Malaysia implemented the goods and services tax (GST) regime from April 1, 2015, which replaced its existing sales and service tax (SST) regime. This GST law was enacted after six years of its first presentment in the Malaysian Parliament, and it was the last country before India that implemented GST; the standard rate was at 6%. On May 10, 2018, Mahathir Mohamad was sworn in as seventh PM and, on May 16, he scrapped GST, fulfilling a campaign promise that gave him an unexpected win in the elections.
This move would increase the budget deficit of Malaysia. It is not yet clear whether the repealed SST would be brought in force again to compensate the country for revenue loss it would incur after scrapping the 6% consumption tax.
This decision might sound alarm bells in India to tread with caution over the next couple of years as the 17th general elections are due in 2019. However, it doesn’t appear likely that India may take such an extreme step because of the difference in structure of GST laws and the contribution of indirect tax collection in the overall revenue of the government in India.
Except anti-profiteering provisions, laws of both the countries are quite different. India follows the dual-GST model, where two types of GST—central GST and state GST—are levied. In stark contrast, Malaysia had followed the single GST levy. In Malaysian GST, there was only one standard rate of 6% on all goods and services, while Indian GST has five different rates, i.e. 0%, 5%, 12%, 18% and 28%, along with compensation cess on some items.
India’s budgeted revenue from GST for FY19 is 33% of its total revenue. The share of actual indirect tax revenue in FY17 constituted 37% and the budgeted revenue from indirect tax collection in FY19 is 44%. The Indian government derives almost half of its revenue from indirect taxes and more than one-third from GST.
India may not take such an extreme step as Malaysia has done, fearing serious economic repercussions and the impact on its credit rating in the international market. The leading credit rating agencies, including Moody’s and Fitch, have warned of widening of the budget deficit and overall reduction in the Malaysian government’s income.
Malaysia had to take this extreme step because of single rate (6%) of GST on all goods and services. Essential items and luxurious items cannot be taxed at the same rate. It is unlikely that this change in economic circumstances in the neighbouring country would impact Indian GST. In fact, after the implementation of GST, India has jumped to 100th rank in the index of Ease of Doing Business. But it is highly advisable for India to take prompt actions to stabilise GST and remove all technical glitches and hurdles which business entities are facing relating to compliances or refunds.
The World Bank has said that India’s economy has recovered from the impact of demonetisation and by the introduction of GST, and would grow at 7.3% in 2018 and 7.5% in 2019. As the inflation rate rebounded, pushing real interest rates down, a recapitalisation plan for banks was announced, and the effects of the two temporary shocks vanished, and growth too bounced back.
Indian GST and Malaysian GST are separate laws, having been implemented according to respective economic conditions. In our opinion, there would not be any perceivable impact of such unpleasant news on Indian GST.
Naveen Wadhwa is DGM-R&D and Shubham Mittal is Manager at Taxmann.com