Idris Jala pushes for GST, says 'much income' unreported

Jala explained that a value-added tax like the GST, where a tax is paid on each step of the process, is a
Jala explained that a value-added tax like the GST, where a tax is paid on each step of the process, is a

KUALA LUMPUR, Oct 21 — Malaysia needs to introduce the controversial goods and services tax (GST) - which is likely to start in 2015 if announced in Budget 2014 this Friday - because much income goes unreported, Datuk Seri Idris Jala said today.

He added that it is not sustainable for the country to depend on fewer than two million tax payers in a country of nearly 30 million people,

"Out of some 29 million in people in Malaysia, only less than two million people pay income tax," the minister in the PM's department wrote on his blog today.

"In fact, if we don’t widen the tax base, there is absolutely no room to cut income taxes further. For various reasons, including the fact that much income goes unreported, we need to broaden the tax base," he said.

Jala explained that a value-added tax like the GST, where a tax is paid on each step of the process, is a "consumption tax" that taxes people with spending power.

Putrajaya is seeking to introduce the goods and services tax (GST), possibly in the upcoming Budget 2014 that will be tabled on Friday, in a bid to broaden the tax base and to narrow the fiscal deficit.

The federal government has stated that it aims to reduce the fiscal deficit from 4.5 per cent of the gross domestic product (GDP) last year to 4 per cent this year, and gradually to 3 per cent by 2015.

Jala stressed that the GST would be implemented only in 2015 if it were to be announced in Budget 2014, as 12 to 18 months is needed for preparation.

He also allayed fears on the impact of the GST on the lower-income group, pointing out that the tax rate for essential goods like food, public transport and education will likely be set at zero.

"Also there is currently the sales tax as well as the service tax now of 6 to 10 per cent which will be repealed once the GST is introduced. In the first few years at least, we expect that the GST will be revenue neutral for the government because gains will be offset due to the termination of the sales and service taxes," said Jala.

The minister explained that the GST would make tax evasion harder, as complete records are necessary at each stage of the taxation process for businesses.

He gave the example of a drink manufacturer, who would have to add a tax, representing the GST, to their product sold to customers, after suppliers similarly include the GST in their sales of sugar, flavour and bottles to the manufacturer.

"But you are entitled to claim a rebate on the tax to the value that you did not add, in other words the tax your suppliers added on. To do that you have to keep proper and complete records," said Jala, referring to the manufacturer.

"For instance, studies have shown that Malaysia has large capital outflows which can’t be reconciled in the national accounts. As much as 80 per cent of this is said to be from transfer pricing where firms transfer costs to various centres around the world to minimise the tax. Once a GST is implemented, it makes it very much more difficult to do so because complete records are kept at every stage of the value-adding process," he added.

Jala stressed that the GST is a "broad-based tax" that taxes based on consumption.

"Because it is the more well-to-do and the wealthy who will consume more, the GST automatically taxes them most, not the lower income group," he said.

Due to public pressure, the implementation of the GST has been postponed several times since the tax was first announced during Budget 2005.

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