GST - A laudable step taken by Najib

AFTER years of debate on its feasibility, Malaysia has finally opted for a broad-based goods and services tax (GST) at a relatively high level of 6 per cent. Given that the country has one of Asia's highest debt-to-GDP (gross domestic product) ratios at 54.8 per cent in 2013 - just below its own legal limit of 55 per cent - Prime Minister Najib Razak may not have had much choice. Rating agency Fitch had warned of a possible sovereign-debt downgrade in July.

The new tax system will come into force in April 2015. It will replace the sales and service taxes. Generally, anyone with a family and earning RM4,000 (S$1,575) or less per month will no longer need to pay any income tax. From 2016, the corporate tax rate will be cut by one percentage point, from 25 per cent to 24 per cent. And for small and medium enterprises, the reduction will be from 20 per cent to 19 per cent from the year of assessment 2016.

Unlike other jurisdictions with a similar tax system, there is a substantial list of exemptions. Rice, sugar, salt, flour and cooking oil are to be excluded. Government services such as passports, licences and, remarkably, highway tolls are also to be GST-free. Inevitably, it will add complexity to the system and, thus, it is significant that the start date is 18 months hence. The tax authorities will need time to gear up. It is going to be no mean feat, given the political realities in Malaysia. In effect, the GST makes every business a tax-collection point as well. It will take some doing to get the system in place to ensure that the right amount is collected and regularly handed over to the government.