The Goods and Services Tax (GST) was introduced amid great acrimony. It was perceived as a means to compensate for the money lost through government’s inefficiency.

As a tax, it hurts the poor more than the rich. It overburdens people already greatly in debt and facing increased cost of living. Although these brickbats are still hurled at the GST, and the opposition exploits them at the hustings, after a year of its introduction, the furore over the GST has subsided.

Undeniably, the GST is regressive. But the larger purpose of the GST is to broaden a tax base that has fewer than two million taxpayers. It was also to ensure sustainable fiscal reform, including public-debt and budget-deficit management.

At six per cent, the GST is lower than the sales tax (10 per cent) and the same as the services tax that it replaced. Notwithstanding, it is one of the lowest rates charged by the 160-odd countries that have implemented a consumption tax.

In a sense, the GST is equitable. Unlike the sales and services tax that was imposed on the final price of a goods or service, the GST is payable only on the value added by the retailer as the latter can claim offsets for the tax he has paid on his supplies and raw materials against his collection.

And the GST applies only to half of the goods and services produced in the economy. Let us do the math. Our gross domestic product (GDP) last year was about RM1.4 trillion. Six per cent (the GST rate) of that GDP is roughly RM85 billion. The GST on half of that GDP would harvest roughly RM43 billion in government revenue.

Since the GST was imposed only in April last year, the amount collected would be two-thirds that amount or RM29 billion. If we account for leakages in and costs of collecting the GST, we shall obtain the government targets of RM27 billion and RM39 billion for last year and this year.

As it sucks out money from the economy to the government coffers, the GST has contracted consumption demand. For example, retail sales fell 4.4 per cent during the first quarter this year. The one-off spike in inflation of one per cent from the GST has prompted antagonists to claim that the tax has left consumers with lesser real income to spend.

Consequently, consumers have tightened their belts and have caused a muted growth of GDP. It is estimated that for every RM10 billion less of spending, GDP will decline by one per cent. Added to this is the slide in oil revenues from slumping oil prices to as low as US$30 (RM120) per barrel. That has led to the government rolling back its expenditure, dampening GDP growth further.

Prime Minister Datuk Seri Najib Razak asserts that the GST is a saviour during this time of revenue shrinkage. He assures that the money collected from the people will be channelled back to them through targeted subsidies and 1Malaysia People’s Aid (BR1M) payments.

The government has also assured that the GST revenue will go into high-impact projects that create jobs, generate income, eradicate poverty and keep the economy afloat.

Lately, oil prices have lifted off their recent lows. They hover around RM50. This is well above the conservative estimate of US$30 to US$35 that the government used in revising its budget early this year. The 2017 Budget is approaching. These give rise to speculation that the GST may be ripe for review.

What are the reasons for this conjecture?

FIRST, oil prices have inclined by 66 per cent from their recent lows. This incline is the same as the decline previously from the 2016 Budget estimate of US$48. Hence, if the oil price stays the same for the rest of the year or even better, increases, we can then see the government reclaiming at least half of the lost nine billion government revenue when the prices plummeted. That RM4.5 billion windfall can easily compensate for a one per cent cut in the GST rate.

SECOND, a cut will put more disposable income back into the hands of consumers, thereby spurring domestic spending. International experience is that a consumption tax is rarely reduced. Canada is one such rarity. As we started with a low rate, there is not much fiscal space to knock down the GST rate.

And there are other reasons why the GST should stay put.

FIRST, the RM39 billion from GST to be collected this year will also go to compensating for the loss of about RM18 billion from the sales and services tax that the GST replaced.

SECOND, the predicted increase in consumer spending may not materialise. With household debt at a lofty 89 per cent of GDP, consumers may decide to pay off their debts. Or they may defer their expenditures to adjust for hard times ahead. Therefore, it might be better to pump back the GST into the economy through public expenditures. These expenditures have a greater multiplier effect compared with private consumption. That will ensure our growth target of four to 4.5 per cent and the budget-deficit target of 3.1 per cent remains intact.

THIRD, research suggests that the initial spike in inflation upon the GST implementation will taper. And the long-term inflation trend will be lower than that without the GST.

FOURTH, to ease the pain of the GST, the government has made concessions to its income-tax structure. It is also expected to collect relatively lower taxes as companies struggle amid the tough business environment.

An increase in the rate is not an option either, given the handsome amounts of money being pulled into the government treasury. A rate rise will be politically unpalatable as it will be economically dangerous.

The Japanese case is instructive. When Japan increased its value-added tax (VAT) by two per cent in 1997, it sent its economy into a tailspin, landing it in recession. In 2014, Prime Minister Shinzo Abe raised the VAT from five to eight per cent.

That rise once again dispatched the economy to a recession. Abe has now twice deferred a proposed VAT hike to 10 per cent. The hike, which was originally planned for last October and then next year, has been shelved for fear of snuffing out once again the embers of growth and spoil his party’s prospects at the local elections.

Hence, the GST is likely to remain the same.

Datuk Dr. John Antony Xavier is head of the Strategic Centre for Public Policy at the Graduate School of Business, Universiti Kebangsaan Malaysia

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