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New general services tax needs
November, 04th 2009

The Government budget deficit will be eased by the introduction of a goods and services tax (GST) and an overhaul of subsidies but tax experts and economists say a lot of groundwork needs to be done prior to that.

The bump in government revenue arising from a GST makes such a tax attractive but politics would play a huge factor before a GST is introduced.

It will create the capacity for the Government to receive more, said a tax expert at one of the Big Four accounting firms.

Government revenue is projected to fall to RM148.4bil in 2010 from RM162.1bil in 2009.

In tabling Budget 2010, the Prime Minister said the Government was currently at the final stage of completing the study on the implementation of GST, particularly in identifying the social impact of GST on the rakyat.

He said the purpose of the study was to ensure that if GST needed to be implemented to stabilise Government finance, it would not burden the rakyat. If GST were implemented, it would replace the current sales tax and service tax, and exemption would be granted to the low-income group. The GST rate to be imposed would be lower than the sales tax and service tax rates.

The budget deficit is projected to fall to 5.6% of gross domestic product in 2010 from 7.4% this year as the Government embarks on a cost cutting programme.

About 10% of the population is currently paying tax and the impact of a GST would depend on the economic situation at the time of introduction, said an economist at a local brokerage.

Tax experts said GST would help alleviate pressure on falling government revenue as the tax would capture a larger segment of the population who are currently below the income tax-paying threshold.

The rate would come in at 3% to 4%. My guess is that it will be 4%, which according to government officials would be the same amount of sales tax and service tax combined, said a tax consultant at another big firm.

With the current exemptions from sales tax and the limited number of services taxable under a service tax, he thinks the Government would raise more tax money even with a 4% rate.

Citing Australia as an example, the expert pointed out that actual collection from a GST when the tax was introduced was much higher than original estimates.

Tax experts said higher tax revenue was also important at a time when corporate profits appeared weak from the global economic crisis and oil revenues were on a downward cycle.

Indirect tax collection for 2009 is 60% of what it was at the same time in 2008, said one of them.

What is holding back the introduction of GST appears to be the political will. Some governments that introduced a GST prior to a general election, like in the case of England and Australia, have fallen.

But the governments that won the elections have now repealed GST in those countries, he said.

The Governments working group on GST is said to have looked at the regressive nature of a GST and have in place measures to deal with the inflationary pressures that arise once a GST is implemented.

The biggest problem is a lack of understanding by people and businesses, the tax expert said, adding that education and awareness programmes were crucial.

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