Saturday, October 26, 2013

The untold stories on GST

At long last GST is really being introduced. I remember it was put under study during the Daim days as Finance Minister, put to thought few years ago and only now due to budget pressure, GST is finally here to come.

We know that government cannot operate without taxes, hence a tax structure needs to be efficient. GST is regarded as consumption tax, which means the more a person consumes, the higher the tax the person is paying indirectly.

Now comes the argument that it is taxing the poor and the lower middle income. It is but this is where we face problems as over 80% of the nation's population are not paying any direct taxes in the form of income tax. How is that? While I see lots of people in the middle income group who I know are paying taxes, I am also seeing people whom are rich which I am seeing may not be paying high taxes as well. They are not employees of a company. They may be working on their own and may be underdeclaring their income or the nature of the tax structure does not require them to pay much taxes.

Put that in the context of stocks investment. If a person has say RM5 million in shares and on average he gets return of 10% per year. He gets RM500,000 per year in return or about RM40,000 a month. Besides the stamp duty through transactions, that person is barely paying any taxes. Compare that to a person whom gets salaries of RM40k per month, I am sure the monthly income tax he pays is around RM8k - RM9k a month. In the eyes of the government, the person under employment is contributing to the government's revenue but not so much to the other person whom is not working but yet could be reaping income just as high as the other who is working. GST is a way which will tax the other non-working individual who is probably enjoying the ride. Hence, the current tax structure (before GST) is friendly to a person who has rich parents whom can provide an initial endowment of RM5 million for him to invest as opposed to the other who has been working hard by getting employed. In this sense, which tax structure is helping the rich and which is helping the hard working individual.

Tax structure has to change as over time the person who is working would be feeling that he has to do something about it. Worse still in a lot of cases, the working person could be regarded as a highly skilled employee and the opportunity to work elsewhere could be available, and that could possibly happen where he moves abroad to a country which is more friendly to his taxes - Singapore, Hong Kong?

GST is not a regressive structure but rather a progressive structure. How is it that another 300,000 between monthly income of RM3,000 to RM4,000 will not be paying income tax if it is regressive. They are being taxed elsewhere through consumption rather than through working. A regressive tax is when one is working but taxed highly whereas the one who is not working (but yet rich enough not to) and not taxed. That deters people from working hard.

A progressive tax is also where it will also cause the small and medium businesses whom may have been underdeclaring their revenue to keep up to speed in their declaration as only through correct declaration, they can claim back the GST paid. If you under declare, you will not be able to clear back your GST paid,

Efficiency - GST is much more efficient in terms of income for the government.

Let me provide a scenario. For now with GST, it now replaces sales and services tax. But over time, I would like to even see it grow and replaces (not entirely) excise and import duties. These 2 duties are highly confusing as even in the example of a PC, it is not taxable. But another example, media devices is taxed (around 25% - 30%). In today's world, PC and media devices are greyed to the extent that it may be difficult to put a distinction to what is a media device and PC and in a PC one can pretty much turn it into a media player. Manufacturers are taking advantage of this loophole.

Another example is import prices. Goods are taxed on the price of the item paid by the importer, but these invoices can be distorted by working together with the suppliers. Say a BMW car can actually be priced at USD20,000 but in the invoice it is declared at USD15,000, hence the importer is only paying at taxes for USD15,000. But in GST system, it will not happen as the importer which is actually paying USD20,000 plus the GST will charge more than the actual price he paid for importation of the car. The final taxes which is to the final consumer will be the determinant of how much the government gets - not the import duty.

There are many reasons where GST will also reduce corruption (especially through the customs) etc as in the above cases, we have heard of customs working together with the importers, distributors on the actual duties for the items imported. These monies which does not go to the government but rather individuals and companies who cheat is revenue lost to the government.

Now, which are you supporting? A tax structure to help the rich to continue getting richer and could be through cheating or a tax structure to help the government's improving its revenue? If you pick the second, there is no doubt GST has to hold.

18 comments:

Unknown said...

I will support Gst, BUT first ask the present government to be prudent before taxing the lower income people. Just look at AG report every year, .. really make you sick.

Kris said...

I agree with CK Alma. I willing to pay taxes, but it pains me to see that our tax more get spend reckless while the government is saying our financials are getting worst. Yet tax collection increasing every year.

F CL said...

Hm... Progressive tax is one that tax people in the higher income bracket more while sparing the lower income group. That is why majority of malaysian don't pay tax. They are spared under such a system.

Regressive tax is one that does the opposite. Why GST is regressive? Because middle income has a higher percentage of their disposable income on consumption. Hence they are being taxed more heavily in terms of consumption to income ratio.

Before : Most people don't pay tax
After : Most middle and lower income pay tax
Conclusion : Regressive.

That is my conclusion. You can read the paper published by Professor Chew Soon Beng of Nanyang Technological University, Singapore. He did some great research on GST's effect.

AdCool said...

It's time for GST and get away the mentality of subsidies. But it also time for the government to be prudent and manage better on the financial part. GST is good because everyone pay their taxes compare to only a selected few paying taxes.

If you do not want to pay more taxes, then don't spend and don't consume that much. If you willing to spend on items other than necessities, means you have the extra money to pay some taxes. Time to wake up and face the reality of competitive and globalized environment.

Big Sea said...



If the objective is helping the poor, GST is definitely wrong.

If the objectibe is to tackle tax evasion, then GST is more effective than income tax.

I support GST because otherwise Malaysia would get into real trouble. Ideal case is for government to stop the reckless spending and do away with GST. That will never happen under BN so dream on.

GST is a life saver for Malaysia. Unfortunately middle class and poor will be suffering from Collateral damage.

Sunny said...

The government should have included this in the secondary school text books as soon as possible before the next election. This is the best way to educate the public and gain popular opinion. When it is included in SPM test, the students will study it seriously and the parents will also get to know it better.

Sunny said...

It is very right for an adult to pay tax. If there is no free lunch, why then government service and public facilities must be provided free? How efficient is the money being spent is another matter. Likewise, a husband should not suspend the financial contribution to the family just be cause his wife has bought a few dresses at unreasonable prices. Do not be surprised that these words are from me a voter to DAP and I'm actually earning a salary between the lower and middle class. There are many people who complains. But among these people, majority of them have paid merely nothing than what they should have paid as taxes in the pass many years. While they reprimand the government spending, they do not question their own conscious of not paying their share. They are actually, perhaps the greater blood suckers to the 10% of people who pay taxes honestly.

Howard said...

GST as regressive tax is a total misconception. Of course that camp will always be able to provide facts and figures, but anyone can provide data that suits their claim so read things with a pinch of salt.

And while i fully support GST, the government needs to address the leakages that have been highlighted every year by AG reports. No point increasing revenue and at the same time having an expenditure that is rising faster than revenue.

Then on why everyone is so against GST. Aside from misconceptions, the invisible hand of oppositions is taking advantage of the negative sentiments, and add on to it.

Malaysians have been living with a stick like a cripple for far too long with all the subsidies. It is time we wake up and show the world that we are not cripples that has to rely on a tongkat.

Disclaimer: Not meant to hurt the physically disadvantaged group.

Justin Teo said...

I'm new to your blog and I really like it. While I agree with you that GST is better as it taxes consumption and not production, I disagree with your assessment.A person who owns shares is paying as much taxes (maybe more) than the average employee. Before you can receive dividends, the company's operating profit is taxed at 25%. So even if you pay nothing on dividends, you already paid indirectly 25% in taxes. Let's not talk about capital gains as it's difficult to generate consistent income through capital gains in the short-term. And not everyone who has millions comes from his parents, a lot of people worked hard for the money and are enjoying their fruits of their labor. Investing is also extremely productive as you're risking your capital and creating a healthy secondary market so new companies will be more willing to raise capital and list in Malaysia.

I don't mean to offend you, just my opinion.

felicity said...

Thanks Justin

I can agree with you, but the purpose of this article is to promote GST as a way to diversify revenue. With the implementation of GST, there is a tendency for corporate and individual income tax to be lowered.

As for dividends, companies are now undergoing single tier dividend from 2014, hence with or without dividends the company is taxed for profits. Which means, your dividend will not be taxed anymore

Justin Teo said...

Actually I'm a free market capitalist and believe taxes should be voluntary and govt should only maintain the military, police and court system. But it is what it is, and GST is better than income tax. But having both GST and income tax is bad as generally people will have to pay more. I'm not sure about GST news, is it replacing income tax? or will we still have income tax?

Yes, I know dividends are not taxed in Malaysia. But still shareholders own the company and profits are taxed, therefore shareholders are indirectly taxed already. While employees may have tax deductions on their income, shareholders have to rely on management to lower tax on profits, but it usually is still over 20% even if it is not the max corporate tax rate of 25%.

Unknown said...

l agree with your opinion that shareholders are indirectly taxed 25% by our government when company pays tax. If there is no company tax by the government, that taxed profits can be distributed to shareholders.

Zuo De said...

While the government need to be more efficient with spending money, that does not mean that all else stop while it become more efficient.

At the same time, I think the article is clear that the more you consume the more tax you pay and who can consume more, the RICH!!!! So GST is very progressive. If you are against GST, then you are actually helping the RICH, get it.

Now how can the government just only provide police, army and court? How about roads, health care, education, airports, etc... TOLL roads every inch, private schools, private hospital... come on, lets talk some sense.

Zuo De

Zuo De said...

While the government need to be more efficient with spending money, that does not mean that all else stop while it become more efficient.

At the same time, I think the article is clear that the more you consume the more tax you pay and who can consume more, the RICH!!!! So GST is very progressive. If you are against GST, then you are actually helping the RICH, get it.

Now how can the government just only provide police, army and court? How about roads, health care, education, airports, etc... TOLL roads every inch, private schools, private hospital... come on, lets talk some sense.

Zuo De

Justin Teo said...

To: Zuo De. I really like this blog so out of respect for the author I will try and hold back.

I don't care rich or poor, they have the right to keep the money they earned. And why are you so against the rich? Yeah I despise those who got their money through fraud or corruption. But most rich people are not like that. They earned their money and are productive and should be respected.

Besides the income tax is not eliminated and it will just end up with both poor and rich paying more as now have to pay GST as well.

And yes, private roads, schools, hospitals should play a much bigger role. I won't say any specific government or country as I don't want to get into trouble, but I don't trust most governments to deliver my mail on time. You expect people to trust the government to educate their kids? And don't tell me the "evil capitalist" will charge people sky high prices. There are private schools even in slums in other countries. Besides, look at america and Europe with their increasingly socialist policies,they have lots of debt troubles.Malaysia might be ok now but if we keep wanting handouts we will be in debt troubles in the long-term.

Also I believe that the majority of people can take care of themselves if their opportunities are not stifled by govt regulations and taxes. Maybe there are some unfortunate people who can't but we can always donate to private charity voluntarily and not be forced to help through taxes.

Taxes should be voluntary as I believe most people are responsible and its their self-interest to pay taxes. We don't want crime to be rampant after all it's not good for safety. And true people will contribute less than if forcibly taxed, but if the govt only runs the police, courts and military you don't need that much tax revenue anyway.

Zuo De said...

Justin,

Easy mate, there was no disrespect intended, just some passionate ranting maybe.

I note your value for small government. However, an efficient system of social protection is an important part of any modern society. People receiving those benefits typically paid for them, directly or indirectly, through contributions they or their employer made on their behalf. Beside it is their right to draw benefits from such programme they help fund, social protection can make for a more productive society.

On your point about donating to private charity, voluntarily, that is, most time it is almost non-existence (from my experience). And most private charity is for their own purposes and more often do not coincide with the need of the community.

A "free market" has been shown to lead to high inequality, something we should strive against (high inequality)

My vision is a community that is a caring responsible family, where people care about each other and act responsibly with strength and effectiveness for each other.

Perhaps, we share similar vision, but different approach. Perhaps not. We can agree to disagree.

Lest we forget, we are all in the same boat.

I am for GST.

Justin Teo said...

Zueo De, hi. While we disagree I don't mean to offend you as well.

If employees pay for social benefits themselves, wouldn't it be better if they had the choice as to what programs to contribute to? I mean someone might decide he doesn't want to contribute to EPF because he can earn a better return himself. Shouldn't he have the choice to do that? And you're right, we're paying for our own subsidies such as petrol, but wouldn't it best if we keep our own money and spend on what we think is best. Let the free market takeover, maybe for example if petrol was more expensive less people will drive and there will be less jams or private transportation companies will step up to provide more efficient services. We will never know in a mixed economy.

Actually a lot of people who can afford it donate to charities that are important to them. And that should be the case. We shouldn't be forced to donate to things we're not passionate about. I might donate to prevent animal cruelty koz I love dogs, but I may not donate to other things. Its my money and I should be able to determine how best to use it. Besides in my opinion charity is secondary, the primary reason in life is to achieve happiness and live the best life that you can. And sometimes a part of it may include donations to causes important to you, but that's secondary.

There's also nothing wrong with inequality. We're not equal in terms of productivity. A business man that have the intelligence to found a great business should deserve much more reward than the guy that sells mickey mouse balloons on the street. That's not to say the balloon seller can't be moral because he sure can, morality is not solely about money after all. It is immoral however to demand the unearned like force the rich to pay higher taxes so we can enjoy more benefits. The money is not ours, we didn't earn it.

I guess we will just have to agree to disagree. Good luck wih your investments though, I guess that's something we may have in common.

GSTX said...

Before: Middle income people pay income tax
After: Middle income people pay income tax + GST

GST is burden to Middle income group