A new single consumption tax - the Goods and Services tax (GST) - will be introduced by the government beginning Jan 1, 2007 to replace the existing sales tax and services tax.

In making the announcement, Prime Minister Abdullah Ahmad Badawi nevertheless stressed that the low-income group would not be burdened by the implementation of GST.

"In this regard, goods and services considered as basic needs will either be zero-rated or exempted. In addition, small businesses will also be exempted from this tax," he said when presenting the 2005 Budget in Parliament today.

He said the GST tax, based on a value-added concept, would be more 'comprehensive, efficient, transparent and effective', thereby enhancing tax compliance.

"The introduction of this new tax will also provide the government with the opportunity to reduce corporate and individual income tax rates," added Abdullah, who is also the finance minister.

At present, the government is levying sales tax on goods at the point of import or at the manufacturers' level and a service tax on selected services, including those provided by professionals and operators of hotels and restaurants.

The introduction of the GST is part of a review of the taxation system proposed by Abdullah in his first budget since taking over from Dr Mahathir Mohamad last November.

Review panel

Other taxation changes proposed by the premier include the establishment of a taxation system review panel that will ensure that the country's taxation system would become '... more efficient, equitable and business friendly, as well as being capable of generating a stable source of revenue'.

"This panel, comprising representatives from the public and private sectors, will review the tax system, including provisions of the Income Tax Act 1967.

"The focus of their review is to ensure that tax provisions remain relevant. Existing provisions will be amended to improve clarity and transparency of tax administration," said Abdullah.

He also outlined several measures to expedite income tax refunds to companies that have made excess payments on their corporate tax.

The measures include the setting-up of a fund to provide for income tax refunds and the offsetting of excess payments against the current year tax liability of the company.

In addition, Abdullah also proposed that the deadline to file tax returns by sole proprietors, partnerships, clubs and associations be extended from April 30 to June 30 each year to provide them sufficient time to prepare their accounts and ascertain their taxes payable.

He also proposed that zakat on business income paid by companies be allowed as a deduction for the computation of income tax, not exceeding 2.5 percent of their aggregate income. At present, companies paying zakat on business income are not granted any tax deduction.

Deficit budget again

Earlier, Abdullah said that the government expected to spend RM117.4 billion next year with a revenue of RM99.2 billion, running into a deficit of 3.8 percent - continuing an eight-year deficit streak.

Abdullah said that of the amount allocated for spending, RM89.1 billion or 75.9 percent would be for operating expenditure and RM28.3 billion for development expenditure.

"The largest development allocation of 49.1 percent or RM13.9 billion is for the economic sector to meet the requirements for infrastructure, agriculture and industry.

"A sum of RM7.6 billion or 26.9 percent is for the social sector, including education and training and health as well as housing. The security sector is allocated RM3 billion or 10.6 percent and general administration RM3.8 billion or 13.4 percent," said Abdullah.

The premier also said that the level of foreign reserves was at its highest level at RM207.2 billion or US$54.5 billion as at Aug 30, sufficient to finance 7.2 months of retained imports.

He added that the country also continued to enjoy full employment and low inflation with the unemployment rate being at 3.5 percent and the Consumer Price Index increasing by only one percent in the first half of this year.

He predicted that the economy was expected to grow at seven percent, higher than earlier projected.