KUALA LUMPUR (June 15): The goods and services tax (GST) is a far superior consumption tax system compared to the sales and services tax (SST) and should be reimposed on its merits as a better, more transparent system, not just to raise tax revenue and provide more subsidies, according to Grant Thornton Malaysia PLT.

"While there is a need to assist the rakyat in challenging times, I hope the main reason for reimplementing the GST is not to provide more subsidies. The resources of the government should be concentrated to (sic) longer term measures that will improve resilience without over reliance on subsidies," said the audit, tax and advisory firm's senior executive director for indirect tax and transfer pricing, Alan Chung.

He was responding to questions from The Edge about plans to reinstate the GST, with the depletion of government resources for subsidies being cited as a main factor to do so.

Malaysia replaced the SST tax regime with the GST on April 1, 2015, with a 6% tax rate. This, however, was reversed in September 2018, when the GST — which the public blamed for rising cost of living and the Pakatan Harapan (PH) coalition pledged to abolish if it came to power — was repealed after PH took control of Putrajaya following the collapse of the Barisan Nasional government, while the SST was reimplemented.

In a May interview with Nikkei Asia in Tokyo, Prime Minister Datuk Seri Ismail Sabri Yaakob said the GST was seen as capable of widening the country's revenue base, and that his administration was not ruling out the possibility of reinstating the tax to increase national income and help combat inflation and rising cost of living.

The news sparked speculation that the government would be reinstating the GST soon. On June 5, Ismail Sabri clarified that the government had yet to decide on the matter and was merely looking into the possibility of doing so.

"A salaried man on the street who draws a fixed monthly salary would look into his expenditure if he cannot get a raise from his employer. Likewise, measures could be taken to review excessive expenditures instead of bolstering revenues. This would include rationalising subsidies to target the needy," Chung said on ways the government could shore up its revenue without raising taxes.

If the government is serious about reintroducing the GST, then it should be announced ahead of time to give businesses time to implement changes, bearing in mind that businesses might have long-term contracts that did not take into account GST and that it would take time to negotiate changes between contracting parties.

"GST is therefore a longer-term measure and not ideal to address the current and immediate issues. Different measures should be adopted and these include improving and broadening the existing consumption taxes, which may also include stamp duties apart from SST. SST has a narrower base, which can be broadened by subjecting more goods and services to tax. This would include the expiry of sales tax exemptions for motor vehicles...," Chung said.

Chung noted that 2017 was when GST was last in effect for a full 12 months, with RM44.35 billion collected that year, compared to 2019's RM27.67 billion collected for SST, which made a lot of people assume there was room to lower the GST rate due to the higher GST collections.

"However, the gross GST collection had been reported without accounting for GST refunds. The total amount of GST refunds is not publicly available, except that a total RM19.47 billion of refunds was outstanding as of 2018. These outstanding GST refunds averaged to roughly RM6.5 billion per year for the period GST was in effect, and this is before accounting for refunds... The total net GST collection therefore, is significantly lower than the gross RM44.34 billion collected in 2017 and the difference collected under SST may not be a lot.

"The question then, can we reduce the 6% GST rate whilst increasing the government’s collection? It is a fallacy to think we can both collect higher taxes and yet not burden the public. It is a double-edged sword that cuts both ways and you cannot have the cake and eat it too," said Chung.

Then, how about introducing different GST rates for different categories of goods or services, such as subjecting luxury goods to higher taxes?

"This is a possibility we must consider with care, as introducing more rates will inevitably increase the complexity of the system and create more uncertainties. From our experience when the GST was implemented, there were disputes even with merely a standard rate and zero-rate. Adding another rate may create more doubts in the application of GST rates," Chung said.

How about raising the threshold for businesses to register and charge GST?

"This has negative implications that also needs to be carefully considered. Firstly, while this will lessen the burden of the rakyat, it is counterintuitive as it reduces the collection of GST with less businesses registered. Secondly, businesses that are not registered will not be entitled to claim GST input tax, thereby increasing their cost of business which will ultimately translate to them charging higher prices," Chung said.

Chung, however, cautioned that reintroducing the GST now, amid prices surging everywhere as global inflationary pressures climb, could end up making the tax an unfortunate price increase scapegoat.

"In 2015, the Price Controls and Anti-profiteering Act 2011 was amended to prevent price increases as a result of the implementation of GST. Unfortunately, the provisions were extremely complicated and embodies complex mathematical calculations that are difficult to understand, much less enforce. Simpler mechanisms would be required to effectively control prices," Chung said.

Among other considerations the government should take note of if it plans to reimplement the GST, said Chung, is how the special refund of sales tax was a thorny issue when the GST was in force, with some claims remaining in dispute for years, while a number of applications were rejected or arbitrarily reduced to a fraction of the initial claim, "based on trivial technicalities".

Apart from that, GST claims were not refunded within the period allocated, Chung noted, adding that "worse was when most refunds were initially subject to audits, which could be unpleasant and taint the experience of businesses".

These issues need to be ironed out and the mechanisms and procedures improved on, so that a similar debacle will not be repeated, he said, adding a better approach must be in place from the onset of the reimplementation of GST.

In particular, he said refunds, be it for sales tax or GST, should be expedited without any delays as they are costly to businesses if they do not receive the refunds.

"Ultimately this cost will be passed on to consumers as price increases. This contradicts the theoretical notion that GST lowers the cost of production which will reduce prices to consumers. When GST was implemented in 2015, prices did not go down as expected. One of the possible causes is the fact that businesses were not receiving the GST refunds and were reluctant to review their prices downwards,” said Chung.

The government should also bear in mind that the GST is transactional in nature and a mistake could often be repeated unintentionally. Therefore, a voluntary disclosure regime should be put in place to encourage companies to correct unintended errors with reduced penalties, similar to the provisions for income taxes, said Chung.

According to him, the GST can be revived by merely repealing the GST (Repeal) Act 2018, which would make the old legislation enforceable again and allow for a quicker reimplementation of GST.

Having said that, he believes it is a good opportunity now to review inherent deficiencies in the legislation. "While the legislation should be tweaked to remove any inherent problems, the best improvement could be brought about in the way the legislation is administered and applied,” he added.