Wednesday, October 23, 2013

Goods and Services Tax (GST) 101: It is No Cure of Malaysia Financial Malaise

For those of you who are not quite familiar with the topic of GST, here is a summary from the media statement of Tony Pua, Member of Parliament for Petaling Jaya Utara on Tuesday, 22 October 2013, which gives you an idea of why GST is no cure of Malaysia Financial Malaise

The proposal to impose the Goods and Services Tax (GST) is a direct result of the BN-led administration's waste, extravagance and leakages.

Idris Jala, the Minister in Prime Minister's Department, has issued a statement to strongly support the implementation of the GST as a panacea to the persistent deficit and increasing debt which Malaysia suffers today. 

Under such policies, the poor would be hit by a double whammy in tax burden. Firstly, the poorer income groups be forced to bear the burden of the reduced income tax of the higher income groups. On top of that, they will be hit by a regressive tax regime which taxes the poor proportionately more than the rich.  

For example a person who earns RM1,000 will be spending practically the full amount of his monthly earnings without any savings. This expenditure will be taxed at an assumed 5 percent GST.  

A person earning RM20,000 per month may spend RM12,000 of his income while saving or investing the balance. He will pay 5 percent on his RM12,000 expenditure, which works out to RM600. 
Based on this sum, the wealthier person is effectively paying only 3 percent tax on his income. Hence the natural impact of the GST is proportionately higher on the poor than on the rich.

This is diametrically opposite to the current progressive income tax structure which raises the percentage of taxes payable at higher income brackets.

Hence if the government were to impose the GST as an excuse to lower income tax rates, then it is effectively abdicating from its obligations and role of social justice and wealth redistribution. 
Instead, the GST and reduced income tax rate will only worsen the already worrisome income inequality in the country.

Cut extravagance instead

Instead of Idris arguing that "we need to broaden the tax base" because only approximately 15 percent of the working population pays taxes today, the government should be asking why the remaining 85 percent are not earning enough to pay taxes after decades of so-called rapid growth and economic development.  

We must remember that it is not because these 85 percent do not want to pay tax, but because they don't earn enough to be eligible to do so. 
It should be noted that the income tax brackets have not been modified for nearly two decades and the question is why the overwhelming majority of workers are still earning suppressed wages at less than RM2,500-3,000 per month. 

In addition, it should be argued that decades of strong and rapid economic growth boasted by the BN administration should have enriched the government with annual surpluses and record savings.

Instead, despite the chest-thumping over the government's ability to manage the economy, we now find ourselves in persistent deficit while the federal government debt has ballooned to RM546 billion, without taking into account another RM150 billion of known contingent liabilities.

The cure for the financial malaise lies not in taxing the people more, especially taxing those who barely earn enough to meet the rising cost of living. The panacea lies in the political will to cut wastage, patronage, extravagance and corruption in government expenditure.

Due to the fact that we are fortunately blessed with oil and gas revenues, as well as an enviable economic growth record over the past decades, the government actually have enough funds in its coffers. What it has however failed to do, is to ensure that these funds are properly utlised and invested. 

Until this government learns and proves to the people that it knows how to manage the rakyat's hard-earned monies in an honest, professional and efficient manner, it will have no right to raise more taxes from the people, especially from the middle-income and the poor