Statistics

Introduction

The implementation of the Goods and Services Tax (GST) in Malaysia is being hotly debated as a means to lighten the financial burden of the government. It is important that we look at the implementation of GST in other regions and countries. Through this article, we will see that GST has been widely implemented throughout the world and contributes to a significant percentage of GDP and tax revenue in some countries.

Value Added Tax (VAT) or GST is now the most common type of consumption tax system implemented worldwide. According to a report by PwC, 145 out of 183 economies use a VAT system. Almost all economies from Central Asia and Eastern Europe, the EU, the OECD, and Latin America and the Caribbean use a VAT/GST system. Meanwhile, some economies from the Middle East (9), Asia-Pacific (12) and Africa (11) do not use VAT/GST, preferring other consumption taxes such as sales tax.

This data shows the general consumption taxes collected by the US, Canada and OECD countries. The US does not have GST but its federal government levies national sales taxes on particular goods and services, and most states levy sales taxes, with rates ranging from zero to 7.5%. On the other hand, Canada’s GST rate is five per cent. All levels of government in Canada, which include the federal, provincial and municipal governments, depend on consumption taxes, referred to as GST or HST. The tax is used to generate government revenue, but at a lesser extent when compared to most OECD countries. Since 1975, the US collects the least amount of tax revenue and social security contributions as a percentage of total tax revenue among all OECD countries.

Table 1 shows the tax revenue generated from VAT as a percentage of GDP. From 2004 to 2007, Iceland had the highest VAT revenue as a percentage of GDP as compared to other countries. Its VAT revenue increased from 10.4% in 2004 to 11.3% in 2006, and subsequently decreased to eight per cent in 2010 following the 2008-2009 global financial crisis. From 2004 to 2010, New Zealand, Germany and France’s tax revenue ranged from six per cent to 10%. Meanwhile, Australia and Japan have the lowest revenue from VAT as a percentage of GDP, hovering at 3.5% to 2.5% respectively with minimal changes from year to year.

Standard rate is the GST rate imposed by governments on all goods and services supplied by manufacturers; a reduced GST rate applies to certain goods and services as determined by governments. Selected countries with high GST rates (more than 20%) such as Austria, Romania and Norway impose higher reduced rates on certain goods and services. For example, Austria and Norway impose a reduced rate of 10% to 15% on food. On the other hand, Switzerland, which has a low GST standard rate of eight per cent, imposes a reduced rate of 2.5% on food. Interestingly, Norway imposes zero-rate on electric cars while Israel imposes zero-rate on fruits and vegetables, tourism services, diamonds, flights and apartment rentals. Goods and services that are zero-rated are taxable for GST but with zero per cent imposed.

The GST was introduced to replace sales and services tax in certain countries. It is based on the value-added concept, which means every production and distribution stage in the supply chain, including the importation of goods and services, is imposed with GST. The Philippines levy the highest GST rate at 12% while Singapore and Thailand have the lowest GST rate among Asean countries at seven per cent. Besides Malaysia, two other Asean countries have not implemented the GST: Brunei and Myanmar. Indonesia was the first country in Asean to implement the GST back in 1985, followed by the Philippines in 1988. Singapore, Cambodia, Thailand and Vietnam followed suit in the 1990s, while Laos implemented the GST in 2009.

In a study of 145 countries, on average, 125 hours are needed by companies for preparation, filing and payment activities related to VAT for an entire year. On the other hand, the same companies only need 74 hours to comply with CIT, or 51 hours less. Referring to Figure 3, companies need to spend 82 hours in the preparation stage and 24 hours in the filing stage, which are 67% and 85% more time needed to comply with VAT than CIT, respectively. However, the time needed to comply with VAT varies greatly from one country to another, ranging from eight hours in Switzerland to 1,374 hours in Brazil. Suggestions to shorten the time spent include improving electronics systems such as online filing, which also reduces calculation errors on tax returns by taxpayers.

Referring to Figure 4, high income countries tend to spend zero to 50 hours on just handling VAT compliances, while middle and low income countries need more than 50 hours. In addition, according to the World Bank Doing Business 2012 Report, Malaysia made paying taxes costlier for firms by reintroducing the real estate capital gains tax in 2010. Additionally, Malaysia needs 133 hours per year to handle taxes issues and it is recommended that the country avoid multiple taxation situations where the same tax base is subject to more than one tax treatment, as it complicates things for both taxpayers and government authorities. The GST implementation, if confirmed, is expected to be effective in 2015 and is hoped to generate more economic activity and produce a better consumption tax system in Malaysia.



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