OF all the people in Malaysia who do not want a value-added tax (VAT) such as the goods and services tax (GST), DAP is the most voluble. But it is difficult to understand why, because the tax is widely recognised as a means to widen the tax base and is adopted by over 160 countries worldwide.

In his latest article, DAP political education director Liew Chin Tong again argues against GST, but his arguments simply don’t hold water. Instead of putting the GST ghost to rest, the backdoor government should resurrect it.

Here’s what Liew says: “By now, Malaysian economists should understand that GST is regressive. Poor, and low- and middle-income families pay more GST as a proportion of their income than their richer counterparts. In short, GST is a tax that kills the golden goose of consumption.”

Let’s look at each point. A regressive tax is defined as one that is applied uniformly, taking a larger percentage of income from low-income earners.

While Malaysia’s GST was uniform at 6%, there was a long list of exemptions, from most food items, books and cheaper clothing to other essentials. The poor were almost totally exempted from the tax.

But what it does is that it taxes consumption – the more you consume, the more you pay. The richer you are, the more you consume, and therefore, you pay more tax. In effect, the rich end up paying more tax.

Yes, when they pay GST, the poor pay more GST as a proportion of their income, but that’s true for almost anything that they pay for or buy. That’s why they are poor.

We have no argument with Liew’s assertion that “the government should attempt to restructure the economic model, so that in a decade’s time, at least 60% of Malaysian households would earn enough to pay direct income tax”.

But in the meantime, and even after that, there is no reason whatsoever why the government should not impose GST – it’s a much better system than the existing sales and services tax (SST), and the infrastructure had already been set up in 2015.

By setting GST at an appropriate rate, and through a system of exemptions, it will impose no additional burden than SST. But, it has quite a few benefits in addition, which DAP should be well aware of.

Let’s reproduce a Q&A from this website to make our point:

Q: Why is VAT administratively superior to a retail sales tax?

A: Retail sales taxes suffer from several enforcement problems. Most notably, the government has no record of transactions with which to verify retailers’ tax payments. In VAT, the chain of crediting creates a natural audit trail, and the seller has more incentive to report the transaction and pay tax.

It further explains: “For any tax, cross-reporting is essential to compliance… In a transaction between two businesses, the seller knows the buyer is reporting the transaction to claim a credit, so the seller has more incentive to report the transaction and pay tax. There’s no similar incentive under a retail sales tax.

“If the retailer doesn’t impose a sales tax on consumer purchases, that’s tax evasion. If the retailer does impose a tax on business purchases, the tax cascades, building up over successive stages of production, which raises and distorts prices. By providing a credit for taxes paid, VAT prevents cascading.

“Last, when retailers evade sales taxes, revenues are lost entirely. With VAT, revenue would only be lost at the value-added retail stage. All these differences help explain why numerous countries have replaced their sales and turnover taxes with VATs”.

Simply put, GST in Malaysia is a major way of cross-checking the accounts of various players in the supply chain, and can be used as an instrument to check tax evasion by comparing the records of the Customs Department, which collects GST, and Inland Revenue Board, which collects income tax. It also widens the tax base.

DAP’s false sloganeering premise

Former finance minister and DAP secretary-general Lim Guan Eng readily admits that there is a huge shadow economy in Malaysia. He reportedly said about a year ago, while still finance minister, that Malaysia’s shadow economy – which comprises illicit activities, such as black market transactions and undeclared work – was worth about RM300 billion, or 21% of the country’s gross domestic product.

“If not handled well, it will not only result in a big loss of revenue to the country, but also reflect the inefficiency of the government agencies and implementing machinery in handling issues related to the shadow economy.”

And yet, he thought he was doing the country a favour by abolishing GST. He anchored DAP’s election political strategy to that by saying the reason for inflation was GST. That was not possible because the tax was implemented in April 2015, and full-year implementation had run for two years after that.

In 2018, the year of the general election, that was no longer true – their election sloganeering was based on a false premise. Lim had the option of reducing GST if he wanted to lessen the burden on the public instead of reintroducing the archaic SST, which is also a uniform tax and can be considered regressive under Liew’s argument. 

Liew, in his latest writing, creates political disinformation, not education, when he calls for GST to be put to rest once and for all. What that will do is encourage tax evasion, the fiddling of accounts, and the rise of the black economy.

Is that what DAP wants for this country? Who is helped by dismantling GST? Not the poor, definitely. It is those rich crooks who evade taxes, and who are allowed to go scot-free even from a consumption tax that would have helped recover some of the taxes. – The Vibes, January 28, 2021

P. Gunasegaram says much sin is committed in the name of the poor. He is editorial consultant of The Vibes and executive director of advocacy group Sekhar Institute