Should you fear the new tax?

GST can mean many things to many people and economists argue that it’s inevitable for the good of the country.

ONE Dr A. Soorian of Seremban must have drawn quite a bit of attention when his letter to the editor appeared in Sunday Star on Dec 27. Writing about the proposed 4% goods and services tax (GST), he describes the tax as “a broadband weapon with cumulative effects down the line”.

“When the manufacturer sells goods to the agent, he pays 4% GST, and when the agent sells them to the wholesaler, another 4% is levied. It does not end there. When the goods are sold to the retailer, another 4% is added. Eventually when the consumer purchases them, another 4% is hammered in,” he complains.

“The consumer is potentially liable to pay 16% tax in the upshot!”

He was very wide of the mark, of course. Two readers wrote in to point out that GST does not work that way. The 4% is imposed on the value added at every stage and there is no double taxation (or cascading effect, in the argot of tax consultants).

Aptly enough, Soorian began his letter with this line: “The question of the GST is like the Dead Sea scrolls. It apparently means all things to all people.”

The tax may not be as open to interpretation as the ancient documents, but it certainly has attracted its fair share of criticism, apprehension and misconceptions. After all, it is a tax. How many people are glad about another avenue for the Government to collect money from us?

Nevertheless, consumers in Malaysia are likely to be paying GST (also known as valued added tax, or VAT) from the middle of next year. The pressure on the Government to introduce the tax has been mounting for some time now.

Most countries in the world have implemented similar tax systems to diversify their governments’ revenue sources, and we are going down the same path. To remain competitive as an investment destination, we need to depend less on income tax and to turn to direct tax instead.

The productivity of the sales tax and service tax are not keeping up with our economic growth, which exposes weaknesses in the regime. Also, Malaysia has to start weaning itself off petroleum revenue amid a need to trim the budget deficit.

Thus, in his Budget 2010 speech in October, Prime Minister Datuk Seri Najib Tun Razak indicated that the Government had revived the plan to introduce GST. An earlier plan had been to implement GST in January 2007, but this was deferred in February 2006.

The tax plan cometh

This time around, things have proceeded quickly. Last Dec 16, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah tabled the GST Bill for first reading in Dewan Rakyat. The Bill will be debated in March. Meanwhile, the Finance Ministry has kicked off publicity initiatives on the new tax.

This is a critical step. There is a lot of hand-wringing over the impact of GST. The Soorian letter is merely the tip of the iceberg. Bringing GST into our economic landscape is a major move, and change management, including creating awareness and education, has to be a priority.

Says tax specialist Dr Arjunan Subramaniam: “There is always resistance to change, even change for the better. The main challenge is addressing the mindset of taxpayers. They need to be educated on this new method of indirect taxation.”

Deloitte Malaysia country tax leader Ronnie Lim calls for honesty and transparency in providing information and views on the tax. “GST will have pervasive effects. There has been, and should continue to be, open communication with all who are affected, especially groups perceived to be most disadvantaged,” he says.

Lots of people believe that they will be burdened by GST. It is almost conventional wisdom that the introduction of GST will automatically trigger inflation.

The Malaysian Institute of Accountants calls this a misconception. “If GST is implemented systematically and effectively, and profiteering activities are curbed, inflation will be minimised,” it argues. There are numbers to back this up.

Often cited is the work of Scottish economist Alan Tait. In Value Added Tax: International Practice and Problems, a book he authored in 1988, when he was with the International Monetary Fund, Tait examined the impact of VAT in 35 countries.

His conclusion? “Most governments and the public anticipate with trepidation the effect on prices of introducing a VAT. However, the evidence shows that in most countries the introduction of VAT, or a change in VAT rates, is not inflationary; the change might lead to a once and for all shift in prices, but not an acceleration of price changes,” he wrote.

But this was more than 20 years ago, and cannot be utterly comforting today. For those who still fret over the possibility of rising prices, one source of optimism may be the fact that Malaysia’s GST strategy is the product of several years of consultations and studies.

Lightening the load

One of the prime movers of the GST plan is the Finance Ministry’s Tax Review Panel, which comprises representatives from the public and private sectors. Among its assignments was the formulation of the concept, legislation, processes and procedures for the GST.

The panel spearheaded a social impact study conducted between 2005 and last year. This included public consultations with various industries and sectors, and company visits.

Tax practitioners laud the extensiveness and transparency of the exercise. In particular, they are pleased that were asked to comment on the draft of the GST Bill. The postponement of the GST implementation is also seen a good move because it allowed the Government to fine-tune its GST gameplan.

“The strategy is well thought out because the Government never stopped working on it, even after plans to implement the tax was suspended in February 2006,” says Ernst & Young Tax Consultants Sdn Bhd partner Bhupinder Singh.

More importantly, none of the tax experts expect anything worse than a one-time jump in prices, and that too may not be by a lot.

Chartered Tax Institute of Malaysia (CTIM) president Dr Veerinderjeet Singh points out that a mitigating factor is that the GST will supersede the existing sales tax and service tax.

He says: “Those who say GST is an additional burden on taxpayers are barking up the wrong tree. It’s not true to say it will lead to inflation, which is defined as a persistent increase in prices. We expect a marginal spike in prices, if at all, because GST is a replacement tax, and it can be managed.”

An important aspect of the GST implementation is that it will not just hinge on the tax rules. To prevent traders from exploiting the introduction of GST to hike prices arbitrarily, the Government has lined up related legislative and enforcement measures.

“In the short term, although prices of certain goods and services may be affected by the GST, this should be cushioned by the introduction of the Anti-Profiteering Act,” says KPMG Tax Services Sdn Bhd executive director Tan Eng Yew.

“In addition, a Price Monitoring Council will be established to monitor prices of selected basic necessities and services. The council will penalise businesses that try to profiteer by raising prices.”

Also, to alleviate concerns that the low-income group will be badly disadvantaged, the Government has assured that the new tax will not be imposed on certain basic food items and basic necessities. These may include rice, sugar, vegetables, eggs, meat, poultry.

Among other items that may be exempted from GST are domestic transportation, residential property, private health and education, and government services.

Business concerns

Because it is a consumption tax, GST works on the principle that it is not a cost to business. Yet, businesses that underestimate the impact of the tax and the work needed to be ready for the tax, may find themselves in trouble.

Says Lim of Deloitte, “For property, the winning strategy is location, location, location. For GST, it’s preparation, preparation, preparation.”

Khoo Chuan Keat, tax leader and senior executive director of PricewaterhouseCoopers Taxation Services Sdn Bhd warns of the complexities of the GST provisions, particularly when combined with complex operations and business models.

“Apart from compliance issues, failure to assess the GST impact on their businesses could result in input tax leakages, with adverse impact on competitiveness and profitability,” he adds.

The work required to get businesses ready for the GST implementation can be demanding. Employees have to be trained. IT and accounting systems need to be modified. Certain processes, structures and relationships must be reviewed to take into account the GST regime.

BDO Tax Services Sdn Bhd director Pauline Lum believes that it will be a race against time for some businesses. “Based on the experience in other countries that have implemented GST, it takes an entity 12 to 18 months to make sure that their systems are in place and are GST-compliant,” she says.

CTIM’s Veerinderjeet says another challenge lies in the quality of record-keeping. “My worry is that the culture of keeping proper sets of accounts is not as embedded as we think it is. It’s good to put out a message to businesses that they need to get their accounts in order and to appreciate the importance of keeping proper records.”

The smaller businesses may find it tough to cope especially. Professor Dr Jeyapalan Kasipillai of Monash University’s Sunway campus says the implementation of GST may results in a strain on smaller businesses due to higher compliance costs and the need for professional advice.

“The most significant factor determining cost increases for small and medium enterprises in implementing GST is ‘owner’s time’ needed for understanding the tax system and maintaining records,” he adds.

Given such constraints, it is more than likely than many businesses will find themselves in breach of the law unknowingly, particularly during the early days after the GST Act kicks in. This is a precarious position because the penalties are significantly harsher than those for sales tax offences.

Most observers expect the authorities to spare the rod in such circumstances. “Instead of flexing its muscles, the Customs must be gentle in implementing the GST for the first 12 months or so, and not resort to imposing penalties, except in cases of fraud,” urges Arjunan.

ACCA Malaysia country head Jennifer Lopez shares that stance: “Where businesses gets it wrong, first-time offenders should not be penalised. Instead, they should get support and help to correct their mistakes. This is part of the education process.”

In coming up with the GST strategy, the Government has demonstrated a willingness to listen and respond to the opinions of stakeholders. The tangible results have been well-received so far. And now for the big test – following up the sound plans with consistent and effective implementation.