Friday, October 15, 2010

GST Postponed

Of all the news that’s come out over the last couple of days, the news over the postponement of GST (Goods and Services Tax) implementation has got to be the most disappointing (read the original press release here, reasonable English translation via The Star).

The reaction (and underlying explanations) to the postponement are more disappointing still (emphasis added):

GST acceptance easier if reductions known upfront

PETALING JAYA: The goods and services tax (GST) may have found easier acceptance if the Government had made known a reduction in corporate and personal tax rates upfront.

Observers said due to the politically sensitive nature of imposing new taxes, even indirect ones, the move to implement the GST necessitated a more transparent communication over how and when personal and corporate taxes would be restructured...

...Deloitte Malaysia head of tax practice Ronnie Lim told StarBiz if the reductions in personal and corporate tax rates were made known upfront, the GST would have seen easier facilitation...

...Lim said as part of structural reforms in the tax regime for personal taxes, there should be a widening of tax bands which would exempt more from income tax and that with increasing incomes, individuals were not dragged into higher tax bands.

Besides these reforms, he said there should be simplification and consolidation of the many reliefs or deductions available and, improvement of the monthly tax deduction system such that most employees need not file tax returns annually, the exact amount of tax due being automatically collected through monthly tax deduction...

...PricewaterhouseCoopers Taxation Services Sdn Bhd senior executive director Wan Heng Choon said the lack of transparency bred uncertainty among the business community while individuals feared the impact on their spending power.

“Although the GST bill has been tabled, the regulations that contain important details of how the mechanics of the tax will operate are still closeted in secrecy,” he said...

...“The business community was also promised industry guides that will provide guidance and clarity of how the GST law will affect various industry sectors. Only a handful have been released and the feedback is that they have not provided the certainty that was promised,” he added...

...Meanwhile, analysts said the new timeframe for implementation could be around 2012.

After all this time working on it, it appears neither the legal framework nor the measures necessary to put GST in place are ready for prime time.

Having said that, I’m unsure whether a cut in the personal income tax rate is really called for. Less than 20% of the workforce actually pays tax, which is why a GST would be more efficient – it broadens the tax base and incentivizes personal savings.

A GST would also be regressive, in that it effects the lower income groups more than the higher income groups. But that can be handled in two ways – zero rating essential items such as food, and by direct government transfers to the poor. And given the narrow tax base, that argues even more against a cut in personal income tax.

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