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The economic structure of Malaysia is largely dominated by services and industry, which makes up 48% and 42% of the economy respectively. Malaysia has one of the most open economies in Asia having an import and export value of goods and services amounting to 159% of GDP (Vincent et al. (1997). However, Malaysia has experienced a steep decline in external demand for its export products as a result of the global recession. This has resulted in a GDP reduction of 1.7% in 2009 (RaboBank, 2010). The country is also thwarted with fierce and frequent conflict between the Government and political opposition parties which has slowed policy reform. Oil revenues are comprised of petroleum income tax, export duties and royalties which make up 40% of total Government revenue (RaboBank, 2010). Malaysia has long followed an aggressive industrial policy using various incentives including tax policy to promote both economic and social goals (Alavi, 1996).
Furthermore, this has not been helped with an increasing budget deficit and a large percentage of revenue generated from oil (Taha & Loganathan, 2008). The Malaysian government has experienced certain difficulties in balancing its budget. Ever since 1970, the Malaysian deficit has been slowly accumulating even during periods of economic upturns and downturns (Narayanan, 2007). This has prompted the view that the budget deficit is not only structural to the financial structure of the country, but also shows an apparent lack of fiscal discipline (Saifuddin, 2008).
Fiscal Spending has been an active policy tool in promoting the National Economic Policy (NEP)'s objectives; to eradicate poverty and restructure society (Salim and Zalina, 2008). However, this was ended in 1986 when the budget reached an unsustainable level. There have been rigorous effects to minimise the deficit which resulted in a small budget surplus (Narayanan, 2007). However, during periods of decline such as the Asian crisis of 1997, the government attempted to introduce anti-cyclical fiscal policies which saw expenditure surpass revenues. This has led to a national deficit of 7% of GDP in 2009; a 22-year high, which has triggered a 67 billion ringgit stimulus package to help revive growth (Bloomberg, 2010).
It has been Malaysia's substantial oil revenues and large domestic savings that have helped manage the deficit (Taha and Loganathan, 2008). According to the New York Times, taxes and royalties from oil and gas have amounted to 40 percent of Malaysian government revenue, up from about 10 percent a decade ago. However, as the impact of the global economic crisis continues, it will have a major impact on countries dependant on oil revenue. This is seen now with Malaysia's declining oil reserves and lower oil revenues because of a fall in global oil prices (Langdon, 2007).
As oil prices remain truncated due to the adverse demand by developed countries, it will negatively affect the government's monetary reserves and the government will need to seek new revenue sources (Brook, 2004). Malaysia must lower its dependency on petroleum and petroleum related products as a source of its revenues. That is why a reduction in non-productive raising revenues and restructuring subsidies expenditures have been requested in order to tap into new and reliable sources of revenue (Narayanan, 2007). It is believed that the proposed introduction of the Goods and Services Tax (GST) will achieve this.
Therefore, this first chapter will consist of the motivations behind this piece of research, and the considerations needed for a reform program on the nation's tax system. This will thus lead on to the overall hypothesis of the research.
Motivation for the selection of research topic
Each country employs its own tax policies as a method of generating revenue as without it, countries would struggle to stimulate growth for further development. One aspect of tax, indirect tax has interested me the most, more specifically; Value-added Tax (VAT). VAT is unlike any other tax as the cost is borne by the consumer. So in theory, this form of taxation will not impact on the economy as importers and exporters will remain largely unaffected because the costs are passed down to the consumer. . Furthermore, VAT is considered a repressive tax because the more a consumer spends, the more VAT they will have to pay. This makes it an invaluable instrument in generating revenue quickly. It has been well known that the International Monetary Fund (IMF) and the World Bank view Malaysia's narrow tax base economy as unviable (Hamdan, 2010). Malaysia has been mainly focused on generating revenue from its natural resources and has always imposed low tax rates. In the 2007 budget proposal, the Prime Minister YAB Datuk Seri Abdullah Haju Ahmad Badawi announced plans for implementing VAT. This motivated me to research the various issues a developing nation such as Malaysia would experience when trying to implement VAT and how the Malaysian people would take towards this form of taxation.
According to the proposal, GST will only be applicable to businesses that generate sales of RM300, 000 and more. However, as GST will be passed right down to the consumer, the focus of this study will be conducted on how GST impacts on the ordinary Malaysian Citizen right up to the small and medium sized businesses. The reason for this is to obtain a thorough understanding of the overall impact the implementation GST will have across the country.
Considerations required for a reform program: Implementing GST
"GST has, in recent decades, become the most important single tax in most developing and transitional economies" (Richard M. Bird, 2005). The evidence can be witnessed by the number of countries in recent years who have attempted to implement this, namely Taiwan and Pakistan. More importantly, it was noted by Victor Thuronyi (2003), "while there are differences in VAT from one country to another, compared with the income tax, VAT laws are remarkably similar." This supports the intentions of developing nations such as Malaysia who are still in the process of implementing VAT. However, one of the major hurdles faced by these developing economies was raised by Richard M. Bird (2005). He argues that "developing countries encounter various problems in the introduction process, caused by the lack of self-assessment based on tax return practices, the difficulties in establishing efficient VAT control systems, a large share of shadow economy and tax fraud." These concerns are all relevant to the issues currently experienced by the Malaysian Government.
Malaysia aims to replace its current sales tax and services tax of 10% and 5% respectively with a proposed GST rate of 4%. The ITD (2005) paper has commented on how "the choice between a single-rate and a multiple-rate VAT depends mainly on balancing tax administration considerations, favouring a single rate, against the availability of other instruments better targeted to achieve distributional objectives, the relative absence of which tends to favour further rate differentiation". However, according to CPA Australia, "the GST rate should provide a beneficial outcome for the consumer", since GST will be levied at a multi-rate. The problem with this is that it may cause an impending divide between the rich and the poor. A lower tax rate on necessities and on luxuries will benefit the rich due to the fact that their total spending power will increase. However, Edmiston & Bird (2004) remarked how imposing a higher rate on luxury goods is not a productive method of increasing progressive fiscal system. Alebel (2009) has discussed how the Governments choice between a single-rate and a multiple-rate GST will affect its citizens. This means the governments proposed use of a single tax rate will generate more revenue and lower its administrative costs which would make the transition a lot easier. However, this will also impact negatively on the poorest.
Nevertheless, before the Government can even think about rolling out GST across the country, it must first look at the capabilities of its own infrastructure and the businesses that operate within Malaysia. It will not be a simple approach of adopting a generic accounting system because the government and businesses will have to accommodate for the GST laws and the nature of its business operations within Malaysia. According to Alebel (2009), the implementation and enforcement of GST will need administrators to have an efficient computerization system which will be able to carry out the task of checking and auditing the revenues from GST. Moreover, Alebel (2009) continued by stating how administrators must also be well trained in order to operate the computerized systems and on top of that possess extensive knowledge about GST in order to provide the public with the extra guidance it will require. In order to achieve this, the government will be required to invest large sums of capital into its existing infrastructure while also providing extensive education programs for the public. What needs to be identified is whether the Government is capable of educating taxpayers and enforcing business compliance with the new tax system.
As it stands, with regards to the attitude of Malaysian Citizens towards tax is; there is a large degree of non-compliance. As of 2005, the number of tax defaulters has risen from 25,160 in 2003 to 239,666 (Sia, 2008). This is a direct result of the Governments lack of enforcement and education for taxpayers. The existence of a relationship between education and tax compliance is supported by Kasipillar (2003) who concluded that if "taxpayers had adequate tax knowledge, there would be minimal unintentional non-compliance". Furthermore, Singh (2007) and Alebel (2009) have also commented on the importance of taxpayers being adequately informed to avoid unwarranted discrepancies in implementing GST and to also avoid increases in price levels. The lack of tax knowledge is closely related to the demography of Australia's aborigines because a large percentage of Malaysian states are based on "remote communities that are usually deficient in clerical, accounting and managerial skills; so any increased burden in this area will create difficulties" (Stanley, 2002). It will be interesting to identify what methods the government will employ to overcome this problem.
The Government has proposed that GST compliance will be applicable to businesses that achieve an annual sales turnover of between RM100,000 to RM300, 000 or more and will be imposed on all supplies of goods and services at every stage of the supply chain (Chew & Tan, 2009). This means that all businesses that supply taxable goods and services will have to charge GST. This is offset by the GST paid on purchases where the net amount will have to be remitted to the Royal Malaysian Customs. Business will then be required to obtain and keep tax invoices from suppliers if they are to reclaim the GST paid. Besides the point of non-compliance, another major problem is majority of businesses will struggle to keep track and report these invoices due to a lack of technology and training. This was pointed out by Patterson (1990) who found that regardless of governments' intentions to simplify GST; it did not aid businesses with its execution. This will inevitably cause further compliance issues as businesses will be inept in keeping accurate records and reporting its revenues appropriately.
Another important factor the Government must consider is the possibility of price rises which can adversely impact on the lives of Malaysian Citizens. However, it has been pointed out that the increase in price may initially be due to the transitional phase of GST. Singh (2007) has observed that with the introduction of GST, it can result in a one-time increase in the cost of living. Moreover, James and Zheshi (2004) witnessed how the introduction of GST in China in 1994 did not cause an increase in the rate of inflation. This is also aided by the promise by the Malaysian Prime Minister that there will be no rise in inflation. However, Dewan et al. (2003) found that an increase in GST resulted in a direct increase in inflation. This brings into question whether the implementation of GST will do more harm than good to the welfare of Malaysian Citizens. Therefore it is important to identify whether the implementation will either cause a one-time increase in price or a continuous increase in the average of price over the time.
Hypothesis/ Research question
1.3 Objectives of Study
With the introduction of GST, how would this effect inflation?
There is a growing concern that the introduction of GST could increase inflation as the passing of the cost will inevitably end up with the consumer.
What measures have been taken in order to ensure that compliance, effective audit and strict application of penalties can be enforced?
The Government must have the necessary controls for risk management in place in order for the transition to GST to be successful.
Is there a suitable model that can be adopted from a country with the same economic structure that has already successfully implemented GST?
By having a model to base the implementation of GST, the Government can avoid the mistakes made by the model country and this would further increase the success of the implementation.
Are there any contingency plans set up by the government to ensure adequate training is provided and full support to industries for the introduction of GST?
This would be a vital question as many governmental and private sector companies would have to update their software in order to accommodate the change.
The contribution of the research
The contribution that will be made revolves around identifying the key issues that implementing VAT will have on the country's' economical and administrative structure, along with ascertaining how this will effect taxpayers in Malaysia and whether there is a suitable model that can be adopted to guarantee the success of .
This research will center on how VAT can be adopted with taking into consideration the infrastructure that is already in place in Malaysia and the attitudes of taxpayers on tax in general and how this will impact on the success of VAT as a new method of generating revenue for the country. Since the Government has struggled to implement VAT, this will provide an insight into why and to provide an explanation to the difficulties faced by Malaysia. By looking at the problems and isolating the reasons behind this, it will help educate readers and hopefully identify solutions by recognizing similar difficulties faced by other countries who have successfully implemented VAT.
Lastly, the impact of VAT on taxpayers is unique to every individual country. Therefore this research will provide additional awareness into how Malaysian Citizens perceive this new method of tax. By providing a first-hand account on how taxpayers feel this will affect them, it will provide a valuable insight into how the Government should approach the implementation. If successful, the outcome of this research will be an invaluable source of information to individuals whose Government is adopting VAT.
1.4 Research Methodology
The Literature review will be based on critiquing journals and literature written on the theories behind the implementation of VAT and how it has affected the country's economy and the welfare of its citizens, and whether the difficulties experienced are applicable to Malaysia.
My secondary research will focus on obtaining personal accounts on how the implementation of VAT will impact on businesses and taxpayers within Malaysia. This will be conducted in the form of interviews and questionnaires, with the intention of obtaining qualitative feedback.
Aims of the research method:
The primary research will consist of reviewing academic literature regarding the concept and structure of VAT in the modern world. This will provide an understanding into the motivation behind adopting VAT as an integral instrument for generating revenue. Furthermore, the literature will demonstrate how VAT is practiced within different countries and the problems experienced with adopting VAT. In addition to this, the research will also focus on the different VAT models that have been adopted by different countries to identify a model that is most suitable to Malaysia. Also, the literature will supplement the main research objectives by focusing on case studies of developing countries who have recently implemented VAT in the last 15 years. Moreover, the literature will also provide a qualified explanation on the problems that have been identified in the introduction part of the research. This will aid in providing an overall view of the challenges a developing country such as Malaysia will face and the supporting evidence for the proposed solutions.
The secondary element of the research method will consist of qualitative data collection. This collection technique will provide the research with the information it requires to identify patterns or attitudes of behaviour and to have a better understanding of the environment and influences that affect them" (Otlacan, 2005). This means that this method will allow the research to obtain personal accounts on the impact VAT will have on individuals within the country. However, qualitative data can be a double aged sword as the findings may lend to more in-depth and comprehensive data but the data itself can be very subjective which can lead to a difficulty in establishing a reliable and valid set of results.
From the various qualitative data collection techniques available, the method that has been chosen to collate data would be in-depth interviews. This is because interviews provide a face to face interaction between the participant and interviewer. This allows the interviewee to provide their point of view to the subject in question. The type of interview that would be performed would be structured interviews because it helps maintain a focus on the chosen subject by providing a prepared response and having detailed information regarding the subject issue. However, the only drawback would be that the theory unrelated to the subject may not be uncovered as the questions asked are too rigid to allow for follow up questions in responses to the interviewee's answers. As an interviewer, you would need to be aware of the key matters to be directed during the interview.
Firstly, the interviewees will be chosen from the financial sector, manufacturing sector and service sector respectively. The sources will be obtained through contacts in Malaysia. Participants will be contacted via email to request permission for an interview. The interview itself would be conducted over the phone as that would be the most convenient method of communicating as subjects will be based in Malaysia. Questions would be formulated prior to the interview and sent to the participants'. The findings from this would help construct an account on the general consensus of how the implementation of VAT will affect businesses within the financial and manufacturing sector. This is vital information as the success of the transition depends largely on the whether majority of businesses within Malaysia are compliant with the new tax method.
Secondly, in order to obtain information regarding the impact VAT will have on normal ordinary taxpayers, questionnaires will be posted on a networking website to enable residents in Malaysia to partake in the survey. The questions will consist of those similar to the interview questions; however for relevance issues, the questions will be general and directed more towards the public. Also, the questions will be close ended and participants will be tasked with rating the questions 1 - 9 in terms of agreement. The findings will be used to construct a table to give the reader a simplistic approach to reading the data. Moreover, the data will provide invaluable information public opinion regarding the new tax method and how taxpayers perceive it.