The Goods and Services Tax (GST) will be implemented on April 1 next year, but many remain unsure whether the GST is a progressive or regressive tax system and its impact on the people.
The GST mechanism and its implications may not be something straight forward for most people, Customs Department’s GST director Subromaniam Tholasy said.
He said things became more complicated when people started talking of progressive and regressive tax systems without knowing what they were.
He pointed out under a regressive taxation system, the medium and low-income group would bear much of the tax burden. Under a progressive taxation system, the high-income earners pay more taxes.
“GST is a broad-based consumer tax based on expenditure and not on income, as misunderstood by some.
“This means if someone spends more on GST imposed goods and services, thus the person will be paying more taxes.
“The confusion happens as some feel GST is based on income. If GST is based on income, every value-added tax (VAT) or GST will appear more regressive and will burden the medium and low-income earners,” he said.
The Customs Department and Finance Ministry have conducted intensive study on GST implemented by160 nations. The study conducted pointed out that Malaysia’s GST model is progressive in nature.
Subromaniam said the International Monetary Fund (IMF) concurred with this finding.
He went on to explain that in the event all goods and services were to be subjected to GST without any exemptions, then it could be considered regressive.
“Nonetheless, when GST is implemented, there will be many exemptions, or zero GST. This is bound to benefit the low and medium-income earners.
“Based on the spending patterns of low and medium-income earners, they hardly spend on non-essential items and services, or items that do not enjoy GST exemptions.”
Elaborating on other factors that contributed to the general public apprehension on GST, he said some feared that GST would be implemented, along with the existing Sales and Services Tax (SST).
“GST will replace SST. There is a general misconception that the GST will be implemented with the existing SST. If this is true, then it will burden the people and appear regressive.”
Speaking on the existing SST, Subromaniam said that while both taxes were progressive in nature, the government wanted to go ahead with GST to restructure the national taxation system.
The restructuring of the national taxation system is seen crucial in overcoming the loopholes with SST and to ensure an effective, efficient and transparent tax system to enhance the nation’s competitiveness.
Among the shortcomings of the existing taxation system are overlapping taxation and multi-level taxation, transfer pricing and value and no tax exemption on exports.
“GST is more effective as it will help to reduce the bureaucratic hassle and enhance tax compliance within the society.
“Apart from that, there would be greater transparency on the pricing as all business transactions would be recorded on invoice receipts that will be audited by the Customs Department.”
Subromaniam said based on the accumulated data, the tax burden on households with an income of RM2,000 per month is only 2.59% while for those with an income of RM12,000 is 4.14% per month.
He said with a GST rate of 6%, the tax paid by households with a RM2,000 income is RM39.16 per month while for the households with a RM12,000 income, it is RM345.06 a month, nine times greater.
“Households with an income of RM2,000 spend about 32% of the total purchases on items with zero GST and 32.63% on GST-imposed items.
“Households with an income of RM12,000 only spend about 12.15% of their total income on GST-exempted goods while 63.90% of the spending is on GST-imposed items.”
Among the things exempted from GST are basic necessities like rice, sugar, salt, flour, cooking oil, lentil, spices, salted fish and shrimp paste.
Government services like the issuance of passport, licence, healthcare services, learning in school; and transport services like bus and train, highway tolls and education services are exempted from GST.
“The public have to seek knowledge on GST to understand the system better and should avoid from listening to hearsay that GST will benefit the rich and burden the poor.
“It is undeniable that GST has an impact on the medium and low-income earners, but the impact is very small on them compared with the impact on high-income earners.
“In spite of the negligible impact of GST on the low and medium-income group, the government will continue with the special cash assistance, among others the Bantuan Rakyat 1Malaysia (BR1M) and RM300 cash for BR1M recipients, when GST is implemented.”
GST has been implemented in 160 nations and the rate of 6% is the lowest in the world compared with Singapore (7%) and Indonesia (10%), the Philippines, Thailand, Cambodia, Laos and Vietnam