For three years in a row - May 1st 2014 and 2015, and April 2nd 2016, Pakatan Rakyat supporters held an anti-GST rally.
Thoughout the GE 14 campaign, GST was the main and most impactful political weapon of mass destruction for Pakatan Harapan to demolish the then ruling Barisan Nasional.
Few Ministers, including Prime Minister recently admitted rising prices was a result of profiteering along the supply chain, but back then, GST was blamed for price increases. Now that the system has reverted to SST, prices increased even more and rapidly.
Guan Eng abolished GST single handedly
Mahathir was sworn in as PM on May 10, 2018. He then appointed Lim Guan Eng as Finance Minister on May 13.
He was supposed to be cleared off corruption case first but sworn in on May 21st. Subsequently, Tommy Thomas-engineered acquital was official on September 3rd.
Understandably, PH has to deliver on this promise. Before Guan Eng was sworn in, Finance Ministry announced to zero-rise GST starting for June 1st on May 16th.
Guan Eng could evade responsibility, but the civil servant would not announce having known the Finance Minister was appointed. He must have given the instruction.
Guan Eng made a decision ahead of the PM and before cabinet was formed to endorse a major decision. To save government the embarassment of this "unauthorised" announcement, Tan Sri Dr Zeti Akhtar Aziz made the famous "No turning back" statement.
There was a defenisve tone when she said, "So we know from the starting point that it has been decided, there’s no question about it. The issue is how it is going to be accomplished."
Mahathir's plan was to zero-rise, but not to abolish. Government was supposed to size up the situation first before reintroducing SST. Apparently, the plan was to maintain GST, but at a lower rate of 3% instead of 6%.
That could be why Zeti said, "We will tell how GST can be abolished in 100 days." Government was not prepared, had no sufficient understanding on the implication and likely not sure of the financial impact on government.
When Guan Eng made the announcement, he did not look for a long term solution. It was purely playing to the political gallery. An early sign of incompetency Mahathir chose to ignore.
Messed up government cashflow
Together, Guan Eng announced tax holiday for three months from early June.
The weekly collection of GST averages between RM1.2 to RM1.5 billion. For one month, it is between RM4.8 to RM6 billion. And, for three months, that is RM14.4 to 18 billion.
He only realised later government would be short of money. Rebate forms part of the GST system, in which RM16 billion has to be paid out. Upon implementation of SST, the money will not be coming in immediately, but at end of year, (if memory serve me right).
If it takes another three months before any form of tax received, the government will continue to be denied by RM14.4 to 18 billion. That is not taking into account the drop in tax collection due to shrinking economy.
Simple estimate would be to multiply RM18 billion by 3 to derive to RM54 billion. Dato Najib estimated the government budget would be short by RM50 billion!
Guan Eng realised the problems that arised from his reckless and not thought out decision. He used the GST rebate to pass blame to Dato Najib under the pretext of redirecting the GST rebate of RM16 billion elsewhere. The sensational excuse would be 1MDB.
Customs denied it happened. There have been a PAC on the matter and proven Najib did no wrong.
The mot embarassing part of the abolishment is that did not produce the desired result to lower consumer prices of goods and the claimed positive impact expected. No promised anti-profiteering law was put in place.
Malaysia's sovereign rating should not drop according to Zeti but over time, it did.
GST was a transparent system and SST was a convenient system for tax evader. Thus, the suspicion Guan Eng was rewarding black economy operators for their political support.
The realisation of his error could explain the frantic need to cook up stories of government having RM1 trillion debt in which the latest figure remained less than RM800 billion after massive borrowing by government. And, money needed to pay for 1MDB, when all borrowings are matched against asset, which Guan Eng have given a glowing praises.
To cut it short, the economic impact of Guan Eng's reckless single handed decision is the reason why Malaysia is in an economic mess and returning to third world country status to borrow from IMF-backed Asian Development Bank. Mahathir is losing his water face like foreign plastic rubbish being dumped in Malaysia.
Where are the experts claiming abolishing GST is a step in the right direction?
There is a current whispering campaign among Chinese businessmen to sabotage the tax system by mass refusal to pay GST/SST or income tax. No prison cell is enough to fill up tax evaders and government will lose control.
That could lead to a total collapse of government.
Before Dato Hamid Bador expressed his agreement to IPCMC, the last call for IPCMC came from G25.
G25 was the loudest and gave credibility to DAP's agenda to reduce and reform the civil service. Today, it is being aggressively pursued by DAP's Federal Minister, CM and state exco members.
G25 have been vocal on many other reforms, including advocating Islam liberal agenda. However, it is not politically feasible for a government dependent on majority Muslim voters and rapidly declining popularity.
Sheriff Kassim's GST proposal is equally politically challenging, but push come to shove, government may end up taking that U-turn. It is unlike the U-turn on PTPTN, which opposing BN did not advocate.
The reality is oil prices is at a level for relief, but not a bonus to cover government expenses and shortfall. Revenue from various economic sectors declining. Petronas already milked twice and for additional RM82 billion. GLCs being sold for its proceed to find its way back to government coffer under so-called FDI.
And, government still has its commitments.
There seemed to be no light at the end of the current dark economic tunnel with more negative factors coming Malaysia way, including the US-China trade spat. There is so much IRD can do to go after tax evaders.
Another round of tax system change and another round of profiteering will increase prices further. BN-PAS can just sit tight to take over government after a snap election or scheduled GE15, which ever come first.
Looks certainly sure.... So it is politically near impossible to restore GST.
Daim's "six month" promise
Thus, the outcome of Daim's six months promise to straighten things out with a Guan Eng and Tony Pua sabotaging his every move would be an interesting case study and pivotal moment in history and politics.
It comes on the back of a scenario where the government's back is against the wall and Guan Eng cannot stop talking.
Monetary policies have limited effectiveness to counter the risk of stagflation or remote possibility of deflation. Malaysia is begging for international loan at a time its credit rating is coming down, foreign investors ignoring its capital market, FDI would go Vietnam than Malaysia, and ringgit declining unabated with no serious effort from Guan Eng.
All the making for an increasingly dysfunctional financial and fiscal system.
Government may need to take the most bitter quinine to stop the malaria, but the carrier mosquito is the Finance Minister himself.
Edited: 11 PM
Restore GST for fiscal stability
Friday, 24 May 2019
IT’S time for the Pakatan Harapan government to consider reinstating the goods and services tax (GST) as a means of strengthening market perception on the fiscal stability of the country, more so as it is now reviving stalled infrastructure and other projects and spending more on subsidy programmes to help the poor.
Most economists support the revival of government spending as it would facilitate the achievement of the growth and social objectives. However, this must be supported by a strong revenue base in order to be sustainable.
Also, investors welcome the new government’s reform initiatives to strengthen the rule of law and eliminate abuse of power, as these are important in reviving business confidence and sustaining development efforts.
The market is also impressed with the efforts to reduce waste and leakages in government spending.
While all these initiatives to promote Malaysia as a country with a clean and responsible administration are commendable, analysts have questioned the wisdom of abolishing the GST, as it makes federal revenue more exposed to the uncertainties of oil prices.
As the statistics show, the share of federal revenue to GDP has been steadily declining. At the same time, government operating expenditure has been growing faster than revenue. Salaries and pensions account for 44% of the budget, making it the largest item in the operating budget. It is also the fastest growing expenditure item.
Although there has been much talk of downsizing the civil service, statutory bodies and government-linked companies (GLC), the political risks are too great to expect any significant reforms to reduce the expenditure burden on the non-performing or redundant public sector agencies.
The provision for debt servicing is also rising, taking up 13% of the operating budget.
Expenditure on salaries, pensions, debt servicing and constitutional grants to state governments are non-discretionary in nature, meaning the government is locked into providing the allocations, come rain or shine.
With all these fixed obligations on federal expenditure, there is concern over whether the government revenue base is strong enough to withstand any sudden downturns on commodity prices, especially crude oil.
The proposal on the GST was announced in two previous budgets (1988 and 1993), but each time its implementation was postponed. It was finally implemented on April 1, 2015, but it was then withdrawn in 2018 after the 14th General Election.
GST is a tax on consumption, but unlike the sales and services tax (SST), it covers every stage of the transaction process while allowing manufacturers, wholesalers and retailers to claim credit on the tax paid on purchases of their inputs to avoid being taxed twice. This makes it a superior tax compared with the SST.
It was calculated that even at a lower rate of 4%, GST can yield a higher revenue than the 10% SST, with exemptions being strictly limited to the basic essentials.
GST is also useful in catching tax evaders and bringing them into the tax system. Thus, GST can complement efforts to strengthen the income tax on individuals as well as the corporate sector.
The GST idea gained momentum in the Treasury when Malaysia was tackling its first major economic crisis in 1985/86 caused by the “twin deficits” in the external account as well as in the government fiscal balance.
The government had to cut down on its expenditure so drastically that many projects on the ground were affected.
As public spending was constrained by the budget deficit, the government concentrated the recovery efforts on stimulating the revival of the private sector by relaxing regulatory controls under the New Economic Policy. This helped the recovery process.
The government was faced with another economic crisis following the 1997/98 East Asia financial meltdown. Several reforms were then introduced to strengthen institutional governance in banking and financial institutions and in the corporate as well as the GLC sector.
The administrative delivery system was also made more efficient to facilitate economic recovery. But the government hesitated on the tough fiscal reforms.
As the threats of downgrading our sovereign rating by external agencies became imminent, the government finally implemented the two hot button reforms – abolition of the oil and other subsidies in 2014 and the implementation of the GST in 2015.
These two fiscal reforms were no doubt unpopular, especially as they were implemented in close succession, but they saved the country from the more serious prospect of its sovereign rating being downgraded by credit rating agencies, which would trigger a spiralling effect on interest rates and borrowing costs for business, leading to lower investment, unemployment and poverty.
Currently, there is market talk that some international funds may reduce their holdings of Malaysian government bonds based on fears that with the abolition of the GST, government finances will face a challenging future.
This speculation is having a dampening effect on the ringgit, which is a major factor in the high cost of living, especially in urban areas.
Reinstating the GST would help change the foreign view on the country’s fiscal health and subsequently improve the value of the ringgit and reduce the pressure on cost of living.
There is a saying that there is only one thing more dreadful than death – taxes. Unfortunately, tax is unavoidable if the country is to continue its high level of spending on social services while maintaining a healthy fiscal balance.
For an open economy like Malaysia, fiscal stability is extremely important for sustainable growth.
TAN SRI MOHD SHERIFF MOHD KASSIM