Do we need GST back: Not before Malaysia overhauls its tax system

AS announced in the pre-Budget statement (PBS), our revenue for the first half of the year (H1) was lower than the Budget 2021 estimates – although up by 4.6% compared to the same period in 2020.

This has led to the calls for reintroducing the Goods and Services Tax (GST) as reported in article in The Edge Market on Sept 3.

At the risk of over-simplification, it could be argued that the GST – abolished by the previous Pakatan Harapan administration as part of its manifesto commitment – was a political decision based on policy consideration.

In the policy context of Malaysia, the GST had led to inflationary pressure and erosion of purchasing power. An issue that needs addressing also is the cost of compliance, alongside unauthorised collection.

Whereas, the proposal to implementing the GST was akin to a policy decision based on political (or ideological) consideration.

The pendulum swung away from the Washington Consensus (a bold break that was the right thing to do) during the Asian Financial Crisis (AFC) was to eventually embracing it in the form of shift towards indirect taxation to widen tax base.

Our technocrats in economic-decision making and management later bought in the case for GST was perfectly understandable.

It was set within the scenario whereby “populist” measures which ingeniously appealed to all strata of the society as embodied in the form of cronyism and pump-priming, viewed as too skewed towards political considerations.

The Keynesian predilection of the political elite (due to the nexus with the business elite) all too often sat comfortably with the Monetarist conviction (due to educational and intellectual influence gained overseas) of the technocratic elite.

Under Prime Minister Tun Abdullah Ahmad Badawi administration onwards, the institutional and administrative reforms, correspondingly, became “too dependent” on external consultants, among other things, for policy ideas and formulation.

All of this paved the way for the introduction of the GST, as our technocrats were motivated by the desire to widen the tax base as a measure to reduce wealth inequality in the long-run.

Digital Services Tax fine, for now…

EMIR Research has been consistent in our stance, and also in line with the previous Perikatan Nasional administration and now under the new prime minister, that the timing is not right for reintroducing the GST.

It is not just the economic situation but the whole tax system itself needs to be overhauled before reintroducing GST.

We call for our tax system to be more progressive, as a pre-requisite and pre-condition for the reintroduction of the GST.

In the meantime, we have the Digital Services Tax (DST) set at 6% which has the potential to “emulate” and “mimic” the role of the GST.

In an EMIR Research article, “The DST in Malaysia: Calibrating the policy compass” (December 13, 2019), we had called on the Government to ratify the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting Convention (“Convention”) and deposit the instrument of ratification without delay.

The convention was ratified in August last year, with its instrument of ratification deposited on Feb 18 this year and it came into force on June 1. It is our hope that this would result in a coordinated and concerted effort on an international level to combat aggressive tax avoidance effectively.

However, the article also argued that the main policy intention of the DST should be to serve as base from which other digital-related taxes would emerge and expand.

In another EMIR Research article, “Look to digitalisation as new source of revenue” (June 2, 2020), we argued for the Service Tax Act (2018) to be amended as follows:

  • Firstly, the DST must be redefined to encompass domestic service providers (DSPs) and not just foreign service providers (FSPs) only;
  • Secondly, the DST could be reconceptualised and redefined to include business to business (B2B) – applying along the entire supply chain (up-, mid- and down-streams) where digital transactions occur – whether domestically or externally; and
  • Thirdly, the nature of the services delivered may also need to be updated to include the Internet of Things (IoT) powered by wireless technology (such as low-powered wide area network/LPWAN) as between vendor (business) and backroom office operations (business).

As a form of consumption tax like GST, albeit imposed on the service provider, the DST is more progressive and equitable even when the cost is passed down to the consumer. This is because even if borne by the consumer, due to the following:

  • The target end-user normally or typically can afford the surcharge – based on the income/socio-economic profile; and
  • The DST, unlike the GST, is not inflationary as measured according to core inflation or the Consumer Price Index/CPI (headline inflation), i.e., it’s “insulated”/” immune” to the broader price dynamics. – Sept 7, 2021.

Rais Hussin & Jason Loh Seong Wei are part of the research team of EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.


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