GST can be implemented in a manner that prevents inequality
Ever since the government announced it would implement goods and services tax (GST) in April next year, there have been criticisms launched by several parties that the GST will in fact burden the poor. However, according to experts this need not be the case, as GST can be implemented in a manner that prevents inequality and eases the financial burden of the poor.
Mohd Rozlan Mohammed Ali, deputy director of the technical unit committee on GST at the Malaysian Association of Tax Accountants, a speaker at the forum entitled “Malaysia’s Goods and Services Tax (GST): Possible Lessons from the United Kingdom and Singapore”, supports this view.
During his presentation at the forum, he pointed out that the Malaysian GST rates are 6%, 0% and exempt. He added that the government had also reduced the personal income tax rate and had pledged a special BR1M assistance of RM300 to deserving households to help them cope with the introduction of the GST.
“The poor comprises those with a monthly income of less than RM1,000, urban poor household income of less than RM3,000 a month and lower middle income group, with a household income of less than RM4,000 a month. These groups spend at least 70% on essential goods and services which fall under the 0% and exempt GST rates. The 0% (GST) rate helps the poor and underprivileged to some extent,” said Mohd Rozlan (pic).
He suggested that the government emulate what had been carried out in the United Kingdom to help the underprivileged, where the UK had a 0% valued added tax rate on clothes and footwear for children under the age of 14. “Here, the poor and underprivileged have to bear the costs of school uniforms. If the government can consider 0% GST rate for these, it will lessen the impact on the poor.”
There are lessons to be learned from the Singapore experience, as well. Singapore, whose GST rate stands at 7%, first introduced the tax in 1994. “The GST system was designed for simplicity, effectiveness and efficiency in compliance and administration,” said deputy commissioner of the international, investigation & indirect taxes group at the Inland Revenue Authority of Singapore Chia-Tern Huey Min during her presentation.
Chia-Tern also explained that to further help the public, each GST rate increase was accompanied by a reduction in corporate and personal income tax rates. For example, when the GST rate was increased from 5% to 7% in 2007, the corporate tax rate was slashed by 2% to 18%. In fact, when GST was first introduced in 1994 in the island state, 70% of individuals were exempted from income tax that year while the rest paid less tax.
On addressing the effects of the GST implementation, she shared that it was found that it was more effective for the government to collect the GST on essential goods from everyone, and use the resources to support the poor directly. She added that more than 80% of GST collections in Singapore are contributed by higher-income groups and foreigners.
To help the lower income group, the Singaporean government implemented offsets to alleviate the effects of GST on this group. Redistribution was achieved via state education, namely increased subsidies to offset the GST payable; health services, where GST was absorbed for subsidised patients in public hospitals and polyclinics; “Automatic Employment Benefits”, which involved topping up the wages of older, lower-income workers and targeted measures such as GST credits and GS vouchers to relieve the tax burden on lower-income groups.
The Malaysian government should consider the best practices of the United Kingdom and Singapore in terms of helping the poor and underprivileged cope with the introduction of the GST next year. It is the best way to stem unfair criticisms towards this tax system and keep the public happy.