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Why we need GST

October 21, 2013 by Idris Jala

It will broaden the tax base and help those most in need.

There are many more myths than facts about the goods and services tax or GST which the government plans to introduce not long from now. I will attempt to dispel some of the myths associated with this tax and put the GST in perspective.

The first thing to remember is that the GST is only one of measures that the government will be taking to overhaul the financial system of the country to find new sources of revenue and improve the efficiency of tax collection.

Other measures are being undertaken to reduce corruption, to reduce waste and create highly transparent procurement processes among others.

GST is part of a holistic programme of improvement for the government which will be combined with these other measures to help us on our way to achieve high income and developed status in a sustainable and inclusive manner. That target is getting per capita income up to US$15,000 by 2020.

Our current tax base is way too narrow - we depend too much on income tax, both individual and corporate. Out of some 29 million in people in Malaysia, only less than two million people pay income tax.

We cannot afford to go back to these same people and corporations and ask them for more and more tax - we can only hope that as their income increases, they will pay more tax. In fact, if we don't widen the tax base, there is absolutely no room to cut income taxes further.

For various reasons, including the fact that much income goes unreported, we need to broaden the tax base. A value-added tax such as GST, where a tax is paid on every step in the value-added process is a consumption tax and therefore taxes those who can afford to spend.

If you are making money but don't pay tax for various reasons, you still want to spend on the things that you want to have and to use. And when you consume, the government can capture a part of that as income for itself through the GST.

If you are concerned about being adversely impacted by the GST, it is important to remember that when GST is implemented we can zero-rate or set the tax rate at zero for any number of essential goods and this is what the government intends to do to ensure that citizens do not get burdened by taxes on essential items.

Also there is currently the sales tax as well as the service tax now of 6-10% which will be repealed once the GST is introduced. In the first few years at least, we expect that the GST will be revenue neutral for the government because gains will be offset due to the termination of the sales and service taxes.

But further out, the GST will help the government gain extra revenue. This will be because we expect more and more people to become affluent as measures to increase income bite and become reality. As consumption and affluence increases, government income from GST will increase in tandem.

What's in it for citizens? First, because essential goods and services that will be consumed such as food, public transport and education are likely to be zero-rated, consumers will not be paying extra taxes here. Second, as government revenue increases, it has more money to provide for social safety net programmes such as BR1M, the 1Malaysia cash assistance programme for lower middle and low-income groups.

But contrary to popular belief, GST implementation is like to be only sometime in 2015 if it is announced at the forthcoming Budget because you need a lead time of 12 to 18 months to prepare for the value-added tax.

Imagine say manufacturing a consumer product such as a bottled drink and that you are the manufacturer. You will have to buy all your inputs such as sugar, flavour, bottles and so on from suppliers. These suppliers will include a GST in their sales to you.

When you sell your bottled drink, you will have to add on a tax to your product which represents the GST. But you are entitled to claim a rebate on the tax to the value that you did not add, in other words the tax your suppliers added on. To do that you have to keep proper and complete records.

The government will be helping businesses, and especially small businesses to set up the record-keeping system for this so that there is a smooth transition to the value-added tax system without any major hiccups.

This record-keeping produces other attendant benefits as well. For instance, studies have shown that Malaysia has large capital outflows which can't be reconciled in the national accounts. As much as 80% of this is said to be from transfer pricing where firms transfer costs to various centres around the world to minimise the tax.

Once a GST is implemented it makes it very much more difficult to do so because complete records are kept at every stage of the value-adding process. There are records of who sells to you and at what price and the same for yourself, all along the chain. It is just a matter of going down the chain to see if you are playing around with your figures.

Not just capital outflows but all manner of other things can be tracked down too. It becomes easier for Customs to determine who is avoiding duties and for the Inland Revenue Department to check to see who is evading taxes.

By introducing GST, the entire record-keeping process becomes much more rigorous and will definitely contribute to much better and more efficient collection of all taxes and duties in future.

Most countries in the world already have a value-added tax. Most countries in Asean already have it too. And even oil-producing countries have it.

The appeal is that it is a broad-based tax which taxes based on amount of consumption. Because it is the more well-to-do and the wealthy who will consume more, the GST automatically taxes them most, not the lower income group.

Whichever way one looks at it, the GST is a progressive move to overhaul the tax system of the country. It is an imperative - but not the only one - of a developing and developed economy which will provide sustainable revenue to the government for it to plough back to needed sectors within the economy.

Implementation of VAT/ GST System by Country (160 Countries)

  Country Year of Implementation Initial Standard Rate (%) Current Standard Rate (%) Registration Threshold (Local Currency) Registration Threshold (USD)
1.  Argentina 1974 21.0 ARS 300,000 (Goods)
ARS 200,000 (Services)
56,190 (Goods)
37,450 (Services)
2. Azerbaijan 1992 18.0 AZN 120,000 152,940
3.   Azores
(the autonomous regions of Portugal)
1986 16.0 None None
4.   Belarus 1991 20.0 None None
5.  Bolivia 1986 13.0 None None
6.  Brazil IPI: 1964
ICMS: 1989
IPI: 10.0 – 15.0
ICMS: 7.0 – 25.0
None None
7. Chile 1974 19.0 None None
8.   Colombia 1983 16.0 COP 100,500,000 52,940
9.   Costa Rica 1982 13.0 None None
10.    Cyprus 1992 18.0 € 15,600 20,730
11. Dominican Republic 1992 16.0 None None
12.  Ecuador 1981 12.0 None None
13.  El Salvador 1992 13.0 SVC 50,000 5,715
14.  Estonia 1991 20.0 € 16,000 21,260
15.  Faroe Islands 1993 25.0 DKK 30,000 5,340
16.  Fiji 1992 15.0 $100,000 54,250
17.  Georgia 1993 18.0 GEL 100,000 60,580
18. Guatemala 1992 12.0 None None
19. Haiti 1982 10.0 G 30,000 710
20.    Honduras 1964 12.0 None None
21.  Isle of Man 1973 20.0 £ 77,000 119,030
22.    Israel 1976 18.0 NIS 100,000 27,680
23.  Jamaica 1991 12.5 None None
24.    Kazakhstan 1991 12.0 30,000 times the Minimum Calculated Index (MCI)
~ KZT 1,731
346,200
25. Madeira
(the autonomous regions of Portugal)
1986 22.0 None None
26.  Monaco 1954 19.6 € 777,000 (Goods)
€ 234,000 (Services)
1,032,180 (Goods)
108,270 (Services)
27.  Nicaragua 1984 15.0 None None
28.  Pakistan 1990 16.0 PKR 5 million 50,735
29.  Panama 1976 7.0 PAB 36,000 36,000
30.  Paraguay 1992 10.0 None None
31.    Peru 1991 18.0 None None
32.  Romania 1993 24.0 € 65,000 86,305
33.  Trinidad and Tobago 1990 15.0 TT$ 360,000 56,160
34.  Turkmenistan 1993 15.0 None None
35. Ukraine 1992 20.0 UAH 300,000 36,740
36.  Uruguay 1972 22.0 None None
37.    Uzbekistan 1992 20.0 None None
38.    Venezuela 1993 12.0 None None
39.  Iran 2008 1.5 5.0 IRR 3 billion 244,440
40.  Japan 1989 3.0 5.0 ¥ 10 million 103,610
41.  Jersey 2008 3.0 5.0 £ 300,000 463,710
42.  Singapore 1994 3.0 7.0 S$ 1 million 785,340
43.  Taiwan 1986 5.0 5.0 None None
44. Nigeria 1993 5.0 5.0 None None
45.  Liechtenstein 1995 6.5 8.0 CHF 100,000 107,790
46.  Switzerland 1995 6.5 8.0 None None
47.  Canada 1991 7.0 5.0 CAD 30,000 29,380
48.  Ivory Coast 1960 8.0 18.0 None None
49. Luxembourg 1969 8.0 15.0 None None
50.  Australia 2000 10.0 10.0 AU$ 75,000 71,065
51.  Belize 2006 10.0 12.5 BZD 75,000 37,130
52.  Botswana 2002 10.0 12.0 P 500,000 58,500
53.    Cambodia 1999 10.0 10.0 KHR 125 million (Goods)
KHR 60 million (Services)
30,490 (Goods)
14,630 (Services)
54.  Denmark 1967 10.0 25.0 DKK 50,000 8,910
55.  Egypt 1991 10.0 10.0 EGP 54,000 7,720
56.  Germany 1968 10.0 19.0 None None
57.  Ghana 1998 10.0 12.5 GH₡ 120,000 59,720
58.  Indonesia 1984 10.0 10.0 IDR 600 million 60,550
59. Laos 2009 10.0 10.0 5 billion kip 648,740
60.  Lebanon 2002 10.0 10.0 LBP 150 million 99,240
61. Mexico 1980 10.0 16.0 None None
62.  New Zealand 1986 10.0 15.0 NZD 60,000 47,220
63.  Papua New Guinea 2004 10.0 10.0 K 250,000 111,280
64. Philippines 1988 10.0 12.0 P 1,919,500 44,390
65.  Samoa 1994 10.0 15.0 WST 78,000 33,370
66.  South Africa 1991 10.0 14.0 R 1 million 97,600
67.  South Korea 1977 10.0 10.0 None None
68.  Sri Lanka 2002 10.0 12.0 Rs 12 million 93,340
69.    Sudan 2000 10.0 15.0 None None
70.  Sweden 1969 10.0 25.0 None None
71. Thailand 1992 10.0 7.0 THB 1.8 million 1,100
72. Turkey 1984 10.0 18.0 None None
73.  United Kingdom 1973 10.0 20.0 £ 77,000 118,970
74.  Vietnam 1999 10.0 10.0 None None
75. Italy 1973 12.0 21.0 None None
76.  Netherlands 1969 12.0 21.0 None None
77. Niger 1994 12.0 19.0 None None
78. Spain 1986 12.0 21.0 None None
79. Albania 1995 12.5 20.0 ALL 5.0 million 47,400
80.  India 2005 12.5 12.5 INR 500,000 8,510
81.  Niue 2009 12.5 12.5 NZD 200,000 157,400
82.  Vanuatu 1998 12.5 13.0 VT 4 million 42,440
83. Algeria 1992 13.0 17.0 DZD 100,000 1,260
84. Jordan 1994 13.0 16.0 JD 75,000 (Retail Trading)
JD 50,000 (Trading and Manufacturing)
JD 30,000 (Services and Industrial Activities)
105,860 (Retail Trading)
70,570 (Trading and Manufacturing)
42,240 (Services and Industrial Activities)
85.  Nepal 1997 13.0 13.0 Rs 2 million 21,330
86.  Lesotho 2003 14.0 14.0 M 500,000 49,040
87. Mauritania 1995 14.0 14.0 None None
88.  Antigua and Barbuda 2007 15.0 15.0 XCD 300,000 111,110
89.  Bangladesh 1991 15.0 15.0 Taka 2 million 25,720
90.  Barbados 1997 15.0 17.5 BBD 80,000 20,000
91.  Burkina Faso 1993 15.0 18.0 XOF 50 million (Goods)
XOF 15 million (Services)
102,080
30,625
92.  Cape Verde 2004 15.0 15.0 None None
93.  Dominica 2006 15.0 15.0 XCD 60,000 22,220
94. Equatorial Guinea 2004 15.0 15.0 None None
95. Ethiopia 2003 15.0 15.0 500,000 Birr 26,720
96.  Gambia 2013 15.0 15.0 GMD 150,000 4,110
97.  Grenada 2010 15.0 15.0 XCD 120,000 44,440
98. Guinea-Bissau 2001 15.0 15.0 None None
99.    Malta 1999 15.0 18.0 € 7,000 9,290
100.  Mauritius 1998 15.0 15.0 Rs 4 million 128,720
101. Mongolia 1998 15.0 10.0 10 million togrogs 6,960
102.   Namibia 2000 15.0 15.0 N$ 200,000 19,610
103.  Saint Vincent and the Grenadines 2007 15.0 15.0 XCD 120,000 44,444
104.  Seychelles 2012 15.0 15.0 SCR 5 million 420,980
105.     Sierra Leone 2009 15.0 15.0 Le 200 million 46,200
106. Tonga 2005 15.0 15.0 TOP 100,000 55,550
107.  Zimbabwe 2004 15.0 15.0 ZWD 21,714,000 60,000
108.   Austria 1973 16.0 20.0 € 35,000 46,870
109. Democratic Republic of the Congo 2012 16.0 16.0 None None
110.  Greece 1987 16.0 23.0 None None
111.   Guyana 2007 16.0 16.0 GYD 10 million 48,910
112. Kosovo 2001 16.0 16.0 € 50,000 66,360
113. Portugal 1986 16.0 23.0 None None
114.   Republic of Congo 2012 16.0 16.0 None None
115. Ireland 1972 16.4 23.0 € 75,000 (Goods)
€ 37,500 (Services)
99,550 (Goods)
49,775 (Services)
116.  France 1954 16.7 19.6 € 777,000 (Goods)
€ 234,000 (Services)
1,032,180 (Goods)
108,270 (Services)
117. Bosnia Herzegovina 2006 17.0 17.0 BAM 50,000 34,230
118. China 1994 17.0 17.0 RMB 5,000 – RMB 20,000 monthly 815 – 3,260 monthly
119.  Kenya 1990 17.0 16.0 KES 5 million 58,380
120.  Mali 1991 17.0 18.0 CFAF 30 million 60,700
121.   Montenegro 2003 17.0 19.0 € 18,000 23,900
122. Mozambique 2008 17.0 17.0 None None
123. Saint Kitts and Nevis 2010 17.0 17.0 XCD 150,000 (Goods)
XCD 96,000 (Services)
55,555 (Goods)
35,555 (Services)
124. Tunisia 1988 17.0 18.0 TND 100,000 61,980
125.  Malawi 2002 17.5 16.5 MK 6 million 18,420
126. Belgium 1971 18.0 21.0 None None
127.   Benin 1991 18.0 18.0 None None
128.  Burundi 2009 18.0 18.0 BIF 100 million 64,940
129.   Central African Republic 2001 18.0 19.0 XAF 30 million 60,810
130. Chad 2000 18.0 18.0 None None
131.   Gabon 1995 18.0 18.0 XAF 80 million 162,010
132.   Guinea 1996 18.0 18.0 500 million GNF 71,420
133. Lithuania 1994 18.0 21.0 LTL 155,000 59,580
134. Macedonia 2000 18.0 18.0 MKD 2 million 43,430
135. Rwanda 2001 18.0 18.0 RWF 20 million 30,865
136. Senegal 2001 18.0 18.0 None None
137.  Serbia 2004 18.0 20.0 RSD 40 million 46,470
138.  Togo 1995 18.0 18.0 XOF 40 million 80,770
139.  Uganda 1996 18.0 18.0 UGX 50 million 19,340
140.  Cameroon 1999 18.7 19.25 XAF 15 million 30,615
141.  Morocco 1986 19.0 20.0 None None
142. Slovenia 1999 19.0 22.0 € 25,000 33,110
143. Armenia 1993 20.0 20.0 AMD 58,350,000 139,850
144. Bulgaria 1994 20.0 20.0 BGN 50,000 34,220
145. Kyrgyzstan 1999 20.0 12.0 2.5 million som 51,620
146.  Madagascar 1994 20.0 20.0 MGA 200 million 92,360
147. Moldova 1998 20.0 20.0 MDL 600,000 48,460
148. Norway 1970 20.0 25.0 NOK 50,000 8,640
149.  Tajikistan 2007 20.0 20.0 TJS 200,000 41,990
150. Tanzania 1998 20.0 18.0 TZS 40 million 24,410
151. Zambia 1995 20.0 16.0 ZMK 800 million 147,060
152. Croatia 1998 22.0 25.0 HRK 230,000 40,870
153.   Finland 1994 22.0 24.0 € 8,500 11,290
154.  Latvia 1995 22.0 21.0 LVL 35,000 66,190
155.  Poland 1993 22.0 23.0 PLN 150,000 46,390
156. Czech Republic 1993 23.0 21.0 CZK 1 million 51,710
157. Iceland 1990 24.5 25.5 ISK 1 million 830
158. Hungary 1988 25.0 27.0 None None
159.  Slovak Republic 1993 25.0 20.0 € 49,790 65,950
160.  Russia 1991 28.0 18.0 None None
2013/10/18
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