Will GST increase govt revenue?

WITH the unveiling of the 2014 Budget, the long-awaited goods and services tax (GST) has at last come knocking at our doors.

Come April 2015, the GST will replace the service and sales taxes (SST). Previously, we predicted that the rate would be between six and 10 per cent, the former being the current service tax rate while the latter is the sales tax rate.

The common expectation was that the GST would be four per cent on the supposition that that rate would be revenue neutral. That is, the revenue from the GST will just offset the revenue lost from the repeal of the SST. By setting it at six per cent, or one per cent lower than that of Singapore and Thailand, the government has to showcase our GST as the lowest in Asean.

There is always a risk in introducing an unpopular tax. The fear is that the GST may shrink consumption and, consequently, stall growth if consumers take fright. When a two per cent rise in a similar value-added tax (VAT) took the rate to five per cent in Japan in 1997, the nation slipped into a recession. And, the premier lost his job!

It would, however, be disingenuous to attribute this unfortunate turn of events entirely to the VAT increase. Other knock-on effects such as the Asian financial crisis and Japan’s notorious 50 per cent corporate income tax rate then (it has since been brought down to 40 per cent) had a part in dispatching Japan to the doldrums.

With our economy expected to post a modest five per cent growth, the risk of a recession is negligible. More so, government expenditure is expected to remain stable, if not increase, as the year wears on.

Reduction in personal income taxes, the RM2,000 tax relief for those with monthly incomes of up to RM8,000 and the RM300 for households who are BR1M recipients, should have the Keynesian effect of increasing the overall propensity to consume in the economy. Such increased consumption should spur economic growth and further fill government coffers through the GST.

So, will the proposed GST bring in the expected increase in government revenue? We consider that at the proposed rate of six per cent, the impact on the government’s treasury will be minimal. Let us do the math

by Prof Datuk Dr John Antony Xavier

Rea d more @: Will GST increase govt revenue? – Columnist – New Straits Times http://www.nst.com.my/opinion/columnist/will-gst-increase-govt-revenue-1.387243?cache=%27%60

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