Tuesday, August 20, 2013

GST For Malaysia, Malaysia for GST?

The textbook case for the GST is clear - it is in lieu of the direct income taxes. (1) Would the implementation of the GST means a corresponding reduction in the income tax, both personal incomes and corporate incomes? If it is not, and if it is not tax neutral and if it is to increase tax revenue, then there will be a net withdrawal from the system. If consumption is going to be the growth driver as investment falters, then you ain't got an economic strategy for growth.

(2) The counter-argument is that the GST is a replacement for the current SST the Sales and Services Tax. GST is argued to be more efficient than the SST. The SST is imposed at the manufacturing stage and its cost impact escalated through the supply chain. We all know that. The SST was preferred because it is easier to implement, especially the sales tax. The services tax is a bit messy as businesses start charging customers the services tax even when they do not have to, which means they are pocketing the receipts. The simple services tax cannot be properly implemented. Now, the preference is for a wide-ranging tax net on goods and services at every level of the supply chain, with GST being collected and GST refunded. Every firm now needs an HR section to sieve through every bill and make sure they are properly accounted for and submitted. This army is also required for the customs which is responsible for implementing the GST. All these are fine, because they have to be done and other countries are doing it - although I now hate shopping in London and then have to queue up at Heathrow (in fact, the agency sent me a cheque and my banker says it'll cost me more to cash it!). All these may create a minor surge of economic activity. But my major concern is that surely this adds cost to firms and the argument is that GST is better than SST because the GST has no escalation costs in the supply chain. Concept without reality.

(3) To complicate the implementation, there is also zero-rated items and sectors which I am surely everybody will try to get into, with or without the approval of whoever is the approving authority. This will create the same problem with subsidy which the government trying to abolish in the midst of selective handouts. This is clearly selling to the general public. Now the problem is this: if the majority of the voters are poor, and the government is concerned about it, then the government is presiding over a failing economy. Are we seeing an economic strategy of how to fail an economy?

I think we are in great danger of mistaking management consultants for economists, and if they are so clever, they should all be taking a proper job rather than hopping from one to another the success of which cannot be traced. The reason for the dire of proper investments in this country is that there is a lack of clarity in economic policy, except for the consistency in punishing the locals who save, invest and work hard.


James said...

Ethorist, thanks for this, you have answered my confusion as to how economists figured that the government can increase tax revenue and say that there is no increase in taxes. The increase from revenue must come from consumers, so if there is any increase in tax revenue there must be somehow an increase in taxation, all things being equal unless GST is able to stimulate an increase in consumption. Claiming efficiency in collection is to assume that GST is less prone to tax evasion and tax fraud, which is difficult to believe at best. Unless I still got it wrong somehow. Walla, your thoughts?

hishamh said...


The increased tax revenue from GST will largely be derived from more goods falling within the tax net as relative to the sales tax, which has quite limited coverage in practice. In that sense, consumers will be paying more. Note that higher prices don't figure into the picture here.

Research into the question of tax fraud and evasion (the serious kind, not the consultant kind), confirms that GST?VAT is more resistant than sales taxes.

In fact the mechanism of a GST/VAT should drive both the above results - as businesses will want to claim rebates on their inputs, that simultaneously improves tax collection while increasing the tax coverage of goods and services.


A few clarifications:

1. The current sales tax is single-stage, not multi-stage, and applies only when goods are sold at retail - there isn't a cascading tax effect.

2. I think you're confusing the service tax with service charges that many restaurants and hotels tack on to the bill. The former is statutory and goes to the government, the latter is not and does not.

3. I don't think a cut in either the corporate tax rate or income tax rate is really warranted in Malaysia's case, as the tax base is so narrow, though that's jus my opinion.

etheorist said...

James & hishamh,

Thank you for your comments.

1. The cascading tax effect of the SST argument comes from the official presentation which uses the example of a sales tax at the manufacturer level and the tax enters the entire supply chain later on with the tax at the wholesale and retail level. This example is used to show why SST is no good and should be replaced with the GST.

2. I am using the terms as used by economists. Of course, at ground level, the service tax is billed as government tax and the billed service tax is in tip for the staff. The cut-off used to be or is RM1 million annual sales turnover. The proposal now is RM500,000.

3. This is an interesting area for debate. If the base is narrow, then the adverse impact of a cut in income tax on the government should be minimal, and therefore it should be an excellent to go all the way with the textbook argument for indirect taxes to discourage consumption (and presumably to encourage savings) and for no direct tax principally income taxes in order not to discourage work and effort.

This debate was first started in this country in the depth of the last recession, so it is not all that new. The GST/VAT was given up because of the intricacies of implementation in the pre-digital age. SST was recommended for its simplicity. There is always the issue of VAT theft, which points to the issue of enforcement.

walla said...

Some time back i had posted links to studies on major issues faced in various industries from implementing GST in a number of countries.

Perhaps those issues are still fresh in the minds in treasury as they ponder when to roll out the new tax regime. There must have been some compelling reasons for the delay.

Yet it may be said other countries have implemented it without fanfare. However we can ask whether their official silence really meant there were no problems masked to hide issues which still prevail. I think those who are about to decide whether to roll-out now should answer that first.

In any case, i add a few more articles at the end of this comment. Language aside, they should merit some reflection.

There are a few shadow issues one can think of which may impinge on the roll-out:

the cashflow effect

There is a new dynamic in a multi-stage tax regime that is not so apparent in a single-stage tax regime.

The dynamic is cashflow. Each stage has to pay GST on its input before getting paid for its output. If the player miscalculates his sales prospects, then he may end up paying the tax in advance for goods still in the store.

Thus GST adds artificial overhead costs and to cover that, he will preempt by raising his prices. Presumably this will cascade with the final tab for the end-consumer's account.

If the latter has assets, he may then raise his rentals which will raise other prices with the side effect of increasing public pressure to maintain subsidies.

Of course, some of the intermediate stages may have folded before then but that's hardly any consolation.

All this is the other supply chain apparently overlooked; the supply of inflation. Even when one tries to escape by the technicality of defining inflation as needing more than a one-time hit.

We need to get real on the negative multipliers from the roll-out of GST. They will hit harder than one can imagine on those who are the producers oiling this economy.

Just look at how they already gripe about the minimum wage ruling to understand how tight their financial bottom-lines are from the angle of cash-flow maintenance which itself has an effect on credit-worthiness by which business potential is actuated or otherwise.

the threshold effect

I don't know whether there will be revenue thresholds for GST like how it was for outlets as service tax collectors. If there are going to be similar thresholds, then the problem will get doubled with goods as well under the new tax regime what it already is under the present service tax regime.

Some outlets are still creative in mixing up service tax and service charges to the chagrin of the end-consumer. To tease out the payable would require more manpower which will add more costs besides making honest business processes less lubricious.

You may also get to see more business entities each with smaller revenue bases; compute the administrative costs against derivable benefit from a national viewpoint.

the processing effect

If even large multinationals have problems processing their GST exposures, one can ask what will be faced by those thousands of small enterprises run as mom and pop shops or by individuals who are already beleaguered by daily pressures of decreasing demands but increasing costs what more the need now to add new calculations, perhaps computerize when they can't afford or don't know how, and bloat their receivables awaiting rebate claims if they know how to do that. Not forgetting rounding losses for millions of transactions.

walla said...


The basic message here is the psychological make-up of decision-makers.

Getting an assured monthly salary while discharging tasks wrapped in a cocoon of certainties is vastly different from the real world of fighting for every crumb against ever-changing situations propelled by forces beyond one's control with cost of failure carried forward and accumulated in the following month, or week.

And assuredly, stochastic is hardly a good pill to change the mindset of decision-makers. Just consider how irrelevant is the consumer price index these days.

the counter effect

It's not just a tax regime that will be changed. It's also the implementor regime. Treasury and Customs operate differently.

One works mostly behind a counter and operates by what may be discerned as a set protocol. Because of their diverse scope,the other needs a wider interacting space. It moves around, and, to put it diplomatically, interacts more.

Under the proposed new system, its powers will now be enlarged that may even include determining the exchange rates for imported goods and services with reverse mechanism claimage for exported goods and proscribed services.

In a nutshell, the change is in effect from steady state protocol to any state non-protocol. Unless the standards and protocols are in place before the roll-out, there will be definition of scope issues.

One needs only be reminded of the Y2K problem some thirteen years ago. People tried to overcome it by changing the date on their computers.

A change of date or other parameter can change a lot of things. Tax quanta for instance.

the what-government effect

Under the auspices of polite company, it can be said it is moot whether this effect should be included. After all, one can muster as many for the present as opposed to it.

However it's not just quantity of support. For both country and economy, it should be quality of support. Unless someone has a cogent argument otherwise, I can't locate a reason to doubt that.

To put it trenchantly, does present-G have enough reputational capital to win acceptance of GST? One suspects quality negative perceptions will outweigh quantity positive perceptions. Some will say this itself is a perception. If so, invitation is now presented for contrarian views. Start by auditing project costs over say thirty years, note the aired deliverable, then ponder on the actual results, and draw the final conclusion.

Hopefully none will be drawn that development could have been delivered better, cheaper, faster and with less caprice, waste and leakage.

You can guess as much from the way the carrot of development is dangled as a weapon even against the very taxpayers who would have happily made the changes unnecessary because they would have been only too happy to pay taxes to ramp revenues from a healthier and cleaner economy that results from better and more honest governance which would have given a firmer and stronger financial base upon which all live or die. And that is the third supply chain. Chain of good governance.

Does anyone think honest hardworking people will pay taxes just to fund the frivolous lifestyles of petty politicians, especially when they can argue since the GST is to increase tax revenue for such a government, income tax reduction would nullify its objective and thus will likely not be given because the net national effect of doing so will only be more administrative charges and bureaucracy?

Both deposited on the tattered plate of the end-consumer. Namely, the rakyat.







James said...


Is the GST applied only at retail? If so, a transaction between a manufacturer/producer to wholesale or contractor (non retail) is not captured? Please clarify. Thanks.

James said...


I am sorry, I misread your clarification, ie only current sales tax is applied at retail, so GST is applied through the value chain of sales or services.

In any case, the net effect of GST will be to increase government tax revenue, and businesses will have to recover their costs of managing such taxes and recovery of such taxes, to the end effect, the is actually a tax increase in effect for consumers.

Hyman said...

This is gorgeous!