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Goods and service tax, changes for better or worse

Goods and Services tax (GST) is one type of indirect taxes. GST is a broad based

consumption tax. Many developing and emerging economies have been transforming their

tax revenue bases by progressively moving from direct taxes to consumption taxes such as

GST in recent years. GST is known as a consumption tax since it is borne by the end

user/consumer and therefore is not intended to add costs to the business. Many countries all

around the world have implemented the goods and services tax system and reaped many

benefits from it. It is well documented that a GST can be an effective form of indirect tax and

Malaysia can most assuredly benefit from it also.

The most obvious advantage and the primary reason to move to a GST is to increase

the government revenue. Since GST is a multistage tax, businesses along the supply chain

would be encourages to be GST registered, thus a larger part of the economy will be brought

to the surface for tax contribution. Also GST is based on consumption and hence very broad

based it is a more stable source of revenue. Implementing GST on a broader base causes a

larger proportion of all activities to be captured in the tax net and thus allowing fewer

avenues of escape making administration simpler reducing costs. A broader base means alower rate which means that the efficiency cost of raising revenue is correspondingly lower;

the lowered administrative costs hence contribute to the increase in revenue.

Another benefit of implementing GST is that it has built in control mechanisms that

help minimize tax evasion by traders, therefore also contributing to an increase in revenue.

With GST in place taxpayers are required to have good and proper record keeping, which can

lead to improvement in the maintenance of proper accounts and financial records, which will

allow for better checks and control by the Royal Malaysian Customs. GST can also for this

reason potentially reduces tax leakages such as smuggling as there could be checks before

unusual credit claims are processed.

Yet given the above advantages there are many critics to the GST system. There

comes a trade off when choosing between a single rate and a multiple rate GST. If multiple

tax rates are used by lowering the tax rate on necessities and imposing high rate in luxury

goods the administration cost may increase and lead to reduced revenue. This system

disregards the differences in expenditure pattern and differences between high level and

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lower income earners in the country. It is not easy to set the tax rate at a standard rate without

affecting equity and social welfare in the country. Furthermore it is important to mention

GST is a broad-based tax and exemptions and zero ratings must be scrutinised very carefully.

Too many exemptions would result in the erosion of the tax base.

There is a need for efficient and effective computerisation of the relevant department

which will be administering the tax. The personnel should also be knowledgeable about the

GST since in the initial period, the public which does not very familiar with the new tax

system will need extra guidance from the administrators. Training costs need to be taken into

account. There is a great need to also educate the public on GST operations and provide

support during the transition from sales tax to GST especially on treatment of various

purchases just before the implementation