Tuesday, March 23, 2010

KJ: Better for gov't to implement GST now

Khairy Jamaluddin talks about the Goods and Services Tax (GST), the state of the economy, and Najib Abdul Razak's first year as Prime Minister in the second part of an exclusive interview with Malaysiakini.

The Umno Youth chief wants an assurance from the government that the GST won't burden the consumers.

khairy jamaluddin kj interview 190310While the Bill's second reading has been postponed from the current parliamentary session, Khairy (left) suggested it could be better for the government to introduce GST now if all the implementation agencies are ready, so the people could see, assess it, and not see it being made an election issue.

"Its implementation will bring about 'neutral inflation' as its effects will only be one-off. But what is more important is that the teething problems be addressed first before implementation," he said.

The Rembau MP revealed that Anwar Ibrahim tried to introduce GST as early as in 1993, when he was the finance minister.

Khairy also noted a major error in the opposition's argument on the GST.

"The fallacy of consumers having to pay up to 16 percent in GST, is a misconception brought up by the opposition. I have seen that being said in the opposition's ceramah and this is untrue as they will be charged with only four percent."

Khairy agreed further dialogue and meetings with the public is needed for them to understand.

Excerpts of the interview follow, with content edited for language and brevity.

Malaysiakini: There is skeptism in the implementation of the GST. What are your views?

Khairy: In principle, I agree with the implementation of the GST if the circumstances are right. In fact, I fully support the need to restructure our present taxation system. We are too dependent on direct taxation like income tax, corporate tax and the like. Ultimately, a system in which direct taxation is not counterbalanced by indirect taxation will result in the government's revenue being unstable.

It is better for us to have a more stable system where the proportions of direct and indirect taxation are similar. This is the case for most developed economies. We must re-examine the current tax system, and come up with a solution that does not burden the people. This is of utmost importance.

Such restructuring is also important as a means of increasing government revenue. This is due to the depletion of petroleum resources, which is anticipated within the next 10 to 15 years. The government needs other sources of income to replace its over-reliance on the contribution of Petronas. Thus, GST should be viewed as part of this restructuring exercise.

A mistake repeatedly made by the opposition is to suggest that GST is a new tax, on top of what is currently in place. This in inaccurate. Strictly speaking, GST, when implemented, will not be a new tax but a replacement to the Sales and Services Tax (SST) of five to 10 percent.

NONEIn fact, its introduction is not new - I was planning to raise this in Parliament - but I'm giving the scoop to Malaysiakini. In 1993, the then finance minister, a certain Datuk Seri Anwar Ibrahim, proclaimed in Parliament that the government planned to replace the SST with a new tax.

Although he did not specifically mention the GST by name, we can safely assume that it (GST) was what he meant. One shouldn't be so quick to forget what one had uttered in the past.

Petaling Jaya Utara MP Tony Pua had said the SST base is smaller than that of the GST, and more items will be taxable under GST. But, we must remember GST is a reclaimable tax.

Another fallacy propagated by the opposition in their ceramahs is that GST will be imposed and compounded at all stages of the supply chain - manufacturing, wholesaler, distribution and retailing.

Strictly speaking, this is untrue, and to his credit Pua acknowledges this. GST is not compounded. The wholesaler for example, can claim from the government, the value of the difference between GST charged and paid. Others along the chain can do the same. Most importantly consumers are charged four percent, not more.

There may be an impact on prices, but this will be 'one-off' with no inflationary consequence from GST because there will be no sustained price increase.

I have raised this issue with the Finance Ministry, when I was invited to give my views on the matter. I asked them to ensure that in the long run GST will be inflation-neutral. Most importantly, it must not burden the consumer.

From the perspective of companies and businesses, GST may be viewed with some apprehension as expressed by the Federation of Malaysian Manufacturers. But I believe there is enough time between now and its introduction for us to make sure businesses, especially SMEs, are prepared.

In fact, I was made to understand that there are companies with an annual revenue of less than RM500,000 threshold wishing to opt into the GST system, so they are in a position to reclaim the GST paid.

GST will streamline the taxation system to make it more systematic, and as stated by the ministry, it will bring about an estimated RM1 billion of extra income to the government annually.

This may be relatively small for now, but one can expect the amount to increase, and give the government a more stable source of income, without burdening the people.

Talk about the prerequisites that should be in place before implementation.

Smaller businesses may be concerned with the ability and readiness of the government to reimburse their GST claims in a timely fashion. They are worried it may affect their cash flow. They perceive government bureaucracy as sluggish and Customs would be slow to act on their claims.

Taking this into account, I asked Customs if it was prepared for the GST Act, which stipulates a time frame - let's say 14 days for the GST reimbursement to be paid, and a penalty imposed if it is not met. They assured me they are prepared and the Finance Ministry was also confident.

I also acknowledge the risk of some businesses engaging in profiteering, especially at the expense of consumers. Thus, an anti-profiteering law, coupled with swift enforcement and stiff penalties, should be a precondition to introducing GST.

Thus, the concerns voiced about implementation are being addressed. In fact, it may well be that the postponement of the second reading of the bill, has to do with matters of implementation. Teething problems should be resolved before it is tabled.

There is an argument that GST would be a burden as the disparity in income between the rich and poor is very wide where we are the largest among South East Asian countries?

That may be a valid point if there was not already the SST in place, which everyone pays. Currently, only 10 per cent of Malaysians pay income tax ie. those within the higher income bracket. But like the current SST, the GST will be imposed across the board.

khairy jamaluddin kj interview 190310Having said that, the government has introduced a comprehensive list of essential items which will not be taxable under the GST. Items of necessities such as rice, flour, cooking oil, and poultry are exempted or zero-rated.

This will reduce the regressive nature of the GST and avoid burdening the people. Spending patterns of low and middle-income households show a larger proportion of their income is spent on food and (non-alcoholic) beverages than the upper income brackets.

If you say the government is prepared, why the need to postpone (its reading)?

The preparation levels may not yet achieve a point which is deemed satisfactory to the PM or the second finance minister. You must remember that for the PM, it is all about performance now, which entails smooth implementation is imperative.

As with anything new, dissemination of accurate information over GST is also important. To that end, we will conduct roadshows to explain the issues accurately.

You will note that some mamak shops or high end restaurants charge SST to customers but do not pay the Customs. How can the government assure it does not occur?

That points precisely to the beauty of GST. It is unlike the SST where you can avoid paying. If you wish to claim from the government, you must have paid GST to your supplier and it is audited properly. GST avoids the problems of tax evasion and overlap; of course these merits are conveniently absent from the opposition's commentary.

So how long is it postponed? Some people say after the general election?

It is up to the government to decide when the Bill should be tabled; but I reiterate that the most important aspect, is its smooth and effective implementation. I have even offered a critique of the GST in an article I wrote, because I want to ensure people and small businesses are not burdened. But if the government is confident... then I have no problem with it.

If you are going to claim back you need to keep your receipts?

NONEYes, but this should be viewed positively as it will encourage businesses to maintain systematic and organised records. In fact, when the government introduced the self-assessment tax as a system of filing taxes, it taught us to conduct our own affairs in a more orderly fashion - it brings positive change at all levels.

Based on what you say, it is difficult to explain to your constitutents in Rembau?

I must admit it is not easy...I am not an expert on the issue. But what is required is for us to go down to the ground. We must address the most basic yet pertinent concerns among the people that is will GST result in inflation?

If the government can assure us that the answer is no, then we can explain that to the people. When my constituent purchases a product, he or she should not feel that the price has gone up, beyond the minimal adjustment that may happen at first. There should be no discernible price increase. If such a product was priced at say, RM5, it should not increase more than RM6 or RM7 (when it is implemented). It will not occur. This is most important to the consumer.

People expect that elections is just around the corner and the GST will be a thorn to BN?

That is a political decision for the leadership to make. I am amongst those from within BN who have voiced out that GST should not be introduced in a hurry if we are not prepared. But if the leadership feels confident that all is in place, then as a political unit we must be ready.

After all, postponing it until after elections does not mean the Opposition will not use it as an election issue to say that a vote for BN is a vote for GST. So it may well be better for us to introduce first, with proper implementation, for the people to see its impact for themselves.

At which point it would cease to be a potential election issue. Furthermore, investors could see the act of postponing GST for the wrong reasons as a sign of inconsistency in the policy-making, which is never good for investment.

How long do you need to explain to your constituents in Rembau?

Don't underestimate the people of Rembau. They're very clever people. They did, after all, elect a representative who graduated from Oxford (laughs).

After one year Najib Abdul Razak as Prime Minister, how do you assess his performance?

NONEThe biggest challenge facing Najib (left) after he took office was the state of the economy. He became PM when there was an economic crisis, and was entrusted with the responsibility of making sure the stimulus packages were implemented well.

Some may make remarks like spending money cannot be difficult, but if the billions were spent on activities with low multiplier effects and projects which do not benefit the rakyat, it would not see the desired results.

The manner in which he handled these issues is impressive and served as impetus for the nation's economy. Our economic projections today are better than before. If one were to assess him on how he performed, one of his most important tasks was to stabilise the economy, where he has fared excellently.

Secondly, on concerns of economic management in a time of global crisis, he has continued the reform agenda initiated by Pak Lah's (Abdullah Ahmad Badawi) tenure as PM. Obviously, he is adding new ideas and employing approaches of his own.

The introduction of Key Performance Index (KPI), the prioritising of the National Key Results Area (NKRA) complete with Labs, the Government Transformation Plan, and latest of all the New Economic Model (NEM).

All these point towards a very systematic and well calculated series of reforms, where one comes after the other in decidedly assured manner. Stabilise the economy, reform the government and then reform the economy.

Further, it is worth noting that all these reforms occur in line with the concept of '1Malaysia: People First, Performance Now'. There is a clear vision from the Prime Minister.

But the talk on the ground is that the economy is not that good, with not much foreign direct investment and an outflow of investment?

Importantly, the prime minister is not one who suffers from denial syndrome. He realises that private investment is at lower levels than previously. Capital outflow is also a worrying trend. I trust the New Economic Model takes all this in into account. What is most significant is that the PM is aggressive and proactive in attracting investments, as evidenced by his foreign investment missions.

How many investment losing to other countries in the region?

We have relied on low labour cost for our competitiveness, but this resulted in our reliance on certain things that stunt our growth, such as foreign labour and subisidies. So much so, that some of the investments in Malaysia are due to electricity is subsidised.

Steps away from these comfort zones will be initially difficult, but if we do not bite the bullet now we will live to regret later. Transformation may be a tricky and complicated process but we avoid it at our own peril.

Tomorrow Part 3: Khairy talks on Umno and BN youth labs

Part 1: KJ: No secret agenda with Perkasa

courtesy of Malaysiakini

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