KINIBIZ The pre-budget 2013/2014 Economic Report released by the Finance Ministry today includes a section on the long-anticipated implementation of a national Goods and Services Tax (GST).

Prime Minister Najib Abdul Razak is widely expected to at the very least, announce a GST framework during tonight’s 2014 Budget speech for eventual implementation at a later date.

The budget announcement is set to be one of the most contentious yet. Economists predict Najib, who also holds the post of finance minister, will need to introduce some difficult measures to narrow the growing fiscal deficit.

This would likely include the introduction of GST to broaden the tax base and lay the foundation for a source of stable tax income.

In four pages, the report detailed the shortcomings of the Sales and Service Tax regime, explained the rational for the introduction of GST and listed the essential goods and services exempt or zero-rated from the tax.

The Finance Ministry confirmed the GST as a replacement tax to the current Sales and Service Tax currently levied at a maximum rate of 10 percent and 6 percent respectively.

According to the report, “Sales Tax and Service Tax will be abolished and replaced with GST, if implemented.”

“There are inherent weaknesses in the structure and implementation of the Sales and Service Tax… contrary to basic tax principles such as neutrality, equity and efficiency,” said the report.

'Essential' foodstuff in exempt list

Measures to reduce the regressive nature of the GST listed in the report include a long list of zero-rated and exempt supplies on goods and services deemed essential, such as foodstuff.

Federal government revenue from Sales Tax and Service Tax is estimated to reach RM16.4 billion or 7.4 percent of total revenue.

Of this number, Sales Tax is expected to generate RM10.2 billion and Service Tax slightly less at RM6.2 billion, according to the Economic Report.

A Finance Ministry tax review panel in 2009 proposed an introductory GST rate of 4 percent as revenue neutral to the current Sales and Service Tax regime.

Since then there has been no further indication of the GST rate. But according to reports the rate will be set no lower than 4 percent and no higher than 7 percent.

GST is a value-added consumption tax. KiniBiz has a detailed explanation in a four-part feature on the controversial tax system.

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