KUALA LUMPUR: The first read of the goods and services tax (GST) in parliament on Dec 16 not only allowed the government room for flexibility of rates, it also put into question whether a meningful income tax reduction can be achieved with the projected increase in tax revenue of a low RM1 billion.

In a report released Dec 17, Maybank Investment Bank (Maybank IB) said the 4% GST rate announced by the government was a compromise and pointed out that the rate is not officially mentioned in the bill.

"We think it's a simple compromise between the 3% rate proposed by tax experts/consultants and the 5% rate that we believe the government has originally wanted.

"Why the rate was not specified in the Bill? We think this is to give flexibility for government to review the tax rate from time to time, with the general view that GST will tend to go up over time as income tax rates are lowered as 'offset,'" the unit said.

Impact analysis was also given by the government showing that revenue collected from GST would be RM13 billion per annum versus RM12 billion currently collected from the Sales Tax and Services Tax (SST).

Maybank IB said the small revenue "uplift" reflects direct replacement of SST by GST, lower GST rate versus SST (ie 4% versus 5%-10%) although it must be noted that GST is a "multi-stage" tax as opposed to the "single-stage" SST, and GST tax base is still relatively narrow in view of the exemptions, especially for small and medium enterprises (SME) and professional services.

The bank commented, "The RM1 billion increment on revenue from imposing GST to replace SST also put into question whether the government can offer 'meaningful' income tax reduction with the implementation of GST."

According to Maybank IB, the reading in parliament on Dec 16 puts the government on schedule to meet its target of implementing the new tax in mid-2011. The second reading for the bill will be March 2010.

Some exemptions from the GST also were unveiled. These include for companies with revenues not exceeding RM500,000 per annum, benefitting 70% of more than 700,000 SMEs in the country, essential goods such as agricultural products (paddy, vegetables), basic food items (rice, sugar, flour, cooking oil, fish, meat, chicken) and professional services.

The exemptions were consistent with the normal practice worldwide to minimise the adverse effect to low income groups and small businesses from what is essentially a "regressive" tax, said the investment bank.

However, the bank said: "Basic food items like rice, sugar and flour will see higher prices next year anyway as the government remove and/or revamp the price subsidies for these items."