Malaysia did away with GST at great cost

To win the previous elections, Malaysian opposition promised to withdraw the GST. They eventually did so, but at great cost. And now, they are struggling to find ways to bring back the GST.

During the last elections, the promise to abolish GST was a powerful card played successfully by then opposition Pakatan Harapan to wrest power from Barisan Nasional. When they won, it was one of the first things that they did so quite quickly. Actually, almost too quickly.

As a revenue generator, GST’s performance is unrivalled because of its broad consumption base. Since consumption cannot be hidden, even people who evade or avoid taxes on income are forced to pay taxes when they consume.

However, the way Malaysia implemented the GST was flawed. They treated it like a normal tax and left it at that. When it was introduced, it was implemented hastily as a fire-fighting measure without adequate thought or preparation.Unlike Singapore there was no rebate mechanism. So when the cost of living, goods and services increased, the tax increased with it.

Unlike income tax, there was no way to select people not to charge. Singapore dealt with this problem by giving “transfers”, which are essentially rebates.

It is understandable then that the Rakyat did not like the tax. Eventually, GST became a weak point for Umno.

So Pakatan won and they removed the tax as quickly as they implemented it… which was another disaster.

A little over a year after the implementation of the new Sales Tax and Service Tax (SST), Prime Minister Tun Dr Mahathir Mohamad has indicated that if the rakyat believe that the abolished Goods and Services Tax (GST) may benefit the country, the government will conduct a study on the possibility of reviving it.

The SST regime was reintroduced to replace GST on Sept 1,2018. Each tax regime has its strengths and weaknesses. One of the challenges with SST is preventing a cascading “tax-on-tax” effect which will increase the cost of goods and services.

Unlike the existing SST regime, GST would help mitigate the tax cascading effect as it provides an input tax mechanism where businesses could recover any GST incurred as an input tax credit, subject to conditions being met. This helps to alleviate the tax cascading effect mentioned above, as any GST incurred by the business would be claimed back as input tax credit, where the same would not form part of the cost of doing business.

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