Even MPs’ constituency funds will be reduced by GST

As if taxing charities isn’t enough, even MPs’ constituency funds will be reduced by GST

Previously, we highlighted how the introduction of the Goods and Services Tax (GST) on 1 April 2015 will have an adverse impact on charities and non-profits.

With the advent of the GST, various forms of charitable donations are set to be taxed by the government. Coupled with the generally grim outlook for the economy this year and the fact that contributions have seen a downtrend in recent times, charities and non-profit organisations in our country will effectively suffer a “double whammy,” further aggravating their already cash-strapped situation.

We now want to highlight another startling fact – that even constituency funds meant for serving the needs of the people will take a hit as a result of the GST.

Constituency allocations will be reduced by six per cent because of GST

Every year, the Penang state government provides an allocation of funds for elected representatives to use for the benefit of their constituency. Members of Parliament, for example, are allocated RM200,000 a year, out of which RM80,000 is meant for the execution of small-scale projects such as minor infrastructure works while the balance RM120,000 is earmarked for the purchase of supplies, most of which are used to assist needy non-profit organisations in the constituency.

With the introduction of the GST, however, the real value of these constituency funds will effectively be reduced. This is because whatever supplies procured or projects implemented will carry an additional six per cent cost in the form of GST. For example, a non-profit organisation seeks sponsorship for an event to promote awareness of their cause. Let’s say their local MP agrees to sponsor supplies totalling RM10,000. Unfortunately, the MP will end up paying RM10,600 instead, as the supplier of the goods would have to charge an additional six per cent GST.

Multiply this to a larger scale and it becomes clear that the RM200,000 yearly allocation for constituency funds will no longer be channelled in full to the constituency, as RM12,000 of that amount will actually now go to the Federal Government in the form of the GST.

In other words, the real functional value of a Penang MP’s constituency allocation will be reduced from RM200,000 to only RM188,000 a year. More for the Federal Government, less for the people.

The negative social impact of GST is grossly underestimated

In their eagerness to impose a universal consumption tax on Malaysians, the government has grossly underestimated the negative social consequences that will result. As we have previously pointed out, due to inadequate government support, charities and non-profit organisations in Malaysia are heavily dependent on individual donations and corporate sponsorship, with the latter playing an increasingly significant role.

However, once the GST is implemented, cash contributions or donations in kind by corporate donors will be subject to tax if the donor receives some kind of “benefit,” such as in the form of publicity where the event carries the name of the sponsor or if the sponsor’s logo is displayed on t-shirts.

Other activities undertaken by charities will also be subject to GST, as summarised in the table below:

In addition to the tax burden that has to be absorbed by charities and non-profit organisations, the complex accounting required for GST compliance also means that they would have to suffer increased operational costs and additional investments.

And if the above limitations are not punishing enough, now even government allocations that are meant to help the public, especially those in the charity and non-profit sector, will be significantly reduced.

In fact, smaller charities and non-profits may end up folding up their operations as a result of cash-flow problems and other difficulties caused by the GST. This will result in a great cost to society, as charities are essentially delivering services that the government has failed to provide. Once they are gone, who will step in to help those in need?

Defer the GST

Instead of looking for ways to take money from charities, we urge the government to give more by increasing funding and support for the non-profit welfare sector. In addition, we strongly believe that it is wrong for the government to treat charities the same way they do businesses, especially with regards to taxation.

Even in an advanced country like Australia, where there is significant government funding for charities and non-profits, a report by the Australia Institute in 2000 found that “charities will be substantially worse off from the GST.” One can only imagine the severe impact it will have in Malaysia.

Thus, we strongly reiterate our stance that the Federal Government should defer the implementation of the GST until our nation is better prepared, both socially and economically.