NOV 8 — It is the time of the year again where the focus switches to the analysis and debate on the annual Malaysian National Budget. Budget 2016 was finalised and presented by Prime Minister Najib Razak in the Malaysian Parliament on the 23^rd of October. Once again, the Prime Minister presented yet another deficit budget.

One of the changes comprise of the addition of ever more zero-rated items exempted from the Goods and Services Tax (GST). The new list of exempted items include medicines, common food items, teaching materials and equipment, as well as economy class tickets for passengers travelling on Rural Air Services (RAS).

Of course, this move will no doubt be music to the ears for households that struggle to make ends meet. However, looking at the bigger picture, by introducing more and more zero-rated items only increases transection cost for collecting tax revenues, eventually reducing the overall efficiency of the GST tax system. So, what exactly does the term “transection cost” mean?

Transaction cost is the cost incurred for the operations of enforcing and collecting tax revenues. Looking at the operations of the GST tax system as an example, introducing more exempted “categories” increases complexity and confusion. Hence, this greatly slows down the rate of information being processed.

In order to make up for the slowing and increased workload, a larger workforce is required by the Royal Malaysian Customs Department. This subsequently mean a higher operational and transaction cost of collecting the tax, where net tax revenue received by the Malaysian government is greatly reduced. Making matters worse, the government too has also spent around RM5 Billion to date for the development of new software and systems to accommodate the complications of GST.

By analysing these qualitative data available, it clearly shows that the GST system is not a win-win situation for both the government and ordinary Malaysians. Not only the amount of money taxed from GST will be removed from being circulated within the Malaysian economy, it also proves to be an inefficient system when compared to the previous Sales and Services Tax (SST) system in terms of tax revenue versus transection cost ratio.


General solutions

So what alternatives can be prescribed to replace the GST tax system?

I personally believe Malaysia should follow the footsteps of the UK Government in its attempt to move from being a high tax, high welfare society to low tax and low welfare. Rather than going through a welfare “merry-go-round”, in terms of taxing the poor through GST and providing aid back to them through BR1M (1Malaysia People’s Aid), the government should seek ways for lower income households to be independent and be self-sustainable.

How can this be achieved? Once again looking at the blueprints of the UK Government, corporation tax rates will be lowered gradually on an annual basis based on the principle that companies pay its employees the National Living Wage as a compromise.

The National Living Wage is the amount of money where an individual needs to earn to cover the basic costs of living. The concept of a National Living Wage is different when compared to the National Minimum Wage. It is an informal benchmark calculated by the government, usually not a legally enforceable minimum level of pay. Thus, the Malaysian government should look into prospect of introducing this National Living Wage alongside the National Minimum Wage, as well as playing a role in defining and calculating a benchmark figure and additional guidelines for its implementation.

One argument made by the Malaysian government in favour of implementing GST was due to the fact that around 90 per cent of Malaysians do not pay any form of tax. GST was propagandised to be a “fair” as it assure all segments of the population plays a role and contribute to the Malaysian tax system.

Nevertheless, this defies the main purpose of tax collection which the government plays a key role to ensure a fair redistribution of wealth from the rich to the poor. Rather than implementing GST, the government should look into ways to raise the household income of the poor so that they will be qualified to pay income tax. The introduction of the National Living Wage, in some sense, is one of the instruments that the government can adopt to achieve this ultimate goal.

In my point of view, adding more exempted and zero-rated items into the GST system is merely a “quick fix” akin to treating cancer with painkillers. While I appreciate that the government is trying to tweak the GST system and make it work, they fail to look at the problem holistically where the core system itself is at fault.

Sometimes a failing system cannot be amended to work, it has to be changed completely. Hence, I would strongly recommend the Malaysian government to consider the prospects of the National Living Wage in its future policy making, as well as zero-rating all items in the GST system temporary until the time is right.

* Roger Teoh is a member of the Democratic Action Party, a postgraduate student studying for an MSc in Transport Engineering at Imperial College London.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail Online.