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Thursday, March 11, 2010

GST and federalism: Is the govt playing fair in taxing the people?

previously published at Centre for Policy Initiatives website www.cpiasia.net
THURSDAY, 25 FEBRUARY 2010 18:48

Malaysia was formed as a federated state where power is shared between three levels of administration, i.e. Federal, State and local governments.
Under this arrangement, the state governments have control over management of religion, land, natural resources and water. However, in reality, state governments in the country are practically left with very little fiscal autonomy. Centralism has been the norm with Umno holding a tight rein.
Presently, Putrajaya has almost absolute power in appointing bureaucrats at all levels, down to the remotest districts. Almost all the taxes collected goes to the central government, which then decides how this money should be used and disbursed.
Not only does the federal government decide how much is distributed to the states for local development, it also collects almost all the forms of taxes.
Under the Federal Constitution, state governments are not allowed to raise their own funds through taxes other than revenues related to land, mining, water and forestry. They cannot even take any loans without the prior approval by the federal government and its monetary agency Bank Negara.
Malaysia can only truly be said to practise federalism if there were to be a decentralisation of power to collect taxes, and autonomy to develop the various states independently.
Water rights sold to GLC
Barisan Nasional which has formed the federal government for 53 years practises fiscal favouritism. BN-ruled states are given favourable allocations as compared to Pakatan- ruled states which are deprived of allocations.
Take for example Penang. It contributed as much as RM25.67 billion to the federal treasury in the form of taxes and customs duties between 2001 and 2008. Nonetheless, Penang only received RM794 million in federal grants or a mere 3% of its revenues contributed to the federal government.
As a comparison, the Umno stronghold of Johor paid RM20.76 billion in revenues to the federal government and received development allocations as much as RM9.9 billion or 47% of what it contributed to the federal treasury between 2004 and 2008.
Despite this generous allocation, the Johor state government is suffering a grave debt of RM1 billion with only RM36 million reserves in the bank as at Dec 31, 2008. Its average monthly operation cost is as high as RM57 million.
Johor was forced to sell its water supply assets to Pengurusan Aset Air Bhd (PAAB) at a price of RM4 billion in March 2009, But thereafter, Johoreans would have to pay an annual lease of RM260 million for water supply from PAAB in a 30-year concession.
What has happened is that Johor surrendered its sovereign right on water resources to a GLC under the federal government. A similar selling away of rights has occurred in the other states too.
GST burden on working class
In the United States where genuine federalism prevails, state and local governments are given the power to collect certain taxes, including sales tax. This is because the individual states determine their own development in essential fields such as education, water, land, health and even public safety and security.
Malaysia, a diverse country like the US, is suited to federalism – a concept we have adopted in name but not in practice.
In the US, state and local governments collect Sales and Use Tax because they need to fund essential service sectors such as education and healthcare which fall under state jurisdiction.
In the Malaysian situation, the Goods and Services Tax (GST) should be collected by state and local governments. State governments should then be permitted to use these funds for propping up alternative education, supportive and paramedic healthcare system, local public transport and so forth.
Nonetheless, GST should not be imposed if it were a burden to the people especially the lower income group and SMEs. Essential goods, especially food, should not be taxed, and SMEs should be given GST exemption in order for them to have a competitive edge against the much more powerful big corporate outlets and hypermarkets.
Expert opinion says the right time to impose GST is only when more than 85% workforce is able to pay income tax. At present, only some 15% of the Malaysians earn more than RM3,000 and are taxable.
The lower income groups would be the worst hit by GST. Whether GST should be imposed and how it should be imposed so as to maximize benefits to the rakyat is a matter that needs in-depth study.
But more importantly, transparency and fair distribution of our tax money should be in place before embarking on the imposition of other forms of taxes in such a hurry.

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