Tuesday, November 24, 2009

GST bill: Where can the public give comments?

A bill relating to the proposed introduction of the goods and services tax (GST) will be tabled for first reading at the end of the current Dewan Rakyat sitting.

Najib is quoted as saying that, "This will allow the public to give their comments, engage them, and if we find it necessary to fine tune it, we'll do so".

He stressed that if the government decided to introduce the GST in Malaysia, it would do so "very gently".

"It's not going to be an abrupt introduction," Najib said, adding that if the GST materialised, the rate would not burden the poor or middle-class Malaysians.

"And, it would not lead to inflation," he added.

Firstly, by tabling a Bill, the legislative process has commenced. There's a First Reading, then, there's a Second Reading and, then, a formal Third Reading whereupon the Bill becomes an Act of Parliament. The speed of the legislative process is at the discretion of the coalition in power.

A sincere effort at allowing public input should involve putting up the draft Bill in a suitable website, perhaps by the Treasury where comments can be received in an orderly fashion.

Tabling a Bill is a fait accompli which is, by definition, "an accomplished, presumably irreversible deed or fact".

Secondly, all consumption taxes has an inflationary effect even if it is a once-off effect.

Thirdly, "not be(ing) abrupt" is a relative view of the Prime Minister. If by "not be(ing) abrupt" he means that there will be lots of publicity about the Bill (and, therefore, following the reasoning, there should not be any psychological shock), then, he may be correct. But, the moment the Bill becomes an Act of Parliament and, it is given the Royal Assent and, is given a Commencement Date, then the implementation will still inevitably be felt by the public and the Malaysian economy as an "abrupt" phenomenon.

The question, therefore, is why the draft Bill should be tabled in Parliament when it can easily be posted at Treasury's website where public opinion can be sought for a period of, say, 6 months?

24 comments:

Peter said...

Actually, the Discussion Paper on GST for Malaysia was released by the MoF on 18 July 2005 with a request for comments / submissions to be provided to The Chairman, Tax Review Panel, Level 11, Centre Block, MoF Malaysia, Prescint 2, Federal Government Administrative Centre,
62592 PUTRAJAYA.
SO the public has been able to submit comments on the GST discussion paper for over 4 years now.

de minimis said...

Good reminder, except that there should be another round of public consultation since the GST matter is now earnestly moving ahead and, it would be a prudent move politically.

Peter said...

DM - "Secondly, all consumption taxes has an inflationary effect even if it is a once-off effect." - I would draw your attention to an article in the Australia Daily Telegraph on 25th October 2001, which stated that in the 3 months to 30 September 2001, following the GST introduction in Australia, the inflation rate FELL to 2.5% which represented a two-year low. While the GST had a one-time inflationary effect in Canada in 1991 there were various other economic factors at play that contributed to this impact. In Malaysia, as long as retailers pass on any cost savings to the consumers, prices of many goods should reduce and that can only result in lower inflation rates. Coupled with expected decreases in personal income tax rates and GST off-sets from the Government for lower-middle income Malaysians, the impact should not be that significant.

ben said...

Peter, there are 10.5 million workers in M'sia and out of that only 1.2 million are taxpayers ie earning at least RM3,000 per month. That means that at least 90% will be hit by GST. Australia is not a good comparison because they have a large middle income tax base vs M'sia.

Before GST can be introduced, we need to build the middle income tax base. Introducing it in prematurely may cost the govt dearly just like the 70% fuel hike.

I haven't heard of GST success story in developing countries, have you ?

Peter said...

Ben you are spot on about the fact that so few Malaysians actually contribute to the tax base. Most people would find this diabolical. In order to correct that, the GST will broaden the tax base to ensure that a much larger number of Malaysians pay some tax. The Gov't of Malaysia has been considering a GST type tax for almost 20 years, thats hardly introducing something prematurely. WIth the proper mechanisms in place to ensure that low and middle income Malaysians are not that disadvantaged by any spike in prices, the introduction of GST in Malaysia should be painless for most of those people who are currently not paying any taxes at all. To do this the gov't has been examing the GST off-sets used in other countries, including some Asean neighbours.
Its unfortunate that every positive step towards full developed nation status requires political jockeying.

Let's also be fair, to call it a fuel hike is not quite accurate. The fact is tt was a lowering of the massive subsidies on petrol that was unpopular. With so many subsidies it makes it difficult for Malaysia to compete with its neighbours in Asean, not to mention the rest of the developed world. To try and increase the competitiveness of Malaysian goods and services, the gov't is adopting the GST.

As for success stories, there is never a good time to introduce a new tax. However, in Malaysia the GST is not "new" per se. It will replace an existing sales + service tax regime that is a punative tax on businesses.
If all of Malaysian's immediate Asean neighbours have a GST and most of those (save Singapore) with a much larger middle income base (think Indonesia), how can the GST be such a bad thing? Trying to broaden the income tax base will only result in more tax evasion and ineffective, sporadic tax collection and the fact is that income tax taxes earnings and takes money out of your pocket as you earn. Income tax is a tax on productivity.

Look at California which is a tax revenue basket case. Most tax revenue in California is derived from the top earners paying income tax. With the recession those numbers have plummetted and high income tax has driven workers out of the state. Dependance on any 1 tax source is irresponsible of any government. California is now looking at a version of the GST to solve its nightmare.

The fact is that the gov't has not taken any tough measures in terms of tax measures for 50 years. Add to that subsidies and price controlls and you see that its time to make changes.

You pay the GST in Singpaore, Thailand, Indonesia, Laos, Australia, the UK and more than 135 other countries in the world. Surely if all those countries have adopted the GST, it can't be all that bad for Malaysia.

PATRICK said...

In gst you pay what you consumed and in whatever you do regardless of whether you are rich or poor, white or black or any colour of your skin.
In income tax you can evade and escape in all sorts of acts. So I think it is fair.

Peter said...

Hey Ben - if you don't like the Australia example (I thought it a good example since the reports are that 1000 Malaysians a week emigrate to Oz from MY), then look at Singapore. Of course, keep in mind Singapore introduced the GST as a brand new consumption tax and unlike MY it was not replacing any existing taxes. Singapore ensured that lower income earners received subsidy type payments which they referred to as GST off-sets.
While Singapore pretty much taxes everything from births to funerals, Malaysia plans to implement a bid of hybrid GST system that will allow reliefs for basic necessities such as groceries,etc. Other reliefs from GST are provided for services such as Health, Education and Transportation.
People who are concerned should take the time to consult the Discussion paper released in 2005 and if they still are concerned to write into the Tax Review Panel of the MoF and provide some informed suggestions. But keep in mind that after 15+ years of studying the impacts of a GST its likely the Malaysian Government has considered all the impacts and effects.

walla said...

EVEN the public sector will have challenges:

http://is.gd/53JG4 (compliance plan for public sector)

http://is.gd/53JHO (admin checklist)

Resources
http://is.gd/53KRR (international guidelines)

http://is.gd/53KVe (worldwide guide 2005)

http://is.gd/53KZi (worldwide guide 2008)

http://is.gd/53L3M (worldwide tax guide 2009)

http://is.gd/53L5n (paying taxes around the world)

http://is.gd/53L74 (for poor students)


Discussion
At least four challenges come to mind:

one, credit-invoice mechanism

will increase running and training costs in businesses, possibly tax and audit fees;

If anything, the indifferent performance in how service tax has been treated with the consumers too often hashed by it invoiced as service fee makes one wary of new schemes.

Additionally, each substratum is supposed to make claims for refunds and rebates from the government which means govt takes money upfront and then will have to be efficiently equal to the job to return it to hundreds of thousands of businesses - on a regular basis - in which case who keeps the interest foregone?


two, unless there is a buffer to nullify inflationary pressures, the new regime may regressively affect the lower income group through their consumption proportion of their income being relatively higher.

three, computerization and administrative compliance can be a costly nightmare;

the govt has to clarify who is going to collect the tax at each level of transaction; if it's Customs, then that's the agency which had bought a few hundred million rgt worth of DOS machines in a windows era, and if's it going to be both IRB and Customs, then their systems must talk seamlessly, and we all know how long it had taken for even the IRB's system to talk to itself.

Finally, if the govt is going to do it, the above content must be read in toto to get a real appreciation of the challenges and issues IN THE CONTEXT OF the local situation, sector by sector, segment by segment.

For instance, the govt should come out with a clear statement WHY it is making the change. A pro-and-con discussion would be good. Then it should come out with a dozen examples on A Month In The GST Administration of (XYZ) where XYZ can be a govt agency, a small business, a medium sized business, a public-listed corporation, even an NGO.

The govt must also show it has some foresight to tell what sort of negative multipliers it thinks can trigger with this new regime.

For example, the housing industry is said to affect over 130 downstream sub-industries. If this industry is negatively affected, would there be negative multipliers cascading all the way down the pyramid with net negativity on the economy?

Not the least, it should take an average middle-income family through the ropes on how the new regime will affect their household bottomline at the end of each month. And it should answer exactly how and when refunds, rebates and exemptions will be made.

These are important issues. Because if we remember how the NS was launched, over a dozen lives were lost.

Meanwhile the MACC and other watchdog agencies should get ready. In this country, any new thing that is going to happen, especially when it involves buying new interfacing systems and thus building the next mega-complex, holes will be punched, leaks will happen, and the project will be launched with champagne glasses clinking faraway.

Postscript

With all the above links including the Resources section, the rakyat are now on parity with the govt on this subject-matter.

May the press and other media take them up and run with them.

walla.

walla said...

The blogger and others have written before on the GST bill:

http://is.gd/53JvC
http://is.gd/53JwE

A Hongkong secondary school student has also written in to appeal against it:

http://is.gd/53KB6

Malaysians have written cogently on the matter:

Case Study Malaysia

http://is.gd/53Kjv (problems and effects)

http://is.gd/53K9q (tax administration)

http://is.gd/53KXT (general)

which may have to be seen in the light of:

Benchmarking Tax Systems
http://is.gd/53K84

Tax Competition Southeast Asia
http://is.gd/53Kb2

The subject matter has also been extensively argued around the world:

Pros-and-cons

http://is.gd/53KmA (primer)
http://is.gd/53L1J (impacts worldwide)
http://is.gd/53KpQ (policy transfers)
http://is.gd/53K1Q (impacts on developing countries)
http://is.gd/53K3f (pre-implementation)
http://is.gd/53Kcm (general discussion)

Singapore has articulated its case:

Singapore: rationale, implementation, design and prospects
http://is.gd/53JNX
http://is.gd/53JPy

So too other countries like:

Case Study Korea
http://is.gd/53K6M

Case Study UK & NZ
http://is.gd/53Ko6

Case Study NZ
http://is.gd/53KxL

Case Study US
http://is.gd/53KsF

Case Studies World
http://is.gd/53KyT
http://is.gd/53KuB

AND there are significant impacts on sectors:

http://is.gd/53JCX (impact on welfare)

http://is.gd/53JH8 (impact on real estate)

http://is.gd/53JYH (impact on housing prices)
http://is.gd/53JJs (impact on housing industry)
http://is.gd/53JN4 (impact on construction industry)

http://is.gd/53Jyn (banks)
http://is.gd/53JUb (mortgage costs)
http://is.gd/53JUV

http://is.gd/53JS0 (impact on small businesses)
http://is.gd/53Jzk (small business compliance costs)
http://is.gd/53KgN (sample advisory)

http://is.gd/53K0e (impact on power sector)

http://is.gd/53K5k (impact on associated companies)
http://is.gd/53Kwc (impact on cross border transactions)

http://is.gd/53KWK (impact on imported services)

WITH critical issues:

http://is.gd/53JAj (compliance costs)
http://is.gd/53JWR (evasion control costs)

http://is.gd/53JEJ (treatment of multiproduction and differentiated exemptions)

http://is.gd/53JKW (changing the rate)

Peter said...

walla - HK as you likely know retreated from moving forward with a GST. As we know, Malaysia is no HK, nor is it a Dubai or a USA, or even a Singapore.
The harsh reality is that government revenues are dwindling and very few Malaysians pay any tax at all. To correct this, a GST with its broad base and low rate will ensure that almost all Malaysians and those non-Malysians consuming products in Malaysia will share the tax burden.

I'll try and address some of your relevant points. The credit-invoice method means that a business will off-set its GST paid against any GST collected and remit the net amount to the gov't. this credit for GST paid, it known as an Input Tax Credit (ITC). This requires neither making a rebate or refund application to the gov't, but simpling off-setting GST paid against GST liabilities for the period. For those businesses that are in a pure "refund" position by virtue of having paid more GST in the period than their GST liabilities for the period, then yes, the gov't will refund that GST paid. There is nothing sinister or complicated in this and it works in almost 140+ other countries around the world (Italy however seems to be a problematic payer...)

There is no question that the GST will likely have an inflationary effect. But as the results from Australia in 2001 have shown (see my previous post here) inflation in Australia actually went DOWN when GST was implemented. However, the gov't has indicated that the GST will not be burden on the rakyat and that proper measures will be in place to assist the lower income Malaysians with the additional costs of the GST. This is not revolutionary and is a system practiced in Singapore, Canada and elsewhere, where lower income groups receive "cash off-sets". For Canada see:
http://www.servicecanada.gc.ca/eng/goc/gst_credit.shtml
Singapore:
http://www.gstoffset.gov.sg/Overview.htm

The GST will be collected by the seller / vendor / merchant and remitted to the Customs department on either a monthly, quarterly or yearly basis. See above for operation of credit-invoice and availability of the GST input tax credit (ITC).

Your other points about government educating the rakyat are quite accurate and hopefully the gov't as part of its GST PR campaign will follow good examples (such as Australia) where the public was provided extensive information on how the GST would impact them. Given that the GST is only likely to be introduced in the middle of 2011 at the earliest, this provides the gov't a full 18 months to do so. Your suggestion of having things like a GST Shopping Guide to educate consumers and businesses on the likely impact / effects of a GST are also postive suggestions. Lets hope the Customs / Min of Finance people are listening.

Its unfortunate that the GST Discussion Paper released in 2005 is not widely available to the public through the Treasury web-site as this would assist in clarifying a number of areas you have expressed concern.

Perhaps someone can check all your helpful links and let us know which are relevant to the Malaysian population.

walla said...

Thanks for your response, Peter.

On the discussion paper you mentioned:

http://is.gd/53TGQ

which was referenced by:

http://is.gd/53TP4

a good write-up.

Peter said...

Much more clarity today on timing and process from the Second FM. We can expect a well planned introduction of GST for Malaysia as the Gov't has provided almost 2 full years to prepare and become familiar with the GST nuances. Legislation released and tabled in December, followed by a Second reading in March 2010 and followed 18 months later (roughly 1 October 2011) by the start of GST itself.

walla said...

let me correct that discussion paper link to: http://is.gd/545aH

if you would care to turn to the last page (Page 30), de minimis is already enshrined in it.

so it will inevitably work.

hishamh said...

Peter,

Is there a link to that Telegraph article you mentioned?

According to Wikipedia, Australia introduced GST in June 2000, not 2001.

The CPI jumped 6.1% y-o-y for that quarter (Q3 2000) which was a 10 year high (vs Q4 1990), and compared to 3.2% in the previous quarter.

Quarter on quarter, the CPI increased 3.7%, a twenty year high (vs Q4 1981), against 0.8% the previous quarter.

Looking at the raw index numbers, the impact of GST was primarily to induce a one time jump in prices, with no second order effects i.e. it was non-inflationary.

This link for details - you want the download for tables 1 & 2.

Peter said...

hishamh - you are correct and I was too fast to post my findings on the GST impact in Australia. The GST was introduced in July 2000 (not 2001). My information was not for 2000 but 2001 and clearly not the first 3 months of GST but the period ending 15 months after GST. The GST will surely create a one time spike in inflation, which in Australia was tempered within the year as the data on your tables shows. The key thing for Malaysia will be to ensure that the low and middle income Malaysians are not significantly impacted by this 4% cost on items that are not currently subject to sale or service tax.
The Gov't will need to immediately begin its campaign to Educate people on how the GST will impact them as I've already been reading hundreds of postings of people's misconceptions on how the GST will work.
hishamh, dm and all, sorry for the misleading info and thank you to hishamh for the correction.

hishamh said...

To err is human, etc etc

BTW, technically a one time rise in prices is not inflation.

Peter said...

hishamh, thanks for the understanding.
walla's links are quite helpful. I've passed that link to the 2005 GST Discussion Paper onto some colleagues.

de minimis said...

bro hishamh

In context, "once-off effect" meant a step ladder effect to the theoretical tune of 4%(if that is the eventual GST rate).

However, we can expect a countervailing knock on effect of reduced consumption due to the passing on of GST in the form of a 4% increase in prices of affected goods and services.

The actual contribution to CPI may be in the range of 1% to 3% depending on the weightage given to GST-affected goods and services that form part of the basket of CPI components.

It's a "guesstimate" since I'm only an amateur economist :D

hishamh said...

bro de minimis,

No problems with your calculation - I'd be guessing too. :)

Actually what I was referring to is that there is a common misconception that if prices go up, that is synonymous with inflation. That isn't the case. It's only inflationary if there is a continuous rise in prices over a period of time.

Hence, a one time rise in prices, even over a broad range of goods, is technically not inflation.

GST would only induce inflation if there are what's called second-order effects where price rises of inputs leak into final goods pricing, and accomodated by wage and salary increases, leading to increased demand that triggers another round of price increases.

Not exactly likely under the current circumstances.

Peter said...

dm posts "However, we can expect a countervailing knock on effect of reduced consumption due to the passing on of GST in the form of a 4% increase in prices of affected goods and services."

Not all goods and services will have a straight forward 4% increase in price. Certain goods and services which already attract the sales or service tax should decrease in the cost to the vendor /retailer / seller and theoretically such cost reductions should be passed onto the consumer (if the seller maintains a constant profit margin) and the 4% would apply on that reduced cost / price.

For example, take any good which attracts the sales tax at 5% and sells to the final consumer for RM10. If the seller strips out the sales tax cost of 5% and has no need to include the GST paid as these will all be recoverable as a GST credit, then under a GST the calculation should look like so:

RM10x95% = 9.50x1.04 = RM9.88 with the GST on 9.50 = RM0.38

Resulting in a cost savings to the final consumer.

This of course assumes that the sellers/ retailers will pass on the savings to consumers. I realize this is a rather "big" ask. In a free market this should work and competition would drive it.

Anonymous said...

Walla, who are you?

Regards,
Yang

Peter said...

The Bill in BM is available on the Parliament website. Awaiting English version tomorrow, unless Walla can post another amazing link here
;-)

Peter said...

The Bill in BM

http://www.parlimen.gov.my/billindex/pdf/DR372009.pdf

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