Unravelling the conundrum of consumption taxes a key aspect

CONSUMPTION taxes play a crucial role in complementing income taxes as a primary source of funding for the government to uphold nation-building, which will contribute towards economic stability and social well-being.

Malaysia has undergone significant changes in its consumption tax system, experiencing both the sales tax and service tax (SST), which is a single-stage tax system, and goods and services tax (GST), or value-added tax, which is a multi-stage tax model, over the past five decades.

The government has noted that the choice between the SST and GST hinges on the nation’s economic goals, administrative capabilities and the need to achieve an optimal balance between revenue generation and the promotion of fairness and equity among the rakyat.

The SST, characterised by its narrower scope that concentrates on specific goods and services, serves as a subtle strategy in consumption tax.

The GST model, on the other hand, broadens the tax base; enhances compliance and transparency; improves efficiency and business-friendliness; and mobilises efficient revenue collection.

Despite the differences in structures, both the SST and GST offer an important fiscal tool for the country to fund the government’s programmes and projects for the benefit of the people.

The consumption tax Malaysia has in place currently is the SST, which was reintroduced on Sept 1, 2018, to replace the GST, which was abolished in May 2018.

The reintroduction of the SST incorporated enhancements to minimise the inherent weaknesses associated with this model and increase tax efficiency.

Nevertheless, the model’s narrower tax base could mean the SST would generate less revenue for the government.

Conversely, the GST has the potential to generate more revenue by virtue of its broader tax base.

The GST was implemented in April 2015 to replace the old system of SST, which had been in place since 1972.

The aim was to streamline the tax structure, as well as to enhance revenue collection, reduce tax evasion and conform to international best practices.

The then-GST was designed to incorporate several features to make it less regressive at a low standard rate of 6%, which included the zero-rating of certain supplies of essential items and exempting certain supplies such as education, healthcare, financial services and public transport.

The adoption of a consumption tax system offers numerous advantages, including promoting savings and streamlining tax administration.

However, similar to other taxation models, consumption taxes have its own challenges such as susceptibility to evasion and avoidance, being regressive and creating administrative burden.

Hence, it is essential to understand and address the various challenges in order to reap the benefits, while mitigating potential pitfalls.

Essentially, an effective consumption tax policy has the potential to enhance the overall tax system that is economically efficient and socially equitable.