The GST and you The likelihood is very high that the National Budget being tabled on October 25 will introduce the country to a Goods and Services Tax (GST). This move is driven by a combination of several external macroeconomic and domestic factors. First, several international ratings agencies have voiced concerns about Malaysia’s mounting fiscal debt, meaning that the country is at risk of a drop in its credit rating [1]. As we know, Malaysia’s fiscal budget has been in deficit since 1998 (see Figure 1). That makes 15 years in a row, showing that the fiscal deficit is now structural rather than cyclical in nature. Second, the loose monetary policy adopted in the US since the financial crisis in 2008 may soon be reversed. The normalisation of long-term interest rates in the US, which are currently at a historic low (see Figure 2), is already resulting in an outflow of capital from emerging markets. Since a significant amount of Malaysian debt securities is held by foreigners (see Figure 3), this leaves the country highly vulnerable. As the US Federal Reserve hinted on a reversal in monetary policy in June 2013, the yield in Malaysian Government Securities has increased (see Figure 4). This means that as US interest rates revert to its long-term rate, borrowing to fund the deficit will cost more in years to come. Third, the above two external factors will increase the cost of raising new finances, thereby negatively affecting Malaysia’s economy and the sustainability of the current fiscal condition [2]. Since Malaysian sovereign notes act as the benchmark in the pricing of Malaysian corporate bonds, the increase in yield will filter down to corporations and households, making the cost of financing higher in Malaysia. Fourth, the federal government has issued strong responses and indicated that it is committed to reforming the subsidy structure and broadening the tax base. Therefore, to be credible in financial markets, the government will have to follow up with concrete actual measures. Finally, raising taxes is never a popular government policy. Hence, the government is very likely to introduce the GST in the first budget after the recently concluded 13th General Election, and in that way, minimise the political fallout. All in all, if the government does not introduce the GST under the given circumstances, Malaysia’s credit ratings will be cut. A credit ratings cut, when combined with the withdrawal of loose monetary policy in the US, will result in a significant withdrawal of foreign capital from Malaysia and an increase in the cost of financing. This will severely impact several infrastructure projects that have been underpinning the growth of Malaysia’s economy. Additionally, the increased debt servicing costs and loss of credibility in the eyes of the financial markets will affect Malaysia’s fiscal situation for years to come. Hence, the costs of not introducing the GST now are significantly high. We have five objectives in our analysis. First, we discuss what the impact of the GST will be on households in Malaysia. Which segments of Malaysian households will feel the pinch harder than others? Second, given that the government has indicated that basic essential items are not going to be subject to GST, will the GST be a progressive or regressive tax [3]? Third, given that the budget is in deficit, what will the expected amount to be raised via GST be in perfect conditions vs. in realistic situations where there are leakages in tax collection? Fourth, what is the expected impact of the GST on inflation? And finally, what are the implications of implementing the GST on Malaysia’s economy in general, the Ringgit, and the offset welfare packages as indicated by the government? According to data from the Household Expenditure Survey 2009/10 (HES), each item was determined to be either zero rated, exempt or subject to a standard GST rate of seven per cent. Unfortunately, in the Goods and Services Tax Bill 2009, the Ministry of Finance and the Royal Malaysian Customs Department did not provide a list of GST-chargeable items. Therefore, two principles were used to determine if the item is subject to GST: 1) According to the Ministry of Finance, basic food items such as rice, sugar, flour, cooking oil, vegetables, fish and meat, eggs and essential services such as health and private education, public transportation, residential property and agricultural land are exempted; and 2) any item that has been value-added is subject to GST. For example, meat and food served at restaurants have undergone a value-adding process and are therefore subject to GST.
Posted on: Wed, 06 Nov 2013 12:11:52 +0000
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