Parliament Select Committee in Tax Reform and GST

Speech (4)
- on the 2005 Budget
by Lim Kit Siang

(Dewan Rakyat, Monday): Yesterday,  the Prime Minister Datuk Seri Abdullah Ahmad Badawi announced that the government would set up a eight-member Taxation System Review Panel, comprising three members from the public sector and five from the private sector, to formulate the details of the goods and services tax (GST) proposed in the budget speech for implementation in 2007.  The panel will be headed by Kamariah Hussain, under-secretary at the Finance Ministry’s tax division. 

He also said that the government  will continue to reduce the budget deficit though he does not foresee achieving a balanced budget by 2006.


He  said the Government had been gradually reducing the budget deficit from 5.6% of the gross domestic product in 2002, to 5.3% last year and 4.5% this year, with a target for 3.8% next year.  The  gradual reduction in the budget deficit however must be seen in the backdrop of the government’s  failure to keep to the original targets of budget deficit in every budget presentation, namely 5% of the gross domestic product in 2002, 3.9% last year and   3.3% this year.  The targetted budget deficit for next year, i.e. 3.8% of the GDP, is 0.5% higher than the target in the 2004 budget, and going by previous performance, where the targetted budget deficit had been  missed by more than a full  percentage point, the actual budget deficit next year after taking into consideration various supplementary estimates to come is likely to be even higher than  4.5% recorded for this year.


Is  the current proposal to introduce the GST conceived as a solution to rebalance the budget, so as to increase tax collections to resolve the intractable problem of  eight consecutive years of budget deficit?


The government  should announce  a roadmap and the timeframe for Malaysia  to return to a balanced budget.


Apart from this eight-member  Taxation System Review Panel announced yesterday, Parliament should itself set up a Select Committee on Tax Reforms to independently conduct studies and make its own input in the review of the tax system and in particular on the proposal to introduce a single consumption tax, the GST, to replace the sales tax and service tax, and paving the way for the reduction of corporate and individual income tax rates.


A Parliamentary Committee on Tax Reforms is important and necessary as it is the MPs who must finally decide by a vote in the House on the proposal of a single consumption tax, and MPs should not leave the issue solely in the hands of the eight-member Taxation System Review Panel.  A Parliamentary Committee could fact have a larger remit that the Panel, as it could also look into the other limb of a balanced budget, namely cutting expenditures apart from devising new ways to extract revenue from the economy.


Indirect taxes like GST are more regressive than direct taxes like corporate and individual income taxes, as the higher one’s income, the smaller portion of that income goes to pay the tax, and vice versa – resulting in greater tax burden on the poorer strata of society as a share of income.


Abdullah has said that the government will ensure that the low-income group will not be burdened by the implementation of GST, and that goods and services considered as basic needs will either by zero-rated or exempted, and that small businesses will also be exempted from this tax.


Such assurances however have not been able to dispel concerns that a GST will create greater hardships for the lower-income earners, erode the competitiveness of small and medium-sized enterprises and may not be the most appropriate mechanism to improve the efficiency of the tax collection system.


There is very well-argued letter in the New Straits Times today on “GST will hit SMEs, individuals” by Andrew Fan, illustrating how a broad-based consumption tax imposing a levy on almost all goods and services does not benefit the average wage earner as it reduces purchasing power and hence quality of life.


Let me use his illustrations:


An individual earns RM35,000 a year (RM2,916 a month).   His income tax for that year is RM1,526 a year. That means his effective disposable income is RM33,474.


Assume GST of five per cent is applied.  Everything this individual buys will be more expensive by five per cent, causing his real disposable income to decline to RM31,880 (RM33,474 divided by 105 per cent).


This means the GST cost to the in individual in real terms is RM1,595.


Given this scenario for an individual, the government’s suggestion to lower the effective income tax rate to compensate for GST rings hollow. Even if income tax rates dropped to zero, it would not cover the GST cost.


This calculation is even more damaging for the individual after factoring in rebates, deductions on income tax and lower effective income tax rates for lower wage earners.


Secondly, GST is bad for SMEs. Most SMEs lose money or make very little money at the beginning. Therefore, they pay no or very little corporate tax during this period. GST, however, will impact a small business from day one.  From day one, it will have to charge its customers more for goods or services and this will lower demand for its offerings.


As MPs will have to make the final decision on  the GST,  Parliament should have its own Commission to study tax reforms in general and a single consumption tax in  particular, to fully consider the pros and cons of a GST, its impact on the average wage-earner and the poorer sections of society, the costs of doing business particularly for SMEs and the efficiency of the tax collection system.


DAP calls for   greater EPF efficiency,   accountability and  transparency  of investment polices and  performance


The budget announcement that the Employees Provident Fund (EPF) would be allowed to double the size of its funds placed with local fund management companies, including non-bank owned companies from RM6 billion to RM12 billion within three years has again raised to the fore the important issues of efficiency, accountability and transparency of EPF investment policies and performance.


During the recent general election in March, the Malaysian Trades Union Congress (MTUC) came out with a general election manifesfo on issues which concerned the workers, chief among which include: 


  • Proposed merger of EPF and SOCSO and all gains utilized to grant enhanced benefits to contributors;
  • Fifty percent worker representation on the Boards of EPF and SOCSO;
  • EPF Act  amended to provide a minimum dividend of 8% per annum;
  • SOCSO Act amended to provide full payment for employees who are temporarily or permanently unfit for work and provide 24 hour coverage against accident risks; and
  • Minimum monthly salary of RM900 for all sectors including plantation sector.


The shock of the lowest EPFs dividends  in four decades 4.25 per cent for 2002  and 4.50 per cent last year , has made more and more of the 10.4 million EPF contributors demand  a proper and rightful say in the security and quality of the RM220 billion EPF monies which constitute their life  savings for their retirement. 

A long-time EPF insider who served for a decade on the EPF Investment Panel until 2001, Dr. R. Thillainathan, offered the sharp critique of the EPF in a recent World Bank conference that EPF’s performance as a retirement scheme is “not satisfactory”. 


He said: 


“EPF’s retirement scheme has not adequately addressed a  contributor’s market or longevity risks.  There has also been a failure to run EPF on a portfolio basis and to restrict its exposure to portfolio risk.  In fact, there has been a tendency to take unnecessary business or credit risks. 


“There has also been a failure to run EPF in the best interest only of its members. 


“These failures have raised serious governance issues. 


“EPF’s management practices with regard to accounting, performance measurement and dividends declared depart from private sector best practices. 


“This had distorted the behaviour of EPF’s regulator and fiduciraries, caused a serious mismatch in the interests of its regulator, fiduciaries  and contributors and therefore led to EPF’s mal-governance.” 


Among Thillainathan’s criticisms are: 


EPF Investment Panel 


Members appointed and can be removed at the pleasure of the Finance Minister. No independent bodies, like Parliament or other expert committees, are consulted on the appointment.  Independence of a member of the EPF Investment Panel requires him to declare his interest and abstain from voting on any interested party transactions, but a member is not required to pre-clear his trades or to report on his investment activity 


Accountability and Liability 


Risk and returns are for the account of the contributors but they have little or no control on investment choices.  Contributors are in no position to discipline members of the Investment Panel against bad management because they have no powers.  Personal liability of an Investment Panel member is not well-established in law. 


Regulation & Supervision 


Ministry of Finance is regulator and supervisor of EPF. But it does not have requisite expertise to do this job especially given its many other equally important job functions.   Where regulator and regulated are both government bodies, as is the case with MOF and EPF, regulator has been less able or willing to go public with criticism of the regulated. 


EPF & Governance Issues 


Risk is borne by contributor but investment decision is exercised by EPF. Arrangement potentially explosive.  


Contributor vs Regulator 


To avoid conflict of interest between contributors and regulator, EPF has to be operated in the best interest only of contributors. Promoting “development” should not be a goal.  Conflict of interest between MOF  as regulator & government as EPF’s biggest borrower. 


And the following are some of Thillainathan’s proposals and conclusions: 


  • Good governance requires qualified and independent governors who can be held accountable and liable.
  • Weaknesses in regulatory, supervisory and accounting framework have made for weaknesses in governance framework of EPF.
  • Easier to reform accounting  and audit framework of EPF to ensure EPF’s performance measurement and report adheres to best practice.
  • Good accounting and disclosure will minimize distortion in behaviour of EPF’s fiduciaries.
  • If poor financial performance does not get properly reported because of weaknesses in the accounting and disclosure framework, then it will be more difficult to bring about changes in governance practices.
  • In any reform of governance practices priority should be given to reform of the accounting of a pension fund and the fund should be audited by an external auditor from private sector who can then be held liable for negligence or fraud.

Something is clearly  very amiss with the EPF management, investment and governance, warranting a major revamp to safeguard the rights and interests of the EPF members.  What is at issue is not just the lowest dividend in 40 years for the past two years, but how best to protect the future of EPF.


The  time has come for EPF to set an example of accountability, transparency and good corporate governance and I call on the Prime Minister to give his support for the  establishment of an EPF Contributors’ Association to protect the rights and interests of the 10.4 million EPF contributors with their  total funds of over RM220  billion and to direct the EPF to give full co-operation to the EPF Contributors’ Association.


Refusal by Commercial Vehicle Licensing Board to renew Lesen Pembawa C for its fleet of eight oil  tankers of transport company, Magna Array Sdn. Bhd. For having  no  bumiputra director unconstitutional, abuse of power detrimental  to national unity and mockery of Vision 2020


I said yesterday that one distinguishing characteristics of the maiden Abdullah budget should be justice, but this is a value which is more often observed in the breach.


After the general election in June this year, a private company Magna Array Sdn Bhd found to its shock that its application for renewal of Lesen Pembawa C for its fleet of eight tankers was rejected by the Commercial Vehicle Licensing Board because it did not have a bumiputra director.


The company changed ownership in May 2002, with three Malaysian Chinese directors replacing the old Board of two Malaysian Chinese and one Malaysian Malay director.


In rejecting the company’s application for renewal of Lesen Pembawa C for its fleet of eight oil tankers, Lembaga Pelesenan Kenderaan Perdagangan, Kementerian Pembangunan Usahawan dan Koperasi in a letter dated 17th June 2004 said:


“Dukacita dimaklumkan bahawa permohonan tuan tidak dapat dipertimbangkan oleh Lembaga Pelesenan Kenderaan Perdagangan dan ditolak dengan alasan Tuan adalah dinasihatkan supaya ada bumiputra dalam Ahli Lembaga Pengarah syarikat tuan.”


The Lesen Pembawa C for the fleet of oil tankers for Magna Array Sdn. Bhd. are ordinary licences and there was  no condition that they are  meant for bumiputras or must have bumiputra participation.   


It is unfair, an abuse of power, unconstitutional, detrimental to national unity and a mockery of Vision 2020 for a government agency to move the goal post and impose a new condition of bumiputra participation by requiring a  bumiputra director  when there had been no such previous condition and after a change of ownership.


Appeals to the Lembaga Pelesenan Kenderaan Perdagangan had been ignored, although the Board knows fully well that this is tantamount to crippling the operation and even survival of the company, after an investment of over a million ringgit in buying over the company.


I understand that this is not an isolated case, and that such abuses of power and unconstitutional actions by government agencies is quite commonplace – adding not only to the cost of doing business but seeding alienation and resentment about the government’s nation-building policies.


I call on the Prime Minister to personally check such abuses of power and unconstitutional action of the Commercial Vehicle Licensing Board and to send out a clear directive to all government agencies to respect the constitutional rights of all Malaysians, whether bumiputras or non-bumiputras.


Call for reason  for the imposition of 7% import duty on  uncoated woodfree printing and writing paper from 29th July 2004


The Finance Ministry should give the reasons for the imposition of 7% import duty on uncoated woodfree  printing and writing paper from  non-ASEAN countries with effect from 29th July 2004.


The sole local supplier, Sabah Forest Industries (SFI) is unable to meet the total local demand for uncoated woodfree paper estimated at 300,000 metric tonnes per annum, as SFI can only produce at maximum 150,000 tonnes per annum of low-end woodfree paper, which are used for school and exercise books and non-demanding printing materials. 


The quality of the paper produced by SFI  is regarded by the local market as of lower quality to their needs. As a result, high-end  woodfree paper, used for printing such as high-speed continuous printing, four-colour printing, laser applications, etc  and value-added paper-based industry have to be imported.


The major  paper suppliers for Malaysia had been  Indonesia, Thailand, Japan, Taiwan, Finland, Brazil, USA, India, China and Russia. 


By imposing the 7% import tax, the Malaysian paper industry is  now forced to import high-end paper from Indonesia and Thailand which are free to hike  prices  because non-ASEAN exporters have been priced out of the market.


This is detrimental to the interests of the Malaysian public, who have to pay more for paper consumption as well as the local  value-added paper-based industry by undermining their competitiveness in the world market  as a result  of the  increased costs of their paper raw materials.


The beneficiaries are paper mills from Indonesia and Thailand.  But how has it benefited the SFI which had requested the imposition of the import duty on uncoated woodfree paper when it does not have the capacity to meet the total local demands for low-end uncoated woodfree paper. It also does not have the capacity to supply high-end paper. Or are there higher corporate and government forces at work which are not apparent to the naked eye?


The question that Parliament wants answer is  the rationale for the 7% import duty for uncoated woodfree paper and how it could benefit the country as a whole when (i) it results in  the increase in the price of paper generally affecting all consumers; (ii) it  undermines the exports and  competitive edge of local paper-based industry in the world market;  (iii) the possible retaliation against Malaysian paper-based finished products to non-ASEAN countries such as Europe, US and Japan for the discriminatory treatment against their paper by imposing import duties on our products; and (iv) when SFI, a private company, also  does not  directly benefit from such an import  duty.


* Lim Kit Siang, Parliamentary Opposition Leader, MP for Ipoh Timur & DAP Central Policy and Strategic Planning Commission Chairman