In 1954 France pioneered the introduction and implementation of the goods and services tax (GST). As of January 2014, only 41 out of 193 UN member states do not have or have yet to implement GST or value-added tax (VAT). The growing number of countries with GST can be seen as the effect of growing budget deficits and the consequent need of governments to raise revenues. The adoption of GST in countries can also be seen as necessary to enhancing the country’s level of competitiveness in order to meet the demands created by the changing dynamics of the world economy.
In principle and on paper, the GST system sounds ideal compared to its predecessor, the sales and services tax regime. In fact, during the 8th Malaysian Student Leaders Summit in August 2014, Prime Minister Najib Razak said the current sales and services tax was unsustainable and that the GST that would foster more resilience in the nation’s economy. The Malaysian government intends for GST to become an efficient, transparent and stable source of revenue.
However, implementation of GST has to coincide with an increase in disposable income if Malaysia wants to avoid large socioeconomic disparity, as GST taxes people indiscriminately, regardless of their earning. Certainly, its effect will be felt more by lower-income earners because the tax will consume a higher share of their wages when compared to wealthier earners. The Minimum Wages Policy, amendments to personal income tax regulations, and listing zero-rated and exempt goods are among the ways the government is attempting to cushion the impact of GST for consumers. Whether it is enough will be seen very soon. Unlike businesses and companies, which can claim tax credits for most goods, except those exempted, consumers at the end of the chain are unable to shift GST. They can only rely on exempted and zero-rated goods and services in order to reduce the effect of GST, or more specifically, their awareness of the categorisation of goods. To a certain extent, consumers are at the mercy of firms to not act unscrupulously for the sake of earning more profits.
Suppliers are likely to have their own set of worries as well. To meet the requirements of compliance with the new tax system, GST, as a multi-stage tax, imposes a much higher standard for record keeping. In order for businesses to correctly impose GST and claim input credits throughout the production and distribution process, accurate records will become a necessity for suppliers of goods and services. Good accounting records will create trails to assist in any examination of whether a business is meeting its tax obligations.
Large corporations may be well-equipped and informed on how to fulfil their GST obligations, for instance, with well-trained personnel who can utilise computerised accounting systems. However, micro businesses might struggle to understand their GST needs. In 2003/04, during the early years of GST implementation in Australia, official statistics from the Australian Taxation Office revealed that around A$34m ($30.45m) worth of penalties and interest was paid by micro businesses. In contrast, penalties of only A$2m ($1.79m) were paid by large corporations, and nil from the government sector. While businesses might earnestly try to meet their GST obligations, bona fide mistakes are likely to be inevitable. Even after awareness programmes have been conducted, the government would still need to be sensitive and understanding with regard to innocent mistakes made by suppliers.
In the UK in 2011/12, it was estimated that £11.4bn ($18.65bn) of VAT was not collected. The loss was largely attributed to VAT fraud. This can occur when registered businesses pay less to the government than they should by understating sales or overstating purchases, or by not charging VAT when they should. Hence, GST does not miraculously solve tax-related issues following implementation – though the government must work to provide clarity when uncertainty arises in order to build up people’s confidence. New GST legislation and regulations offer a solution to improve efficiency in our taxation system and increase national revenue. Yet, like all systems, the key lies in good governance.
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