MIER asks the government to look into tax reform, why the VAT won't get implemented so soon

From the Business Times:

THE government must look seriously into tax reform and announce it in the upcoming Budget 2010, says a senior economist.

"I think we need a serious tax reform in the country. We need to introduce a goods and services tax (GST) or value-added tax (VAT) as soon as possible," Malaysian Institute of Economic Research (MIER) executive director Prof Emeritus Datuk Dr Mohammed Ariff Abdul Kareem said.

Mohammed Ariff believes tax collection this year will fall short of government target.

"If tax collection is lower than the planned target and expenditure is higher than the proposed amount, then the chances are, we are going to run into a bigger deficit than the 7.6 per cent the government is hoping for.

"The deficit will probably touch or exceed 8 per cent this year, but the problem will be far worse next year because this year's tax collection will be based on last year's collection and next year's will be based on this year's," he said in an interview in Kuala Lumpur yesterday.

With growing government expenditure, including development expenditure and declining revenue, we may have a double-digit ratio of debt to gross domestic product (GDP).

"Of course this is a wrong time to introduce GST, simply because the economy is contracting, but it is important that we plan now for the introduction later.

"We should have a clear timetable. We don't seem to have one at this moment," Mohammed Ariff said.

The government should aim to implement VAT by 2012, at the least, when economic recovery is hopefully in place, he added.

"We need a lead time to prepare. We cannot just implement it overnight. We need at least two to three years preparation."

He noted that those countries which had introduced VAT took two to three years of preparations.

"This is because VAT is a very complicated and complex tax. It is collected at different points in a long supply chain. We also have to reimburse tourists who have paid the tax when they leave the country.

"Tourism is such an important activity. We have to put in place an impeccable machinery first."

Mohammed Ariff said VAT needed serious planning.

"I think the government should start doing it now. It should think of introducing VAT by 2012 but start the ball rolling by preparing for it. Don't think about it after economic recovery because we need two to three years of preparations."

Malaysia has already planned to implement the VAT for quite a long time. The infrastructure should be in place, ready to go but we all know our government, the right hand doesn't know what the left hand is doing, so don't get all hyped on the VAT so soon. Plus, with the precarious economic and political situation, a VAT would probably be something that the current government won't risk.