GST system: Hurdles to implementation

GST agreement Hurdles to implementationExecutive SummaryThe differences between the menses Sales and Services levy structure and the proposed GST system is also analysed. The current single stage gross revenue enhancement and operate gross is from 5% to 10% while the proposed broad foundd GST is 4%.This report also determines the importance of GST to the administrations m acetary policies and the potential invalidating impacts of the proposed GST system to blood line entities and the good deal. The main purpose for introducing GST is to micturate the current impose income incomeation system much comprehensive, efficient, effective, transparent and business friendly. The potential negative impact is the problem of impairment hike as a result of inefficient price control and the superfluous residency damages for businesses to have additional bend to track input levyes paid.The possible hurdle Malaysia government faces in the process of implementing this new system is also creation discussed. The signifi bottomt informal field makes the assess system inequitable. Besides, lack of transparency bred uncertainty among the business community. The huge maintenance cost each year of RM8.5 million is burdensome. Moreover, choosing the most suitable assess rate and determine the goods that should exempt take languish time. Fin bothy, be travail exports are generally zero-rated, this is often where GST fraud occurs.This report also critically discusses the tax anesthetizes that have arisen as a result of implementing GST/tub in certain evolution countries. The major reason for the decline in Ukraines ad valorem tax to gross domesticated product ratio lies in the Ukraines tax administration. On the other hand, the VAT evasion, hidden prudence size and decadence in Ukraine are jamly cogitate.In doing this reports, we conducted our researches through books, journals, online materials, government websites and electronic newspapers. However, on that point were several limitations while conducting the submit. at that place were however circumscribed numbers of countries which have implemented GST successfully until today. In addition to that, most countries that adopted GST were developed countries such(prenominal) as Australia, Sin pauseore and etc. there were limited numbers of Asian developing countries which has implemented GST.In conclusion, GST can be an effective in shoot tax. To make it a success, effective educational programmes and private and public celestial sphere partnering is necessary. In planning and implementing the GST, countries like United Kingdom, New Zealand, Australia and Singapore can be apply as learning examples for Malaysia.The contri exceptions of our tax systems, especially the expending taxes to the development of our republics socio-economic systemAccoding to OECD (n.d.), the main purpose for the introduction of tax is to finance the public expenditures as advantageously as add ressing socioeconomic concerns. In the globalized market today, most of the companies and individuals are required to pay taxes. Malaysia has adopted a fiscal-like system for the past few decades. Malaysia taxation system comprises of direct and indirect taxation. Examples of direct taxation income and corporate tax whereas indirect taxation includes gross sales and services tax and also others. Refering to the table 1 below, in 2008, direct taxes accounted for about 51.4% of total taxes and 19.1% comes from indirect taxes (Zakariah and Sulaiman, n.d.). Out of this 19.1%, sales and services tax (con pairingption tax) accounted for 7.3% of the indirect taxes. at that placefore, consumption tax does plays a vital role in total revenue enhancement in the country.Table 1 The breakdown of Indirect Tax Revenue in 2008Table 1 The Gross National harvesting in Malaysia from 2005 to 2009Source http//www.tradechakra.com/economy/malaysia/gnp-of-malaysia-152.phpTable 2 Gross National Income expressed in Purchasing Power Parity DollarsSource http//www.google.com/publicdata?ds=wb-wdimet=ny_gnp_mktp_pp_cdidim=countryMYSdl=enhl=enq=gnp+malaysiaTable 2 Gross National Income expressed in US dollarsSourcehttp//www.google.com/publicdata?ds=wb-wdimet=ny_gdp_mktp_cdidim=countryMYSdl=enhl=enq=gdp+malaysiaCorrection of Market Failures manipulation tax in our country provides a way of changing the pattern of consumers demand by variediating the prices of goods, this in turn actuate their spending decisions. For example, demand for different types of transports impart exhaust affected by the total amount of duties charges. From this point, we can see that consumption tax in Malaysia is exacted as an instrument in correcting connect market failures, for example, externalities. Moreover, in this context, consumption tax is used as a tool in making the polluter pay as well as internalizing the costs of consumption.Increase Overall ProductivityConsumption tax in Malaysia is said t o have a lower negative impact on the organize incentives. This is because sales and service tax leave the choices to the people and is unlikely to distort the alternatives that consumers have to between work and lei certain(predicate). People tend to work harder when they are allowed to hold off more of what they earn. This lead then impact on the economic positively and increase the overall productivity of the country. As shown in the figure above, Malaysia GNP and GDP has been increasing over the past 20 years.Improve economic and social overheadsMalaysian economy experienced the rapid growth on the GDP from US100Billion in 2002 to US221Billion in 2008. In addition, according to governments data, our country also sees the drop in budget shortfall from 7.4% in 2009 to 5.6% in 2010. It is believed that the decrease in budget deficit mainly due to the revenue collection from tax and it is able to stimulate the economic growth by financing investment, which in turn gene grade spi cyer(prenominal) income and utilization through the multiplier effects. Thus, government is able to gain access to immediate rise in money and invest them in the economic and social overheads.In a developing country like Malaysia, consumption tax can be an important instrument of growth as it promotes capital formation, especially in the promotion of social overheads as well as infrastructure. The diagram below shows the importance of sales and service tax in contributing their part to the economy in the indirect tax form.The importance of GST to the governments fiscal policies and our countrys economyDespite the average surpluses of 2% during 1993-1997, Malaysia is brought back to deficit after financial crisis in 1997 (Mahbob Zakariah, nd). grade 2009 saw the biggest fiscal deficit. In responding to the fiscal pressures, Malaysia government focuses on importance of tax rates, an important element under fiscal policies, to alleviate the recession effects. umteen developed count ries such as US and UK often raise their taxes to overcome fiscal deficits.Often than non, fiscal imbalance tends to lower national savings, thus cause slower economic growth. In order to overcome the problem, government will collect to reduce government expenditures and/or raising tax revenues. In fact, the external Monetary Fund reported that it is important for Malaysia to introduce Goods and Services Tax (The Star, 2010). The government managed to lower the fiscal deficit from 7.4% in 2009 to 5.6% in 2010 (The Star, 2010).Besides that, to countermand the middle-income trap, the introduction of GST would help with the socio economic development. An additional estimated RM1billion revenue collected from GST can be well spent and further improve the Malaysias development initiatives, such as transportation, healthcare, education and targeted added value activities. With this, the way GST is utilized will determine whether our country can achieve develped country status by year 2 020.Fiscal Policies give rise an effective management of tax systemGST is oblige at the stages of production and distribution therefore incorporate a self policing implement that lowers the possibility of revenue loss through tax evasion. The proposed GST model will not involve cascading/pyramiding affect (Mahbob Zakariah, nd). This is because tax levied on some(prenominal) goods is determined based on its final value, but not the total number of distribution channels that a particular good passes through. Moreover, in order to avoid the double taxation effect, the output tax to be paid will be offset against the input tax.Widen Malaysias tax baseThe introduction of GST alleviates the heavy reliance on direct taxes (for example, income tax) and petroleum tax, thus widen Malaysias tax base. Petroleum revenue is reported to be unsustainable in the long run as it is depleting (Mahbob Zakariah, nd).. However, the main issue here is that government has increased its dependence on pe troleum revenue as shown in the diagram. When comparing against income tax, GST would be a oftentimes stable computer address of revenue as it is less vulnerable to economic uncertainties. GST is a consumption-based tax, an individuals concumption will determine the amount of tax ones pay.Economic GrowthAttract foreign direct investments jibe to Zainal (2007), Malaysia has been engaging in activities that attract foreign direct investments but it is not fast enough. Koong (2010) reported that proposed GST in Malaysia would be able to allow for a further step-down in the current corporate and indirect tax rate, thus d cranky in more foreign direct investment to the country. This is because proposed GST would be able to provide a more broad-based tax collection and revenues. Currently, Malaysias corporate tax rate is relatively high compared to other neighbouring countries (Amin, 2009). This is one important anchor to achieve high-income developed status by year 2020. The introduc tion of GST assertively realizes high value added economic paradigm. In addition to this, with effective in reduction in corruption, Malaysias GDP will be improved. According to Datuk Akbar Ali (2010), a study showed that an increase of one point in the Corruption Perception Index (CPI) will attract FDI which is equivalent to 0.5percent of the GDP and pushed up the average income by 4 percent.Boost the growth of SMEs (Small Medium Enterprises)GST is not a progressive income tax and it is smooth at the determined rate. Therefore, GST preserve the incentive to work and encourage the growth of small medium enterprises. According to Khoo (2010), in line with the proposed GST, it is also important to consider the broadening of tax allowances to include shopping malls, conventions and office buildings will help in reducing corporations burdens. This is especially for those SMEs which incurred high costs and risks in doing business with limited funds. Tax allowances will be able to allow them grow more quickly.Differences between Sales and Services tax structure and the proposed GST systemThe current sales and services tax is from 5% to 10% while the proposed GST is 4%.1. Single versus multiple stageGST is charged on the consumption of goods and services at every stage of the supply chain while the current sales tax and service tax is levied at only one stage of the supply chain.2. Goods and services subject to taxBoth GST and Sales Tax operate on a negative concept all goods and services are subject to GST unless specifically exempted. Service tax, on the other hand, operates on a positive concept where only services that are specifically prescribed are taxable. The wider tax base of GST provides more revenue for government and simplifies the task of identifying taxable services under the service tax system.3. Tax payment and accounting periodsIn existing structure, sales tax becomes due and payable when there is a sale. On the other hand, service tax is only due when payment is authorized, and where payment is not received, the tax is accounted for at the end of the 12-month period from the date of invoice issued.Time of supply determines when one should account for GST in the GST returns. The approach used by many countries when adopting GST is that a supply is considered to have taken place at the earliest of the following three eventsthe time an invoice is issued orthe time any payment is received by the supplier orthe time a taxable supply is made.The GST concept of time of supply is therefore generally wider and there will potentially be changes to the enterprises cash flows under the new tax.4. Imported services and intangiblesPresently, trade services are not subject to service tax. In many GST regimes, imported services are subject to GST through the concept of a reverse charge whereby a supply received from overseas is treated as being made by the recipient of the service rather than by the provider of the service overseas. The r ecipient of the supply is responsible for the output GST on the imported services.5. multitude registrationCompany can file consolidated GST returns via group registration to reduce their GST administration costs, where supplies made within a group would be treat for GST purposes. This resulted in better cash flow management for the group if goods and services are regularly supplied between group companies. On the other hand, the existing tax structures do not allow consolidated tax filings. In service tax, group relief is available for certain professional services when provided to companies within the self comparable(prenominal) group and subject to certain limitations.The negative impacts of the proposed GST system to business entities and peopleTiming ProblemThe present climate of the Malaysian economy is not conducive for the implementation of new tax system. The impact will be contractionary as GDP drop 139% in 2010 compared to 2005 while inflation has been increasing from 2% in 2008 to 5.4% in 2009 due to increases of prices of major inputs like oil prices (CIA World Factbook).Negative impacts to peopleCurrently only 1.8 million individuals from total of 12 million in the workforce paid tax for their profits, but with GST, the entire workforce will be required to pay tax (Malaysian Digest.com, 2010). People earning below average salary will be forced to spend spear carrier annual expenditure in the midst of inflation due to the regressive nature of GST.It is predicted that a exquisite increase in the prices of goods and services is unavoidable. Although the GST will probably be 4%, the scope of goods and services affected by GST will be very much wider. Moreover, inefficient price control by government results in price hike by unscrupulous traders. This phenomenon is shown in the multiple-fold escalation in prices in almost all products as a result of slight increase in oil prices.Negative impacts to businessEconomy of Collection indirect and dire ct compliance costGST imposes additional compliance costs for businesses to have additional work to account for the tax, tracking of the input taxes paid, undertaking reconciliations and filings of GST returns (Zaid,2010). In addition, where a business has short credit entry periods from its suppliers, business need extra finances to purchase supplies when GST is first introduced, result in cash flow burden. Therefore GST is less effective according to tenner Smiths cannon of effective tax system in relation to economy of collection.Neutrality Altered consumer behaviourOne of G.W. Normans qualities of taxation depends on non-interference, i.e. a tax should not impact on the price or volume of commodities traded. Norman argued that value added tax are interferent, as they create imperfections in the market for goods, and in particular for preferences between imported and domestic produce.90% of Malaysian is not in taxed category and this group of people have to pay taxes for their daily consumption if GST is implemented, which will dampen their spending mood. This would affect SMEs who depend on this group of customer base. Higher bank charges for credit card transactions as a result of GST implementation will raise prices in certain products, adversely affecting SMEs.Experiences in other countries have shown that customers generally go on a shopping spree shortly before the introduction of the tax, followed by a period of relative inactivity after the tax is introduced. Companies may seek extra financing to build up stock to cater for a pre-GST rush. However stock in hand may not be entitled to any input tax credit.Cash Flow issuesGST will hit the cash flow of SMEs, especially businesses with significant funds tied up in buckshee invoices. Businesses need to meet their immediate liabilities to suppliers, staff and the IRA, particularly around tax time. Some businesses were forced to adopt unfavourable ways such as higher deposits or stiffer terms of trade which make small businesses less competitive (Zaid,2010). This condition worsens if tax refund mechanism is not efficient.To register or not to registerBusiness not subject to the GST would not be entitled to read the input tax credits on purchases. In a circumstance where the customers of the business are other GST registered businesses, the supplier may be obligated to license itself as it is likely that the customer would insist on buying from another(prenominal) registered person to enable him to claim the input tax credit (Zaid,2010). Consequently, these SMEs will have to charge higher prices to the customers, eroding their price competitiveness (Zaid,2010).A Supply-Demand abbreviation of a GST-Taxed MarketDeadweight loss happens if the income lost by the economy is greater than the governments income the tax is inefficient. While distortions occur, GST are often considered superior because they distort incentives to invest, save and work less than most other types of taxati on in other words, a GST discourages consumption rather than production (Zaid,2010).Hurdles to implement GST faced by governmentGovernment need to balance the conflict between simplicity and to cater for social needs. However, the more social needs are catered for, the more complex the tax becomes and the more costly it is for the Government to administer and for businesses to comply with it (Trade Chakra, 2010).Informal economyEmran and Stiglitz (2005) argue that VAT is likely to reduce rather than improve social public assistance because informal economy like agriculture sector and unregistered business are able to escape commodity tax coverage dominates DTE (Developing and Transitional Economies). According to World Bank, informal economy constitutes 31% of Malaysian economy, almost double the percentage in other Asian countries such as Vietnam (15.6%) and Singapore (13%). The producers of close substitute of the formal VAT-liable commodity will get high profit without bearing tax while formal sector producer may get lower profit and bearing tax. As a result, resources will be channelled more into informal economy, causing inefficiency in resource allocation. Thus the potential tax base is rather narrow which reduce the growth and development. Therefore, achieving equity as proposed by Adam Smith in order to have an effective tax system is difficult through the implementation of VAT in a country that has significant informal sector.Lack of transparencyPricewaterhouseCoopers Taxation Services Sdn Bhd major(postnominal) executive director Wan Heng Choon said the lack of transparency bred uncertainty among the business community. The industry guides that will provide guidance of how the GST law will affect various industry sectors have not provided the certainty that was promised.CostBN government aims to gain RM1 billion through GST, but within the implementation process, a sum of RM222 million has been allocated as initial cost to ensure the smooth and ef fective implementation of GST system in Malaysia. The allocation will cover the cost of developing the GST computerisation system at RM139 million and the additional operations cost of RM83 million for the agency implementing the system, Malaysian Customs Department. The maintenance cost each year is estimated at RM8.5 million (Office of the Prime Minister, 2010).Rate of tax and exemptionThe government should carefully choose the most suitable tax rate so that the tax will not burden the poor. If the government offers lower tax rate on necessities with the intention to help the poor, in fact this will benefit the rich more because they will spend relatively less of their income. But high rate in luxury goods trigger the intention to lower tax liability any legally or illegally. Choosing the most suitable tax rate and determine the goods that should exempt are not easy for government and may take long time.FraudBecause exports are generally zero-rated, this is often where GST fraud occurs. In Europe, the main source of problems is called carousel fraud. Large quantities of valuable goods (often microchips or mobile phones) are transported from one member state to another. During these transactions, some companies owe GST, others acquire a right to reclaim GST. The first companies, called missing traders go bankrupt without paying. The second group of companies can pump money straight out of the national treasuries.Reasons of initial failure in GST implementation in two countries exampleValue Added Tax (VAT) workings better than other general sales tax in many of the developed and developing countries. This does not mean that VAT ever works well. There are many different reasons for the above conclusion, however only two main issues will be highlighted in the following examples. They are problems with VAT externalize which were left behind by the polity process and how VAT plays its roles particularly in the low-income countries. Is the country capable enou gh to administer VAT?The case study below will discuss the problems faced by Ukraine when implementing VAT.A case study in UkraineLike many other developing countries, VAT has been the workhorse in generating revenue in Ukraine. The way of VAT works will determine the performance of Ukraines entire fiscal system. However, table below shows that Ukraines VAT was in worry since the tax fully came into effect in late 1990s. The collection inefficiency of VAT lead to the decrease in revenue with respect to the countrys GDP, thus widen the gap between actual revenue and potential revenue (Bird, 2005).In general, as GDP grows, VAT yield should also rises, with at least at the same rate as GDP. However, when Ukraines real GDP rose by 49% from 1998 to 2004, the VAT to GDP ratio was decreased by 33%. Moreover, the increasing dependence of VAT on imports caused the collection of VAT on domestic consumption fell markedly by 4.3% to 1.4% of GDP in 2004 (Bird and Gendron, 2006). It is very clea r that VAT system in Ukraine is less efficient in generating revenue for the government.According to Bird and Gendron (2006), the decline in VAT to GDP ratio before 2002 could be explained by the ineffectiveness in the Ukraines tax administration, for example the erosion of tax base in the form of increased exemptions which started immediately once the VAT was introduced. There were just too many exemptions in the VAT. For example, many food processing were taxed at a special rate while later on were allowed to claim the refund. The VAT system later became more complicated as it seemed to give ways for possible evasions and corruptions. However, there was no base changes occurred during 2003-2004 that could possibly explain the decline.There were many Ukraine taxpayers tend to evade when they were trapped within the VAT system. They could possibly hide in the hidden economy. Meanwhile, the VAT evasion, hidden economy size and corruption in Ukraine are closely related. Recently, ther e was a study found that there was a positive correlation between evasion level and hydrofoil International (TI) index of perception of corruption (Bird, 2005). Additionally, the evasion in Ukraine was twice the corruption index, which was about 38%.This not only reflects the weak administration but also weak management in structural problems such as the prevalence of underground economy. For example, just two years after the introduction of GST, there were over 83% of the Ukraine VAT registrants filing tax returns annually. In addition, there were also problems with tax administration that related to the application of VAT at the border. A country like Ukraine which is unable to apply VAT on imports properly is said to be facing higher level of difficulties in applying the system to domestic economy.Most of the time, the initial legislation of VAT was closely related to standard international model with participation of international experts. It may look simple at the initial stag e, however, as time goes many countries found that VAT tends to become much complex and difficult to manage. The case study below will discuss the problems faced by Pakistan when implementing VAT.A case study in PakistanIn 1990, Pakistan introduced the GST for the country to replace its Sales Tax Act. As a developing country, Pakistan headstrong to take the initiative and move a big step forward to introduce GST as GST was said to have futuristic dimensions and political recognition. However, several issues were turn to in relation to the introduction of GST, which remain part of continuously reform process. Undeniably, the introduction of GST in the country has brought about significant improvement in the revenue collection (as shown in the table below).Despite the good performance in revenue collection, there were several shortcomings that were address.Multiple Tax RatesIn 1992, Pakistan introduced VAT at the rate of 12.5%. In 1995, the rate was then raised to 18% in order reduc e the budget deficit by meeting the need for extra revenue. However, there was great pressure from taxpayers in 1998, thus the rate was again reduced to 15%. While on the other hand, industrial raw materials were imposed with a higher rate of 20% (Shahid, n.d.). Moreover, in 1999, a penalty system was established in which a 3% tax was imposed on the supplies made by the registered body to unregistered body. Nevertheless, all these decisions have made the VAT system much complicated with multiple tax rates and create many difficulties for the tax administrative. Additionally, cost of compliance has also increased respectively for the taxpayers (Ehtisham, 2010). The rate was then stabilized at 15% in 2004 (Shahid, n.d.). accommodationWhen GST was first introduced in Pakistan, taxpayers were all required to submit a large amount of documents needed for VAT registration purposes. This then cause unnecessary delays during the carnal verification process by the VAT staff as there were ju st too many documents (Ehtisham, 2010). However, a centralized Registration system was introduced in July 2004 in which it utilized Risk Based Registration Module to handle the paper based registration problems (Shahid, n.d.).Tax ComplianceLow tax compliance in Pakistan is another issue that has to be looked into. There were only about half of the tax registrants file their monthly returns. This is mainly due to the negative relationship between the tax administration and tax registrants as mentioned earlier under the registration section (Ehtisham, 2010). The facilitation strategy was then designed and the taxpayers were educated on the related strategy in order to overcome the problem.AdjudicationThere were numbers of adjudication after the introduction of GST in Pakistan due to unaffordable rate. There was a markedly increase in the number of appeals when the appellate foras were introduced (Shahid, n.d.).. The costs involved were time and revenues. The cost of doing business for taxpayers has been significantly increased due to the involvement in the settlement of the cases. The issue has been addressed and discussed for a couple of years before any action was taken. According to Shahid (n.d.), tax administration finally came up with Alternate Dispute Resolution (ADR) mechanism in which consists of an independent judicial committee to deal with the cases.ConclusionThe main purpose for introducing GST is to make the current taxation system more comprehensive, efficient, effective, transparent and business friendly. GST is expected to increase government income and dependence on oil revenues is hoped to be lessen. Besides, GST is aimed to reduce public administration deficit which hit a more than 20-year high of 7.4 per cent of gross domestic product in 2009 (Zaid). Additional RM1bil in revenue will be received for the first year, while the business sector would save RM4.1bil and export sectors would save RM1.4bil (Zaid).The potential negative impact of the proposed GST system is the problem of price hike as a result of inefficient price control by government. GST also imposes additional compliance costs for businesses to have additional work to track input taxes paid, and undertaking reconciliations and filings of GST returns. Malaysians who are not in taxed category have to start paying taxes for their daily consumption, which will dampen their spending mood.As a developing country, it is important for Malaysia to review its fiscal policy continuously. To enhance the competitiveness in the international market, Malaysia must always prepare itself for any possible economic uncertainties. Malaysian government should always make sure sufficient revenues are raised for the country with minimum impacts on its people and resources, while at the same time improve the living standards of the poors. Moreover, government should always seek for ways to lower poverty level in the country, thus a more equitable society can be achieved.In conclusi on, Malaysia govenrment and the people in the country have not get themselves ready for the tax reform. There should be continuously review of the policy and the tax reform should only be implemented once the impacts on the country and people is minimized.