Opening Speech at International Indirect Tax Forum 2010

Good morning.

I am delighted to be here today to officiate the International Indirect Tax Forum 2010 organised by the International Tax and Investment Centre and KPMG. I understand that this forum is part of the ongoing programmes of the Asia Tax Forum. Malaysia welcomes this initiative as it is critical that issues pertaining to taxation, especially with sweeping changes planned for Malaysia in this sector, be discussed and debated in detail to ensure no stones are left unturned as Malaysia modernizes and evolves into a developed nation in the future.

I have studied the agenda for today and I congratulate the organizers for this great effort. Many eminent speakers have been lined up to add tremendous value to discussions of great importance to Malaysia. I hope each and every participant today gains knowledge and new perspectives on the critical topic of GST.

This is a topic of great interest not only to the Government but to industries, enterprises and even the man-on-the-street. Suffice to say, we need debate and exchange of viewpoints to help us make the right decision for the long-term interest of the nation and to stimulate competitiveness.

Ladies and Gentlemen,

The concept of a consumption tax on goods and services is not new in Malaysia. In fact, Malaysia introduced the sales tax of 10 percent in 1972 and service tax of five percent in 1975. The system worked as it were since then, in a world that is not as open and borderless as it is now.
Over the years, the financial and the business sectors have changed, likewise we too have to evolve the taxation system to meet this changing environment.

Some of the structural weaknesses were identified. For example, the base for collecting the taxes is a narrow-sales tax and is only collected from licensed manufacturers while service tax is only applicable on certain types of taxable services. Even though the tax is in principle a single stage tax, the lack of any credits lead to it being a cost to business. This leads to a cascading and compounding effect of the taxes.

On the other hand, due to the same reason of embedded taxes, exported goods and services may not enjoy full tax relief. Also, leakages from the tax net due to transfer pricing and other schemes.

The Government is very aware that the system of indirect taxation needs to be modernized, and we have started exploring some form of value added taxation system such as GST since the mid 80s.

Today, more than 140 countries have implemented some form of value-added taxations or GST. Practically almost all ASEAN countries have adopted GST, except for Malaysia, Brunei and Myanmar. We have sent our working teams to these countries and other developed nations to study their models and systems and the applicability factor in the Malaysian context. Ultimately, Malaysia wants to develop a system of consumption taxation that is more equitable and customized to local conditions and environment. This is why we are happy with the organizing of this workshop, the International Indirect Tax Forum as a very important platform for discussion.

Ladies and Gentlemen,

Since the current sales and service tax are at rates exceeding the GST proposed rate of 4%, the final prices of these goods and services are not expected to see an increase. The prices of goods and services which currently have little or no taxes will increase slightly. Some goods and services will be exempted from GST and others taxed at a zero rate. The latter category will cover essential goods and services; the measure is to shelter the lower income group from the effect of the tax. The list of exempt and zero-rated items has yet to be released.

Businesses in general need to understand the detailed rules and consider how these would apply to their own business operations.

Ladies and Gentlemen,
The Government has been very proactive in consulting with industry, consumers and other key stakeholders before deciding on the best way to implement GST in the interest of transparency and minimal disruption or impact on business and society. The last few years have been very significant in regards to the hard work put in by Ministry of Finance, Customs and other relevant Government agencies striving to achieve the nation’s aspirations in this regard.

Some of the works the Government has done and is doing to advance the cause of GST implementation are like: The GST Bill was tabled in Parliament last December, was set for a second reading in March this year, but it was postponed as the Government wanted to get more public feedback. The ICT system overhaul to reflect the impending changes are almost completed and nationwide training of the relevant civil servants directly involved in administering as well as dealing with GST are ongoing. Education programs are conducted constantly in order to raise public awareness on the nature of taxation and its impact on their lives. And the list goes one.

It will cost an estimated RM222 million to implement the GST. The preliminary cost to implement the GST includes RM139 million for computerization and RM83 million as operational costs for the Customs Department to be the implementing agency. Government had set aside an allocation in this effort to ensure the smooth and orderly implementation of GST.

Ladies and Gentlemen,

The Government views GST as an important instrument to broaden the tax base in the country and to help reduce the national deficit. GST is a system of consumption tax which is more comprehensive, efficient, transparent and business-friendly. It is important for me to stress in clear terms that GST is a replacement tax – it is not a new consumption tax. With the introduction of GST, the current sales and service taxes will be abolished.

Our studies have indicated that the new system will help the Government collect an additional RM1 billion in the first year of implementation compared to the current sales and service tax model. There will be very little impact on the Consumer Price Index, due to the broader tax base and the inherent efficient nature of the GST.

Ladies and Gentlemen,

Before I end my speech let me add that the move towards GST is a very significant step for Malaysia. The change in the tax landscape would have long-term implications to all of us but it is a necessary step as the nation progresses forward to achieve developed nation status. GST is just one part of an overall sweeping plan to restructure the country’s taxation system – both direct and indirect taxation models. The Government continues to be transparent in initiating these changes, with both the business community and the public aware of these developments.

Thank You.
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