the business can claim a refund. This creates an opportunity for corruption, as the power of tax officers to make refunds may open doors to bribery by business owners.

Furthermore, the government faced with budget pressures may also delay refunds to businesses. These fraudulent practices will not only be evident with the implementation of GST, but also during revisions to the GST.

In India, the GST was revised lower and consumers should have benefited from the reduced sales tax. Unfortunately, due to a lack of monitoring, businesses were keeping the extra gains by charging consumers the same price levels.

In Pakistan, government officers are wary of the potential for corruption and under-invoicing as the country is considering increasing the GST from 16 percent to 17 percent.

Without proper management, it is not surprising for countries to even find that the implementation of GST lowers government revenue, instead of increasing it.

Lack of proper planning will be cause for failure

In 1995, Ghana implemented a VAT system that lasted only three-and-a-half months. The main reason for Ghana's failure was due improper management of public perception, insufficient time to identify the right people, implement procedures and starting the registration of taxpayers, and an unprepared tax administration.

All these factors boiled down to the government's inefficient and ineffective planning prior to implementation.

A similar case was found to occur in Ukraine, during the period 1998 to 2004 when real GDP rose by 49 percent, but the VAT-to-GDP ratio decreased by 33 percent (generally, as GDP grows, VAT yield should also rise, at least at the same rate as GDP). A study showed that the decline in the VAT-to-GDP ratio was caused by the country's ineffective tax administration.

Additionally, successful GST implementation is contingent on income equality

There are also other factors that should be taken into consideration prior to the implementation of the GST. Among them are the infrastructure, the people, the processes and policy, and proper planning.

With the on-goings surrounding Malaysia, such as the National Feedlot Corporation scandal, guns missing in the sea (and possibly in the toilet too), large spending on computers and study trips, the question looms whether the GST should be implemented.

The government should instead focus on the root causes that are causing serious leakages in public funds. From a government management perspective, we have a cost issue, not revenue.

RAJA AHMAD SHAHRIR is Research Associate at Institut Rakyat, a think-tank affiliated with PKR. He tweets at @RajaShahrir and his Facebook is Raja Ahmad Shahrir.