GST: Some More Arguments

We have yet another writer of the online STAR which gave us his views on the GST.

I append it wholesale.

"GST rate bound to increase

THE current taxes on consumption are sales tax (10%) and service tax (5%). It is understood that GST will replace these taxes. The indicated introductory GST rate is 4%.

By simple mathematical logic, 4% is lower than 5% or 10%. Therefore GST is lower. Products and services may be cheaper due to the lower GST tax rate.

Most consumers are probably not aware that the sales tax and service tax are single-stage taxes.

This means that the sales tax is only collected once, mostly by the manufacturer or importer.

For service tax, it is collected only once, by the service providers. Consumers do not necessarily suffer the full 10% sales tax.

For example, let’s say a product’s retail price is RM12 and the manufacturer’s selling price is RM8. The 10% sales tax on the manufacturer price (RM8) is RM0.80 only. Hence the effective sales tax rate is 6.7% only (RM0.80 divided by RM12 multiplied by 100).

GST is a multi-stage consumption tax. This means GST is imposed throughout the

entire production and distribution chain from raw materials suppliers to manufacturers to wholesalers and distributors to retailers and finally to us, the consumers.

Taking the simple example above, the 4% GST on the product’s final selling price (RM12) is RM0.48 only.

Yes, the tax is lower. This is assuming the GST rate remains unchanged. But is it realistic to expect the Malaysian GST rate to remain forever at 4%?

If the GST rate increases, we could end up paying more. Many countries have introduced GST at lower rates to gain public acceptance, but increased the rates over the years.

We only have to look across the Causeway to Singapore. GST was 3% when first introduced. Today it is 7%.

From what can be seen in other countries’ GST systems, a sophisticated accounting

system is needed to track and reconcile input GST and output GST taxes.

Are our small-time businesses such as food-sellers, small-time contractors and mechanics, pasar malam traders and the like ready for this?

Will businesses pass on the extra cost to the consumers?

No consumer likes to pay more, especially extra taxes, now or in future.

TAX PAYING CITIZEN,

Subang Jaya."

Singapore: Employment Bounce Back

This is good for Singapore. This is Business Times Singapore on line report circa 7 December 2009.

'A gloabl Human Resource Consultancy, Manpower Inc, released yesterday their report that hiring momentum has steadily picked up in Singapore.

The further added that 2010 may see job prospects that match pre-crisis levels, as their survey results show employers expect a third consecutive quarter of positive hiring.

The net employment outlook—the difference between the proportion of bosses likely to recruit more and those likely cut jobs—rose to 26 per cent. This seasonally adjusted figure was nine percentage points up from Q4’s outlook — and a sharp 60-point turnaround from the survey’s negative result in Q1 this year.

Back then, Singapore had the worst overall employment outlook among the 35 countries and territories that Manpower surveyed worldwide. But its current outlook for Q1 2010 surpasses all markets but India.

Manpower Singapore country manager Peter Haglund said: “The labour market appears to have turned the corner. Employers are telling us they see an improved hiring climate in the months to come.”

Of 699 employers interviewed across seven industry sectors in October, the majority — 65 per cent — expect to retain their present headcount in Q1 next year.

Twenty-seven per cent plan to raise headcount, nine points up from this quarter, while 5 per cent plan to cut staff strength and 3 per cent are unsure of plans.

Job prospects seem brightest in the finance, insurance and real estate sectors, which has a net employment outlook of 37 per cent.

The public administration and education sector expects brisk hiring too, with an overall net outlook of 36 per cent. Services reported a net outlook of 31 per cent, while manufacturers also expect to add headcount, with a net outlook of 20 per cent in the coming quarter.

But in the transport and utilities, and wholesale and retail trade sectors, caution remains. Haglund said that “employers in both sectors still project positive hiring, but at a slower pace compared with last quarter”.

With labour market conditions overall showing improvement, higher employee turnover can be expected, Haglund said. “Fierce competition among employers to hire the best talent’ will mean ‘companies need to work on their employer branding to ensure they retain and attract the right talent.”

The latest official data estimates total employment here to have risen by 15,400 jobs in the third quarter, ending losses in the first and second quarters of this year.

I think Singapore is bouncing back like a rubber ball. Kudos to the Singaporean government.

Plus: First Government Sell Down of a GLC

The recent sale of 90 million Plus Expressway shares by Malaysia's state pension fund Khazanah Nasional could signal moves by the government to accelerate the reduction of its big holdings in government linked companies (GLCs), so say analysts.

Khazanah's sale of about 90 million Plus shares in the last week of November 2009; to coincide with Premier Najib's visit to New York to pitch Malaysia to investment funds — has raised expectations the government is finally committed to paring its stakes to inject more liquidity into the stock market and to give the private sector more room to maneuver.

Earnings from the disposals will also come in handy, given Malaysia's widening budget deficit, which the government aims to cut next year to 5.6 per cent of gross domestic product from about 7.5 per cent now.

US funds said during meetings with Najib that locally listed companies need to be beefed up to more sizeable levels, noting even when they are sufficiently big, they tend to be too tightly held by government agencies and quasi agencies.

GLCs are involved in all of Malaysia's main sectors and comprise more than a third of the bourse's market capitalisation of US$287 billion (RM975 billion).

Many investors have urged the state to gradually exit, pointing to the detrimental effect its large holdings has on liquidity and trading velocity. Malaysia's trading velocity — total market value traded divided by average market cap — is about 40 per cent, compared with 70-plus per cent for Singapore and Thailand and more than 80 per cent for Hong Kong and Indonesia.

The government appears to be taking greater notice of investor feedback that it ought to step back and reduce its role in the local economy, especially if it wants the private sector to take the reins in reviving the economy and boosting growth beyond the expected 2-3 per cent next year.

Corporate chieftains have long urged the state to play a less interventionist role so local companies and the economy can become more competitive.

One example is AirAsia. Owing to the budget carrier's rapid expansion — in many instances providing competition on the same routes plied by Malaysia Airlines — it has often found itself at odds with MAS as well as Malaysia Airports Holdings — both controlled by Khazanah.

In September, Khazanah sold 55 million or 5 per cent of Malaysia Airports but still retains a whopping 67.7 per cent stake in the company. It holds about 69 per cent of MAS.

Although Khazanah now owns a direct 17.7 per cent interest in Plus, it has an indirect 40.2 per cent stake. “It's good the government is beginning to move on this, but I hope the shares aren't being bought by another agency because then it won't make any difference,” a fund manager said.

Such remarks shows how much trust they have in Malaysia-a land known for rhetoric.

Some Don't Get Away

The court ruling yesterday(7 December 2009)ordering former Malaysia Airlines chairman Tajuddin Ramli to pony up RM589mil he owed to Pengurusan Danaharta Nasional Bhd and two of its subsidiaries is a sad tale of one of the former corporate goliath of Malaysia.

This amount was the balance of a RM1.79bil loan given to him by a group of lenders to finance the much touted single man purchase of a 32% stake in MAS in 1994.Poor Tajuddin has to pay this principal sum of RM589,143,205.57 plus interest at 2% above the Malayan Banking Bhd base lending rate from Jan 1, 2006, until realization.

He also ordered Tajuddin to pay costs amounting to a chicken feed sum of RM350 to the plaintiffs. Tajuddin is appealing.

The payout is one of the largest to be ordered by a court in a suit that has drawn wide attention more for the corporate and political personalities involved rather than the agreements, settlements and unpaid debts.

In his statement of claim, Tajuddin,once a poster boy of many business magazines in Malaysia,had stated that ex Prime Minister Mahathir Mohamad had instructed him to acquire a 32% stake in MAS to bail out Bank Negara which had experienced losses in foreign exchange.[Is this for real?]

Dr Mahathir later told the media he did not remember doing that and it was former Finance Minister Daim Zainuddin who told him that Tajuddin was interested in the shares.[Same tune, same tune]

In 1998 Danaharta acquired Tajuddin’s NPL from the lenders under the Pengurusan Danaharta Nasional Bhd Act, adding that Tajuddin failed to settle his debt to Danaharta from 1998 to 2001.

Tajuddin executed a settlement agreement with Danaharta in Oct 2001, in which he admitted he had been in default of the original loan, and Danaharta agreed to give him a “hair-cut” by discounting the sum if he complied with certain terms.

When Tajuddin defaulted on the payment of the quarterly interest, Danaharta issued a letter of demand, resulting in the tycoon filing for an injunction to restrain them from selling the charged shares.

The High Court dismissed the application and Danaharta terminated the settlement agreement on April 27, 2002, and demanded payment from Tajuddin.

“On April 29, the plaintiffs sold part of the charged shares consisting of Technology Resources Industries (TRI) shares at RM2.75 per share resulting in total share proceeds of RM717,393,875.”

On May 11, 2006, Danaharta sued to recover the balance of RM589,143,205.57 that was still owed on Dec 12, 2005.

As they say, the bigger they are,the harder they fall; irrespective even if they are genuine self made corporate success stories or proxies.

A sad tale of woe, if ever there was one.

Hong Kong: Asset Bubble Trouble?

This Reuters Report (8 December 2009)discusses the potential asset bubble purportedly developing in Hong Kong. As such the government is “very concerned” about the risk of an asset bubble developing although one is not apparent as yet.

The government spokesman did not point to any potential measures to combat the city’s main concern which is property prices, but his remarks reflect worries in many emerging markets over a flood of cash flowing into their economies seeking higher returns.

Both Brazil and Taiwan have imposed capital controls to try to limit the inflows and policymakers elsewhere are talking about potential measures they could take.

“We are very concerned about the risk of an asset bubble,” Tsang,the spokesman told legislators. “The risk is there but it is not very apparent.”

In Hong Kong, residential property prices have jumped 30 per cent this year and the luxury sector is up more than 40 per cent after the city drew a record US$73 billion (RM248 billion) in capital inflows between October 2008 and Nov 13 this year.

Tsang said the financial system was sound and the city could cope with capital inflows and outflows, but he echoed similar concerns voiced by Hong Kong Chief Executive Donald Tsang and central bank chief Norman Chan.

Hong Kong, like other economies in Asia, is watching warily for the formation of asset bubbles to avoid compromising nascent economic recovery.

The Hong Kong Monetary Authority, the central bank, recently reduced the maximum mortgage for luxury properties to 60 per cent from 70 per cent of the price in an effort to cool the market, and mortgage demand has eased from a few months ago.

But the HKMA is more tied than many central banks because the Hong Kong dollar’s currency peg to the US dollar means it has to adopt Federal Reserve monetary policy. US rates have been held between zero and 0.25 per cent since December.

Any possiiblity of that happening in Malaysia since we are desperately starved of cash inflows?

New Zealand: Running out of Momentum?

New Zealand's Treasury Department voiced its concern that the nation's economic recovery may struggle to retain momemtum as indicators point to weak domestic demand.

Reuters in its report today (7 December 2009) intimated that while a string of recent data, including higher house sales, retail sales, migration gains and building consents, had shown a lift in activity, the labour market and domestic demand remained weak.

"There are risks around the sustainability of the economic recovery, as shown by the sharp decline in imports that indicates further subdued consumption and investment," the department said in its monthly commentary on economic indicators.

Weak domestic demand led to further narrowing in the merchandise trade deficit in October, as a sharp fall in imports outweighed a decline in exports, bringing the annual trade deficit to the smallest since 2002.

In a separate statement, Finance Minister Bill English said the report confirmed there were risks surrounding the recovery.

"There are some positive signs as we emerge from the recession, but the road to recovery will be bumpy," English said.

He added that a fall in capital goods imports in the past year pointed to weak business investment activity in the coming year, in addition to weak employment and salary and wage growth.

Last week, English said the government's fiscal position would reflect the impact of the recession on the tax take for some time to come after a worse than expected deficit in October.

The Treasury report said it could be up to two years before company tax revenue started to reflect the improved economy. Updated government economic and fiscal forecasts will be released on Dec 15.

New Zealand posted growth of 0.1 per cent in the three months to June 30 after five consecutive quarters of contraction. The economy shrank 1.8 per cent in the year to June 30.

A Reuters poll has a preliminary median forecast for GDP to increase by 0.4 per cent during the September quarter, the second straight quarter of expansion.

The Reserve Bank of New Zealand is expected to keep interest rates at record lows this week and reaffirm its stance of keeping them there at least until July to help tame expectations of an early end to its easing cycle, the Reuters poll indicated.

Malaysia: Then and Now

The Business Times Singapore today has a very incisive news item. It tells of the moment of truth. Of the day of reckoning.

And so is came to past that Second Finance Minister Ahmad Husni Hanadzlah confirmed belatedly today(7 Dec 2009)that Malaysia had lost its competitive edge. Thus ends the denial. More need not be said.

Reason given: Because Malaysia had stagnated in the past decade and is now in urgent need of wide-ranging reforms to get out of the rut.

Unable to sustain continuous pump priming because of its ballooning budget deficit, the government would like the private sector to take on a more high profile role. I think this will take plenty of motivation. What will they get in return?Forget about blind patriotism!

Ahmad Husni surely paints a forlorn picture of the plight of the economy. He tells bluntly about the the underdeveloped services sector and that the private investment is half the level before the 1997-98 Asian crisis. He added sadly that the mainstay manufacturing sector is suffering from a lack of investment.

Not only has foreign direct investment (FDI) been on the downtrend, local businesses are eschewing the country for better prospects overseas. “We can't blame investors for not increasing their investments locally when the cost of operation in Malaysia is escalating disproportionately due to corruption, red tape, flip-flop policies, a small consumer market, mismatched labour force, etc. It is even harder to grow big when the private sector has to compete with GLCs (government-linked companies) that monopolise many essential services,” an observer posted online.

The Minister's sad revelation now calls for the return of 'genuine meritocracy' and an equal opportunity to participate in the economy — an obvious if indirect reference to the affirmative-action New Economic Policy (NEP), which critics say has been long abused, leading to economic inefficiencies and leakages which bleed the nation.

“The long-term success of the nation's economy must take precedence over the short-term interests of a few protected groups,” stated Ahmad Husni, who as former trade deputy minister, would be only too cognisant of globalisation and the fierce competition globally for investment and talent. Other emerging economies have pulled ahead while insular policies have held Malaysia back.[Basic reason: We are pandering to the narrow interests of a few UMNO warlords!]

At ground level, the response to Ahmad Husni's disclosure ran along the lines of “tell us something new”.[Is there any?]

Truth be told, the myriad problems plaguing the local economy is anything but new. Whether it be an over-reliance on low-skilled foreign labour, corruption, crime, graduate employability, brain drain, untenable subsidies, erosion of confidence in key institutions, religious extremism, a bloated civil service, etc, the numerous structural issues were apparent more than a decade ago.[But they denied it then.]

But owing to complacency and a lack of political will to address the issues, the problems were allowed to fester and grow so much so that today, as National Economic Advisory Council (NEAC) board member Zainal Aznam Yusof observed in an unusually frank assessment: “There are lots of things to be fixed. The roof is not leaking; we do not need a plumber. It is the foundation of the house. Probably the whole house needs to be rebuilt.” [How perceptive!]

The new economic model which is to guide Malaysia towards competitiveness and its aim of being a high- income economy by 2020 is to be unveiled this month. NEAC chairman and head of the economic planning unit Amirsham Aziz has indicated it's not easy to quickly establish a model because the problems are complex and the council wants to ensure the proposals submitted “can withstand the expected public scrutiny”.

“In my opinion, what the prime minister wants is an honest appraisal of where we are today, where do we go from here, and, most importantly, how do we get there.” [Some more wool to be pulled over our eyes or some more sloganeering?]

Because the issues are long-standing, it would be surprising if feedback on the problems and recommendations are all that different from what has been gleaned in the past.[Nothing new just the will to act is absent as it was in the past.]

That the political spirit and flesh are weak is evident in many a capitulation when push comes to shove — the latest being the extension of the much maligned AP (approved permits) system. [Cakap tak serupa bikin!]

Although the vehicle import permit scheme was to be scrapped next year, the government recently saw fit to extend it until 2015. How Malaysia's leaders reconcile this market-unfriendly policy with its stated intent of “the nation's economy taking precedence over the short-term interests of a few protected groups” boggles the mind. [My toes are laughing!]

In the era of ICT and the Internet, investors can easily access and share information. Unfortunately for Malaysia, its tendency to oversell and underdeliver, resulting in a sizeable disconnect between policy execution and rhetoric, has resulted in investors preferring to wait-and-see.[Waiting for Godot?]

That Malaysia stands at a crucial crossroads — or economic emergency, as some see it —is evident. For all the setbacks over the years, the country still has tremendous talents and the ability to help it achieve its stated goals. Acknowledging the challenges is one thing; but if measures to overcome them are not followed through, it is “a sheer waste of time and effort”, as opposition members have observed.

Let Malaysians not have to mourn the loss of yet another lost decade.