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Prices of goods and services will go up if we revert to the Sales and Services Tax. FILE PIC

THE idea to abolish the Good and Services Tax (GST) is mired in confusion. First, there was an idea to “zerorise” it, but this author argued that such a move is dissimilar to abolishing the tax.

Then, came a suggestion to put the rate at zero per cent and reinstate the Sales and Services Tax (SST). Again, this move will not remove the GST but will only result in two different indirect taxes existing in parallel.

Now, there is another proposal to completely remove the GST and roll back to the pre-2015 era. Reverting to the SST will result in serious repercussions on public finance, governance, business operations and costs and, obviously, prices.

In the immediate term, Malay-sia’s tax base will shrink. The number of taxpayers is only 2.27 million out of the 15 million workforce. Assuming a projected year-on-year SST revenue growth of seven per cent per annum, we can expect foregone taxes of at least RM20 billion in this fiscal year. The government will be forced to revise its 2018 Budget, just like how it was done in 2015 and 2016. This is to ensure that the government’s medium-term objective of further reducing its fiscal deficit remains intact.

We cannot dispute the fact that when direct taxes fell by RM14.9 billion in 2015, and subsequently by another RM2.1 billion in 2016 due to falling oil prices, the GST played a critical role in cushioning the sudden dip in revenue.

To be fair, there are ways to mitigate this problem. The government could also roll back individual and corporate taxes to pre-2015 rates and, or insist on higher petroleum-related revenue to make up for the loss in revenue.

Alternatively, the “new” SST rate would have to be set at double the “original” rate of 16 per cent in order to match GST revenue collection. If the new SST rate is set as such, prices of goods and services will skyrocket should producer surplus be maintained. Honestly speaking, nothing good can come out of this.

Unlike the GST, value-adding activities cannot be compensated via input tax under the SST system. Thus, businesses will see no value in undertaking value-adding activities.

Due to the absence of input tax credit, we can expect upward pressure on prices in the wholesale and retail trade, car and motorcycle workshops as these businesses represent a total of 34.2 per cent of GST registrants up to the end of September 2017. In other words, major household expenditure categories such as food and beverage, restaurants and hotels, transport, clothing and footwear will be put at risk of price hikes.

Businesses are profit maximising entities. Unscrupulous businesses could exploit the move to roll back to SST by profiteering without taking into account the actual rise, or even reduction, in input costs. It will also punish businesses that have already invested hundreds of thousands of ringgit in switching to the GST system since 2015.

From the governance standpoint, the cost of enforcement in deterring businesses from profiteering will rise as well. Tax collection will be weakened as there will be greater room for tax avoidance and loopholes among businesses.

Consumers will suffer more if consumer associations are not able to put a strong downward pressure on prices as a result of reverting from GST to SST.

In the medium term, returning to SST will reward businesses but punish consumers as direct taxes will, once again, play a bigger role in revenue generation. Businesses could find creative ways in paying less taxes, but consumers will have less money in their pockets due to the increase in personal tax rate.

The role of import duties is declining due to Malaysia’s active participation in various free trade agreements and the SST is inadequate to complement such a trend. Besides, reverting to the SST will bring little economic sense in economic integration as imports, particularly cars, will become pricier. Once again, a net loss to consumers.

Let us be clear that tax reform is not about raising revenue alone. It is to ensure that governments continue to tackle future economic and social welfare challenges in a sustainable manner. As the world is becoming greyer by the year, it appears that revenues from consumption tax should be designed to be more robust, predictable and prominent than income tax.

Perhaps the real motivation to repeal and replace the GST is not about championing consumer rights nor is it about tax reform. As far as this issue is concerned, depending on who you ask, politicians will give you different answers, but not among economists.

firdaos@isis.org.my

The writer is Director of Economics, Trade and Regional Integration (ETRI), Institute of Strategic and In ternational Studies Malaysia

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