The Goods and Services Tax to be implemented by 1 April 2015 has been the talk of the town, at least it had been until the unending swarm of rate hikes shifted our attention. Nonetheless, there is still a lot left under the carpet. The government has been airing various misleading advertisements about GST and word from social media has been equally misleading albeit spun in the opposite direction. To do my part to clear any confusion regarding GST and to capitalise on my prior research on GST, I shall write a series of articles on the subject.
Part 3 - What will GST do to us?
Foreword
Obviously, GST affects every individual and household in different ways, depending on income and consumption patterns. There is simply no way to account for all the variations therefore I will rely on statistics to prove whatever point I'm trying to prove. That being said, this is not a full-fledged research paper. For that, click here.
Is GST a progressive or regressive tax?
What is a progressive tax? A progressive tax is when the rich, in addition to paying a higher amount in taxes, pay a higher percentage of their income in taxes than the poor.
For an example of progressive tax, look at an income tax system where the first RM1,000 earned is taxed at 10% and anything above is taxed at taxed at 20%. We have 2 people, A who earns RM1,000 and B who earns RM3,000.
A will pay RM100 in income taxes, effectively 10% of RM1,000. Simple. B, on the other hand, needs to pay RM100 for the first RM1,000 he earns and RM400 (20%) for the next RM2,000. B, in total pays RM500 in taxes for a RM3,000 income, effectively 16.67%. B, who earns more than A, pays more in taxes in proportion to income.
A regressive tax is the opposite, where the poor pays a large proportion in income as taxes as compared to the rich. This is never the case with income taxes, not in a single country in the world, as it is simply unconscionable to tax the poor more (in percentage) than the rich.
Back to the question, is GST a progressive or regressive tax?
In short, it is regressive. Why? Look at the graph below.
 |
| Income-expenditure relationship in Malaysia. Source: Penang Institute[1]. |
The graph shows the relationship between income and expenditure of Malaysians. As we can see, if you're earning RM1,000, you will most likely spend all or close to all of the money; if you're earning RM15,000, only about a third of your income is spent. So 6% of all your income is more than 6% of a third of your income, effectively 2%, in relation to income, zero-rated and exempt supplies notwithstanding.
Taking consumption patterns of standard-rated, zero-rated and exempt supplies into account, the effective GST on different income groups in Malaysia is shown in the graph below.
 |
| Effective GST (GSTI) of different income groups. Source: Penang Institute[2]. |
Will GST burden us more than the current tax system?
Yes. For a few simple reasons established in my previous article.
Firstly, GST now affects roughly ten times more businesses than the previous Sales Tax[3]. It can be assumed that ten times more businesses under GST would mean more products being taxed. More products being taxed means consumers are paying more taxes.
This is further reinforced by reason number two, the Royal Malaysian Customs is projecting an increment of RM5 - 6 billion in tax revenue due to the switch from the current Sales and Services Tax to GST[4]. Since GST is completely borne by the consumers, as established in part 1 of this series, the tax burden on consumers is sure to increase.
There is another side to the increase in burden - inflation. We can expect a one-time "blip" in the Consumer Price Index (CPI) once GST is implemented[5]. This is due to GST implementation costs as systems have to be set up to handle GST transactions[6]. However, CIMB analysts expect the inflation rate to just jump once and not accelerate further as GST is a refundable credit system (how does that figure?), there are exemptions e.g. exempt and zero-rated supplies, and last but not least, "strict market enforcement to monitor price changes"[7]. Pardon me for being cynical but 'strict enforcement', 'monitor'? Seriously?
But the government claims that prices will go down after GST is implemented.
Try not to be shocked when you read this: the government lied.
I know what the government tries to sell. Sales Tax is 10%, Services Tax is 6%, with GST, only one tax at 6%. Huge savings.
There are a few fallacies in that claim. One, Sales Tax is levied on manufacturers and is a one stage tax, as compared to GST, where the value added at every stage of the supply chain, is taxed and the taxable value is the final price of the goods or services. Think about it, 10% of the manufacturer's price is much likely to be lower than 6% of the final price after goods have passed through the hands of the manufacturers, wholesalers, retailers.
Two, there can be a marginal decrease in tax once GST is implemented, but it is most likely not going to happen. Say, if there are only 2 stages in the supply chain, manufacturer and service provider. Since under Sales Tax, the service provider will not be able to claim input tax deductions for the 10% paid to the manufacturer, the 10% will be priced into the service provider's price upon which another 6% will be levied. At the maximum, assuming the price of the manufacturer including Sales Tax (110%) is the same as the service provider's price, (now pause for a moment and think about how ludicrous that is, a business that has 0 gross margin,) add 6% service tax onto that (116.6%), effectively, it results in a tax saving of 63.86% from switching from the current system to GST (106%).
(16.6% - 6%)/16.6% = 63.86%
However, this situation is close to impossible in the real world. Supply chains are longer and there would be value added at every stage, which means the final service provider's price would be much higher than the manufacturer's price, cutting the tax savings to a point where they would be minimal. Also, businessmen in the real world are unlikely to pass on savings to consumers when consumers are already willing to pay the higher price, especially when it is not significant enough to increase demand. Don't forget about the implementation costs which would be priced into the goods and services if the government doesn't fully subsidise them.
As a result, prices are most likely increasing, as evidenced in the inflation rate projections by various think tanks and research houses.
Are there any measures in the budget to ease the burden?
There are in fact, two measures that the government has proposed to ease the burden of GST on the rakyat. First is an income tax rate cut; second is an increment in Bantuan Rakyat 1 Malaysia, more commonly known as its acronym, BR1M.
The proposed income tax rate cut is as follows:
Note that as opposed to the other graphs in this article which refer to monthly household income, the income here refers to annual individual income.
So how many people actually benefit from the income tax rate cut? According to PM Datuk Seri Najib Tun Razak, less than 10% of Malaysia's working population pay income taxes, which works out to be 5.6% of the entire population[8]. So, only 5.6% of Malaysians are benefiting from the cut.
BR1M is an annual handout of RM650 paid to heads of households with monthly household income of RM4,000 and below, senior citizens (aged 60 and above) living alone with monthly income of RM4,000 and below, and under 21s with monthly income of RM2,000 and below[9]. It is increased from RM500 for 2014 and beyond. For 2013, there were 6.8 million BR1M applicants[10].
Given that 44.7% of Malaysian households earn more than RM4,000, they are not eligible for BR1M[11]. Minus the 5.6% who benefit from income tax rate cuts, which is supposed to be a much smaller percentage once converted to household from individuals, that leaves about 40% of people who do not benefit from both measures and are to bear the brunt of higher living costs as a result of GST.
 |
| Net effect of income tax saving, BR1M and GST payments (household). Source: Penang Institute[12]. |
Conclusion
As of now, it seems that GST implementation is a certainty. For the poor, the effects of GST will be mitigated; for the rich, the income tax rate cut will result in great savings; for the middle class of Malaysia, there is little that can be done but to brace for a tighter squeeze and pray and hope that this is the last squeeze. However, before GST hits, price and rate hikes are already wrapped and packed as 2014's New Year's gifts, and the effects are not limited to the middle class.
So, during this festive season, remember to be grateful and thank the government.
Chong Yu Cheng
Part 1 - What is GST and how does it work?
Part 2 - Is GST a good system and is the government ready for it?
Part 3 - What will GST do to us?
---------------------------------------------
[1]K H Lim & P Q Ooi, Implementing Goods and Services Tax in Malaysia [PDF document]. Retrieved from Penang Institute Site: http://penanginstitute.org/gst/GST&You_20131109.pdf
[2]Ibid.
[3]T Pua, The Tiger That Lost Its Roar: a Tale of Malaysia’s Political Economy, Democratic Action Party, 2010.
[4]Ibid.
[5] H G Lee, "Inflating Expectations of Subsidy Cuts and GST", Macro Pulse, CIMB, Jun 7, 2013.
[6]Ibid.
[7]Ibid.
[12]Ibid. 1.
No comments:
Post a Comment