MIER recommends 10% Harmonised Sales and Service Tax

by S BIRRUNTHA / pic source: MIER FB

THE Malaysian Institute of Economic Research (MIER) has proposed the Harmonised Sales and Service Tax System (HSST) to be implemented as opposed to the current Goods and Services Tax (GST) rate of 6% and the 10% rate of Sales and Services Tax (SST).

MIER member of the board of trustees Tan Sri Yong Poh Kon said complete harmonisation may be considered by using a single 10% HSST rate for goods and services at a later stage after due study is conducted.

“Like all tax systems, the HSST will not be perfect. There is still a risk of leakages through fraud and under-reporting.

“The solution lies in the automated matching of output invoices with customer records, sample auditing and heavy penalties for defaulters and fraudsters.

“However, we believe that the benefits and advantages of the HSST far outweigh its disadvantages,” he said during the “Harmonising Sales and Services Taxes: The Better Alternative to Reintroducing GST” webinar organised by MIER today.

Yong highlighted that the HSST will be far more tax-efficient and will affect only the most important sectors of the economy.

He added that only 80,000 enterprises will be required to collect RM28 billion, as opposed to the GST’s 480,000 firms under the GST, which had been required to collect RM35 billion.

Additionally, he said the HSST follows the classic 80:20 rule, whereby 80% of tax revenue is collected from only 20% of GST-paying business enterprises in the country.

He noted that this eliminates the unproductive compliance costs of RM10 billion imposed on the economy.

“As the economy grows, tax revenues will increase accordingly. The merits and simplicity of the single-stage HSST are a good and practical alternative to the GST.

“It can be introduced relatively quickly in the country,” Yong explained.

Commenting further, Yong said the fundamental principle for improvements to simplify tax collection under the HSST system is that all inputs should be free of sales tax for any company with a sales tax or service tax number.

He added that the system should not chase sales tax revenue at the beginning of the value chain by collecting input tax just because it is obvious.

He said instead, the system should allow all inputs to accumulate in a manufacturer or service provider without input taxes and ultimately the product or service is taxed only once at the output stage when all costs are already priced into the product.

Yong also emphasised that the fact that all registered businesses can purchase their inputs tax-free does not mean that no tax is levied, only that the tax is levied only when the product or service is ready for sale to consumers.

“To work seamlessly, we must maintain the principle that all inputs are exempted from input tax once a product or service is exempted from SST.

“This would enormously simplify the administration of HSST for the private sector and customs authorities,” he said.

Meanwhile, Yong said an economic or tax modelling exercise will determine how much revenue is lost by granting input tax exemptions on exempted products and services and abolishing the tax on taxes, and how much more can be collected by increasing the service tax rate from the current 6% to 8% or 10%.

He noted that in any case, it should not be a policy by the government to impose a tax on tax in the economy.

Earlier, Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz had mentioned that no new form of tax will be introduced for now, as the country’s economy is still in recovery mode.

He added that if the government decides to reintroduce GST, it will be improved in terms of the efficiency of its reimbursement process, business compliance level, as well as overall administration.

The minister also said improvements will also be made to prevent any confusion in the classification of taxable versus non-taxable goods and to enhance the skills of government officials.