Two of Pakatan Harapan’s ten big promises are the abolition of GST (returning to the SST regime) and the reintroduction of fuel subsidy.[1] While I can agree with most of its other proposals that include credible investigations into various financial scandals besetting the Barisan Nasional government, I oppose these two policies.

With respect to the GST, I think there is a better way to get what Pakatan Harapan seeks to achieve: cut the GST rate to as low as 4% from the current 6%. This policy is equivalent to abolishing the GST without actually abolishing it.

To make sense of why they — abolishing the GST versus cutting the GST rate — are effective equivalent, we have to understand two things.

First, consumers essentially face the end prices only. It is the end prices that matter to them, regardless of tax regimes. If the SST regime had been maintained and its rate hiked to 20% from its previous 6%-10% rates, consumers would have still felt the pain of rising prices. It does not take a GST for that statement on pain to be true.

Second, there is an equivalent GST rate to the old SST one. From my understanding, 4% GST rate is the same to the old 6%-10% SST rate. We know this because at 4% GST rate, government GST revenue would have been the same as its SST revenue (we call this revenue-neutral). In other words, the tax burden faced by residents in Malaysia collectively would remain unchanged if the GST rate had been introduced at 4% back in April 2015. To put it yet in another way, if the GST rate had been implemented at 4% instead of 6% in 2015, consumers would not have faced the price pressures they suffered in 2015-2016. Theoretically at 4%, there would have been no inflation attributable to the taxation system change.

Once we understand these two factors, we can immediately reframe the 2015 introduction of the GST as a tax hike, from 4% to 6%.

So, instead of abolishing the whole GST system altogether, Pakatan Harapan, if it comes to power, should cut the GST rate to 4% at minimum. That in effect will undo the 2015 tax hike and achieve the same effect as abolishing the GST from the perspective of the consumers, given that only the end prices matter.

I think this is the best way to acknowledge and to address the pain many felt during GST implementation, while keeping the benefits of having a transparent and efficient taxation system.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

My fear of returning to the old SST way is that it could lead to an inflationary pressure worse than what we experienced in 2015 and 2016 (discounting the collapse of energy prices). The SST suffers from double taxation problem, unlike the GST. This has the potential of creating a cascading effect throughout the supply chain. Such a large rise in price level would be disastrous to a Pakatan government that campaigned not just against GST, but more importantly, a coalition that campaigned against rising living costs. To prevent such inflation from happening, a SST rate lower than 6%-10% might be needed, which would be a big hit to government revenue (essentially cutting the equivalent GST rate to below 4%).

This is another point to consider: government revenue. There is pressure to increase government revenue for social services, at a time when Malaysian society is ageing, unless you believe in a strict libertarian understanding of the state, which is not the norm in Malaysia. Under current situation, I think Malaysia can afford to loosen up its deficit ratio, but taxes could only be cut so low.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

[1] — Pakatan Harapan (PH) says it will only take 100 days for it to put into place 10 major policy changes if it is voted into government in the 14th general election. [Pakatan pledges to fulfill 10 promises within 100 days of GE14 victory. Kamles Kumar. The Malaysian Insight. March 7 2018]

One Response to “[2866] Cut it to 4%, instead of abolishing GST altogether”

  1. […] [2866] Cut it to 4%, instead of abolishing GST altogether […]

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