Centre for Market Education CEO Carmelo Ferlito.
PETALING JAYA: With the national service tax rate having been upped by two percentage points to 8% from March 1, concerns are undoubtedly raised in the minds of Malaysians about how this would affect the pricing of goods and services going forward.
The service tax increase was among a slew of taxes and planned tax hikes this year that have been and will be introduced by Putrajaya including the low-value goods tax (LVG), digital goods tax (DGT), capital gains tax (CGT) and the high-value goods tax (HVG).
Although the move was in line with the unity government’s determination to grow its revenue and narrow its budget deficit, economists, however, remain concerned about whether the rapid introduction of taxes and the increase of tax rates is the way to go.
For example, economist at the Malaysia University of Science and Technology Geoffrey Williams did not mince his words in his article titled “No Middle Ground to Stupid Taxes” that appeared in Free Malaysia Today on March 3 when he said the new taxes are expected to take RM8bil from the pockets of Malaysians.
Calling such taxes a terrible idea, he argued that with the slowing economy, they would translate to an extra cost of living burden on the public and businesses, especially the micro, small and medium enterprises.
The main question, however, is that even with the new taxes included, are Malaysians paying lower consumption taxes now than when the goods and services tax (GST) was in effect?
Chief executive at Centre for Market Education Carmelo Ferlito was of the opinion that in theory, the new taxes imposed could add to be a higher rate and heavier burden on Malaysians.
However, practically, the question can only be answered once their respective exemptions and ways to elude them are confirmed, he added.
Outlining that the more complex a fiscal system is the higher the chances and incentives there would be for evasion, he told StarBiz that the pillars for a tax system to be effective were simplicity and fairness.
“A system made of a fair income tax, a well designed GST and a rational CGT would probably suffice.
“But I understand that, for obvious reasons, the biggest political parties in the ruling coalition do not want to be associated with the GST,” he observed.
More importantly, Ferlito commented that the government is trying to remain committed to fiscal discipline while attempting to increase its spending, which is logically impossible unless the fiscal burden on the public is intensified.
He added that a serious fiscal discipline strategy should be based on rationalising spending rather than taxing Malaysians more and without a proper and holistic strategy.
“A more strategic and comprehensive approach could be more beneficial, based on a few well-defined and easy to enforce steps and very broad taxes,” he said.
On the other hand, having slammed the service tax increase in his article, Williams nonetheless estimated that even with the new taxes and hikes, the overall tax burden will still be lower than when the GST was imposed.
He explained that in Budget 2024, the estimate for the sales and service tax (SST) was RM35.8bil, which included the recent additional RM5.5bil from the service tax rise from 6% to 8%.
He elaborated, “The other taxes (LVG, HVG, CGT and DGT) would raise around RM2.4bil.
“Hence, the total will be RM38.3bil compared to the estimated RM59.8bil tax burden from when we had the GST, which means the government is keeping the tax burden low by avoiding the GST.”
In his response to StarBiz, Williams acknowledged the government’s efforts in looking for alternative ways of raising revenue without returning to the regressive GST regime, which impacted many people with higher costs, especially those in the low and middle-income groups.
Expounding on his 1% tax on electronic payments suggestion that is anticipated to raise RM15bil efficiently with no market distortions, he said it would be a new idea for Malaysia, calling the tax a simple way of moving to a low-tax, low-regulation system which still raises significant revenue and allows ad-hoc taxes to be done away with.
Meanwhile, reflecting Ferlito’s call on reduced government spending, executive director at the Socio-Economic Research Centre, Lee Heng Guie, said given the government’s limited fiscal space to counter future shocks, it has to enhance its revenue base while restraining its expenditure through price and subsidy reforms.
He opined that these tax increases and subsidy reforms will inflict some social pain on consumers, adding however that the Bantuan Tunai Rahmah will help mitigate the pain.
“We have to sequence the tax changes and price reforms so as to spread out the impact on the economy. It must be well communicated to the public why Putrajaya needs to implement the reforms and make sure the savings are rechannelled for better and productive uses.”
Lee noted that instead of implementing revenue-enhancement measures, the government could seriously consider reimplementing the GST as it is more efficient and transparent.
