It may not make for colourful dinner conversations, but from Malaysia to India, Singapore and Saudi Arabia, the goods and services tax (GST) could well be Asia’s most important economic talking point this year, especially as policy moves to boost reliance on consumption levies come home to roost.
In Malaysia, where Prime Minister Najib Razak is expected to call elections within months, his opponents believe their anti-GST platform will be the single most important factor in swaying government-friendly rural voters fed up by surging costs of living.
The stakes are not as high in India – nationwide polls are due in 2019 – but observers say all eyes will be on how Prime Minister Narendra Modi’s government overcomes the stinging criticism it has faced for the hasty roll-out of a much-hyped GST.
The move – India’s biggest tax reform since independence – was meant to unify the US$2 trillion economy by abolishing state and federal levies to create one of the world’s biggest common markets, but IT glitches and a convoluted structure have tamped down expectations that investors will reap immediate rewards.
Further west, oil producers Saudi Arabia and the United Arab Emirates this week became the first among Gulf countries to implement a 5 per cent value added tax (VAT), as the two kingdoms’ hereditary rulers look to end tax-free living for their subjects after years of low petroleum revenue.
On paper, the GST moves in these Asian economies are in line with prescriptions by the Organisation for Economic Cooperation and Development (OECD), the Paris-based grouping of the world’s developed economies, for increasing tax-to-GDP ratios.
Consumption taxes are seen as a more robust way to deal with tax avoidance, as opposed to assessed taxes where taxpayers declare what they are supposed to be taxed on.
Income tax in OECD countries have come down with the implementation of consumption levies.
Within the grouping, total government revenue from income tax fell from 30 per cent in 1975 to 24 per cent currently, while collections from consumption taxes rose from 13 per cent to 21 per cent in the same period.
In Malaysia, Najib’s critics say the country’s GST of 6 per cent is no silver bullet for an economy they claim is mired by corruption-linked leakages and wastage.
In place since 2013, Malaysia’s GST collections are expected to account for 43.8 billion ringgit (US$10.9 billion) this year, making up some 18.3 per cent of the country’s total estimated revenue of 239.9 billion ringgit.
“Rather than focus on the GST, what we urgently need to do is get rid of the leakages and raise incomes levels so we have at least half of the population paying income tax,” said Wong Chen, one of the leading technocrats in the opposition Pakatan Harapan coalition.
Wong said he was hopeful frustration over the GST – implemented after the 2013 election – would translate into support for the opposition, now helmed by former premier and one-time Najib mentor Mahathir Mohamad. Pundits say while the vote will be tight, Najib’s long-ruling Barisan Nasional coalition is likely to triumph once again.
“Cost of living and the GST is the number one issue on the minds of the economic voters in the rural areas, more so than the 1MDB issue, which is more complicated,” said Wong, referring to the multibillion-dollar corruption scandal at the 1MDB state sovereign wealth fund that has dominated headlines in the country since it became public in 2015.
The case remains a subject of criminal investigations in the US, Singapore, Luxembourg and Switzerland, but the fund and Najib – singled out for his supposed involvement in the graft – deny any wrongdoing.
Wong said if elected, Pakatan Harapan would immediately reduce the GST to 4 per cent, with a view to completely abolishing it within one year.
There is no GST abolition talk in India, but observers say the government is likely to be more circumspect in boasting about its implementation, after the brickbats it received over the troubled launch. Instead, the administration is likely to continue its efforts at damage control.
One of the major grievance with India’s GST was its four rates, instead of the single slab in most OECD countries.
Meanwhile the GST Council – a political body vested with powers to make changes to rates – has been accused of over-tinkering with rates since the nationwide levy was introduced in July.
At its launch, the Modi government was “in no mood to listen to sane voices” criticising the tax, said Gautam Chikermane, vice-president of the New Delhi-based Observer Research Foundation.
After being made to eat humble pie as a result of widespread criticism, “humility has replaced hubris”, Chikermane said. “Finally the government is listening, taking feedback and changing.”
Finance Minister Arun Jaitley is likely to provide an update on the progress of the GST in his February 1 budget speech, Chikermane said.
Discussion of GST in the Gulf and Singapore – which is purportedly mulling a hike to its current 7 per cent rate – is likely to be less pulsating.
Singapore Prime Minister Lee Hsien Loong in November said the taxes in the affluent city state need to rise to cope with increased social and infrastructure spending.
Economists have predicted the government could announce up to a two percentage point increase in the GST in its February budget statement.
The government collected S$11.1 billion in GST last fiscal year, making up 23.6 per cent of total tax revenue.
In Saudi Arabia, the implementation of the VAT on January 1 is expected to trigger a 1.5 per cent increase in overall cost of living.
The government has said the move is part of the powerful Crown Prince Mohammed Bin Salman’s Vision 2030 blueprint to move the country away from a reliance on oil revenues and towards the private sector. Four other Gulf Cooperation Council countries – Bahrain, Qatar, Kuwait and Oman – have pledged to introduce a VAT in 2019. ■