GST - get set for this

THE EDGE WEEKLY ISSUE#992

THE WEEK OF DECEMBER 9 – DECEMBER 15, 2013

MY Say: By Nor Zahidi Alias

Many comments have been bandied about on the Goods and Services Tax (GST), which will hit the Malaysian scene in April 2015.  it is no doubt one of the hottest topics in town, not only among policymakers, economists and politicians, but also among consumer associations and academicians.  It is a subject that has ignited substantial interest among the public due to widespread concerns about how life as we know it will change after it comes into effect.

I was fortunate enough to participate in some discussions on GST at a few conferences in the past month.  It is indeed a humbling experience for an economist like me to listen to different groups of people about the GST.  As one would expect, they have different perspectives of the same issue, but after all is said and done, some critical points can be gleaned from how Malaysians in general regard the upcoming implementation of the GST.

First and foremost is the fear of the unknown.  This is a common reaction to life’s unknowns, things which are not well understood, and things we are not used to in our everyday lives.  We have heard of the sales and service tax (SST) throughout our lives (although some of us do not realise that we have also been paying it all these years), and a shift to something called the GST gives us goosebumps.

Different questions pop up in people’s minds, but anecdotally, the main ones are: “Will this GST blow a bigger hold in my pocket?” and “Will I be paying additional taxes on top of what I am already paying?”

In a lot of ways, consumers are still not accustomed to thinking that this is not a new tax.  In fact, for some reason, it is hard to convince some quarters that GST is a tax regime that will replace the present SST.  By April 2015, whatever SST consumers are paying now will no longer be imposed.  Indeed, nothing will be paid on top of what they are paying now.  In other words, consumers can say goodbye to the 10% sales and 6% service tax, and say hello to the flat GST rate of 6%.

But even if we are able to convince consumers of some of the benefits of switching to GST, the main issue remains the expected increase in prices, which will make a bigger hole in their pockets.  According to some who engaged me in discussion, this is what they fear most, especially when they are already burdened with rising living costs.

Indeed, food prices are rising while homes are becoming more unaffordable, even with double incomes.  Obviously, many do not deem as critical such issues as, say, government budget deficits or the need to maintain Malaysia’s favourable sovereign ratings with international rating agencies.  After all, dollars and cents are what they are primarily concerned with.  And who can blame them?

On the issue of the expected increase in prices, the authorities are doing quite a commendable job in communicating the possible effects of GST to the public.  Yes, prices will likely rise and the government is not denying this possibility.  But this higher inflation rate will likely be temporary as the effect will wear off after a few months, if the experience of other GST-implementing counties like Australia and New Zealand is anything to go by.

Of course, there are those on the opposite end of the spectrum who argue that the consumers will see a one-off price decline due to the lower tax rate (as opposed to sales tax of 10%).  A fair argument, I must say, but based on past experience, prices will likely be “sticky downward”, as economists put it, meaning that businesses will likely prefer to enjoy wider profit margins by maintaining their prices despite declining input costs.

As for addressing government budget deficits and Malaysia’s sovereign ratings, I explained that a country’s economic problems cannot be totally ignored, even at the consumer level.  If, for some reason, our economy goes into a tailspin, say, because of high budget deficits (mainly to finance huge indiscriminate subsidy bills), the labour market will eventually take a hit.

Retrenchments and layoffs will be the likely scenario, causing misery to the people on the street.  In other words, life is not as simple as the average Joe thinks, and the view that “only my pocket alone matters” loses legitimacy as such.

But the positive thing is that consumers have, in general, accepted the fact that some price increases are inevitable.  However, their concerns go slightly beyond this.  Jittery about profiteering activities that may take place following the implementation of GST, consumers want to know how the government will ensure such profiteering does not get out of hand, and what they as consumers can do if they witness instances of unreasonable and indiscriminate price hikes.  Thankfully, these are concerns the government is currently focusing on to assuage the fears of the general public.

On the question of additional revenue that can be collected, it is difficult to provide an accurate answer as precise estimates are hard to find.  Even for Singapore in the early 1990s, the initial strategy was only to get people used to the GST; the focus was not so much on the additional revenue that the government could yield.

However, for Malaysia, any additional revenue will come in handy as the growth in federal government revenue has moderated to circa 9% per annum (on a compound annual growth rate, aka CAGR, basis) between 2003 and 2012, slower than the 12% pace recorded between 2000 and 2008 prior to the Great Recession of 2008.  This is one of the reasons why the government is trying to widen its revenue base through GST in the coming years.

Overall, preliminary estimates suggest that the government will benefit from the higher revenue because of the broader coverage of GST.  The more people consume, the more money there will be in the government’s coffers.  While some may argue that the poor will be hit more because of their higher marginal propensity to consume, it is worthwhile to note that many basic goods are zero-rated (GST-exempt).  Moreover, measures to mitigate the burden on this group have already been announced.

We must now hope for the best.

Nor Zahidi Alias is chief economist of Malaysian Rating Corp Bhd.  Views expressed here are his own.