The second part of the New Straits Times exclusive interview with Second Finance Minister Datuk Johari Abdul Ghani.
Question: What is your take on the Goods and Services Tax (GST)?
Answer: Many people say we, the government, are taking the money from the rakyat through GST. GST is a system that replaces the Sales and Services Tax (SST). GST is an efficient tax system that has been used by more than 170 countries in the world. It is a very efficient system that can reduce our “black economy”.
Q: What do you mean by “black economy”?
A: “Black economy” is untraceable and non-taxable business transactions. That is where a big chunk of the GST revenue now comes from. If people say we collect additional tax from the rakyat, the answer is “no”. You must analyse the figures. The imported goods in this country are a lot. For most of these goods the government is supposed to collect SST, but it was not reported to us. Unfortunately, I can’t share with you the details. We really collect a lot from the import of goods as companies have to declare. If they don’t declare they will not be able to claim their input tax.
Q: Do you see revenue increasing from GST?
A: We expect revenue to increase as we are able to efficiently manage our tax system. It would not be at the expense of the rakyat as a majority of the additional revenue that the government collects is from the untraceable, that includes non-taxable business transactions in the past. When we implemented GST, companies that imported goods started to declare their taxes. They can’t avoid paying GST as the system will also allow them to claim input tax. If they don’t pay, it’s just a matter of time (before) we trace them. The tax collection from the import of goods has increased by more than 150 per cent because in the past many businesses did not pay their SST. Now, they have no choice but to pay the GST.
Q: Are small business owners paying GST?
A: Local companies, especially the ones that are not registered like family-owned businesses, backyard operators and sole proprietors, are exempted from paying GST if their annual sales turnover is less than RM500,000. For those doing millions of ringgit of business, they have to pay tax. Before this they pay 10 per cent SST, now under GST they pay six per cent.
Q: Why have prices of goods increased after the GST?
A: Businesses used to make more profits because some of them didn’t pay SST... but now they have to pay GST. And because of that they don’t want to reduce their profit. They want to still maintain their profit margin. That’s why you see a sudden increase in the prices of goods because some of them take the easy way out by adding GST on top their current selling price. By right, they should reduce the SST elements in the product and then only add the GST on it.
Q: Is the lower-income group affected by the GST?
A: For the government, when we implemented the GST, we knew there would be a spike because suddenly businesses would start to realise that if they pay GST, their profit margin would reduce. So what they do is they increase the prices of goods. Previously they were not paying the SST to the government. That is why the government decided to give the low-income earners the BR1M (1Malaysia People’s Aid) of RM1,000.
Take an example of those who earn RM2,000. If you ask them how they spend, they will list buying rice, sugar, oil, and flour, and paying for transport and education. When you look at the list, those items are already tax-exempted.
But, of course, there would be items that they have to spend on that come with GST. If they spend 25 per cent of their income on GST goods, the tax works out to about RM50. If you times that with 12 months, it is RM600. But the government is giving them RM1,000. So at the end of the day, the lower-income group will benefit and that is what we want, which is to lift some of their financial burden.
But, of course, those with salary of RM10,000, RM15,000 or RM20,000, they will have no choice but to pay GST if they spend beyond the above items. The system is very effective because it will put all businesses on the same level playing field. In the long term it will be good for the country. For the traders, at the end of the day, they have to compete among themselves without anyone having advantage for not paying taxes.
We need healthy competition. If you are not competitive it’s just a matter of time before customers will not buy from you. This disparity in prices will adjust naturally over time. I’ll give you an example. When Celcom was a single mobile phone operator, it charged 20 sen per SMS (short message service). Now, you see the price has reduced by more than 70 per cent, as there are other players competing to offer the best deal. Today, you only have to pay three sen for sending a SMS. You now have more options to choose from to get the best deal. You have Maxis, Digi, U-Mobile, Yes and other small operators. Yes, I like competition because if you want to be a developed country you cannot run away from engaging or participating in competition.
Q: What is the estimate of our “black economy”?
A: Our “black economy”, some people tell me, is about 30 per cent of the GDP (gross domestic product). Some say it’s about 20 or 10 per cent. But I don’t like to say something without providing the evidence. As we go through this, you will be able to see it as it will slowly translate into our GDP, tax collection and competitiveness in the industries. It is important for us to reduce the black economy. If you have a company that operates in Malaysia under the “black economy”, that means it doesn’t pay GST and corporate tax. It only operates and sells goods without declaring its records. When genuine investors come and invest in the same industry, they invest in a factory, build their capacity and pay the GST and corporate tax, but they cannot fight the market because there is no level playing field.
In business you must provide a level playing field. When there is a level playing field, that is where the competition comes. But if one is paying and the other is not, how are you creating a level playing field? I think this is where the role of the government is, which is trying to make sure that we try to reduce as much as possible the black economy and create level playing field for businesses to compete healthily. When you get the right system, you will get more and more serious players coming here to do business.
Q: What are the revenue-raising initiatives for 2016 and onwards? Where do you see the potential for growth?
A: Malaysia is an open economy. The next two years are not going to be easy for the global economy. There are a lot of challenges ahead of us. We must emphasise on our export activities and services industries. Our economy is very diversified. The services industry accounts for 54 per cent of our GDP, manufacturing (23 per cent), plantation (eight per cent), mining (nine per cent), (and) construction (four per cent). Our financial system is resilient and banking sector is well- institutionalised. We must also look at the tourism industry. These are the areas we can promote in order to basically defend our economy from the external factors. The more diversified our economy, the better for us to defend our economy from external challenges.
Q: What can we expect from the 2017 Budget? Will there be any goodies in store for the rakyat? Any surprises?
A: It’s a bit too early for me to share about the budget because right now we are in the process of engaging with a lot of stakeholders. We have a focus group meeting with different stakeholders. I think, all together there are about 20 focus groups — the cost of living, housing, financial sector and many more sectors. Once we get this feedback from the focus group, we consolidate and then compare with our estimate of government revenue.
When it comes to budget, you have to look at government revenue and how much we can spend. However, what I need to stress is that, the action that we want to do or the strategy that we are going to adopt in the budget will always be in line with our 11th Malaysia Plan (11MP). Because 11MP is actually the five-year plan that we have presented to Parliament and the budget is basically a yearly executing plan that we need to take to achieve that long-term plan. So that would be the centre stage of our budget preparation.
Q: So, revenue is the key thing?
A: That is the key thing. You see today we are spending RM50 billion on development expenditure. We are spending on education, health, defence, building schools, roads and all the infrastructure for that RM50 billion. But this RM50 billion, if you want to spend, it’s just like how you want to buy a car or a house, you must look at how much is your income. If your income is RM5,000 you can’t buy a bungalow, a BMW or a Mercedes, right? This is where you need to manage.
You need to look at where is your source of income and then analyse what are your commitments. If you have 10 projects that you want to do, then you have to prioritise which one you want to do first. We want to do all but because of the constraint in our resources, then we have to decide which one is the priority. We always want to see something that can give impact to the rakyat and stimulate the economy. These are the key things that we are looking at. That is the part I’m looking at in terms of our budget. And I’m sure our PM (Prime Minister Datuk Seri Najib Razak) also will have something in his mind for the rakyat. But, whatever it is, we must make sure that we keep the social security net intact so that every people can live and stay in Malaysia and they can progress together with the country.
Q: How do you foresee the oil price performance in the second half of this year?
A: The oil price is currently at US$48 to US$50 per barrel and I’m only comfortable if it is between US$55 and US$60 per barrel in the second half of this year. During the recalibrated budget early this year, it was US$30-US$35 per barrel. When we prepared our budget last time it was US$48 per barrel. So now we are US$50 per barrel. Whatever the price level now, you will see the impact in the next six months.
Q: What would you like to see, going forward?
A: Assuming that we are comfortable with US$55 and US$60 per barrel, we must have a policy in the government, where the moment oil price shoots up to US$70, US$80, US$90 or US$100, we must continue spending our money based on the US$55 or US$60 per barrel level. Anything more, we must take that extra amount and keep it in our reserve. We must create a reserve under whatever circumstances. You must keep that spending up to that US$50 per barrel level.
So, assuming our oil price goes back to US$80, US$90, US$100, anything extra from the US$55 or US$60, we keep it at the side. We build a reserve fund for the country. We want to be a country like Saudi Arabia. When they face huge deficit due to drop in oil prices, they tap their foreign reserve, which is currently at about US$600 billion to US$700 billion. Some of the countries like Kuwait and Qatar, if I’m not mistaken, they, too, have a huge reserve amounting to US$300 billion or US$400 billion from oil revenue reserve that they keep. So we need to start building that.
Q: Is the government’s Bumiputera Agenda being met? As chairman of UDA previously, what were the key challenges you saw and have they been resolved today?
A: We want to help Bumiputeras that really can grow. We do not want Bumiputeras whom we help for 10 to 20 years but (still) don’t grow. They don’t build the capacity. They engage with activity that simply use a sub mentality. That, I think, we need to put in check. We need a genuine Bumiputeras that can fight out there, not only to get government business but (also) to get business out there and become a regional player. We signed the TPP (Trans-Pacific Partnership) agreement and we are going to finalise RCEP (Regional Comprehensive Economic Partnership). We have signed a lot of trade agreements with other countries.
Moving forward, we want to continue to help the Bumiputeras but we want to make sure that the Bumiputeras can also reciprocate in terms of embracing the competition culture. Be prepared to be competitive and able to build capacity. We must allow Bumiputeras to compete among themselves based on merit. The one that can build more capacity, capabilities and talents, they will get more. We want Bumiputeras who can excel and perform better among themselves to get what they deserve.
For those who have capacity of only 10 per cent, they will get only 10 per cent. They cannot get 50 per cent. In the past we don’t check this. If you give the Bumiputeras that have 10 per cent of the capacity 20 per cent, it ends up that the balance 10 per cent goes somewhere else through the sub system. If they have 20 per cent and you give them 50 per cent, then the 30 per cent goes somewhere else.
There is another group of Bumiputeras who have capacity of 70 per cent, but they only get 30 per cent. So they have ample capacity but not given a chance to utilise their capacity. That’s how we want to look at it, going forward. The final analysis is that all Bumiputeras must prepare to be competitive and compete out there and not relying on the government to help them forever.
Q: It is not the number but the quality, right?
A: Yes. It is important to have quality. I give you an example. You have one person like Syed Mokhtar (Tan Sri Syed Mokhtar AlBukhary). Because he is so successful, he employs 140,000 people and then those industries that work within the companies that he owns employ another 200,000 people. So, Syed Mokhtar employs directly 140,000 people and indirectly 200,000 people. Syed Mokhtar has also appointed 28 Bumiputera CEOs (chief executive officer).
So I’m sure everyone will be very happy to see that at the end of the day we have a company that can genuinely really contribute to the economy and GDP growth of the country. We can also have more SMEs (small and medium enterprises).
Q: Moving forward, what are the plans for Bumiputera SMEs?
A: Our forecast in the next five years under 11MP is that by 2020, we want to try to increase the SME contribution to the GDP from 36.5 per cent to 41 per cent. There are also SMEs owned by Bumiputeras. We have to make sure that we choose the right Bumiputeras to help and grow them. I want to see that one day, without the Bumiputera privilege, they can survive on their own.
Q: There is one concern that has been raised — that government-linked companies (GLCs) stand to crowd out the Bumiputeras. Is that a valid concern?
A: Not really. This is a statement without real evidence. I give you an example. TNB (Tenaga Nasional Bhd) doesn’t compete with Bumiputeras. In fact, they allocate for those companies to participate in their Bumiputera vendor programme.
Likewise, you look at PLUS Expressway. They don’t compete with Bumiputeras. You look at PR1MA (1Malaysia People’s Housing Programme), SPNB (Syarikat Perumahan Negara Bhd) and UDA Holdings, they don’t compete with another Bumiputera company. They are there for strategic reasons. They go into strategic areas and locations that they feel the Bumiputera are not capable of playing that part.
Sometimes, you also have to be fair to some of these GLCs. They have to go into some of these industries simply because they don’t have credible Bumiputeras that can fully support them. So, therefore, they build their own and they still accommodate Bumiputeras. If there are any clear-cut case where they compete I am willing to intervene.