«THE IMPACTS OF GOODS AND SERVICES TAX (GST) ON MIDDLE INCOME EARNERS IN MALAYSIA MOHD RIZAL PALIL1 MOHD ADHA IBRAHIM 2 Abstract The introduction of ...»
THE IMPACTS OF GOODS AND SERVICES TAX (GST)
ON MIDDLE INCOME EARNERS IN MALAYSIA
MOHD RIZAL PALIL1
MOHD ADHA IBRAHIM 2
The introduction of GST in Malaysia has called many arguments from
various parties including academics, professionals and the nation
(would become the taxpayers) on how GST affect goods pricesincrease or decrease. The consumers are worrying of the significant
price increases on basic needs when the GST has fully implemented.
With the relatively high living costs particularly in main big cities like Kuala Lumpur, Penang and Johor Bahru, significant price increases due to GST is considered as another burden for middle income earners. Therefore, the main objectives of this study is; first, to obtain a comprehensive overview on consumer readiness, perceptions and acceptance of GST; and secondly to analyse the households’ potential consumptions (purchases) behaviour if GST is introduced.
Data was collected through a structured survey among middle income earners. The proposed monthly income threshold is between RM2,000 (USD667) to RM4,000 (USD1,333) as suggested by Bank Negara Annual Report 2008. Respondents were chosen randomly from various organizations including government and private sectors from various locations in Kuala Lumpur, Malaysia. This study is expected to suggest a proposal to the relevant authorities on the social and economy impacts on those groups so that the authorities could develop strategies in order to reduce the financial burden of middle income earners in Malaysia if GST is implemented. This study is also expected to make a contribution to the tax administration and policy developments literature by demonstrating the impact of a new tax policy in a developing country in order to facilitate low income earners to survive in competitive environment. This study further contributes by providing comprehensive overview on consumer readiness, perceptions and acceptance of GST in a developing country, particularly in Asian countries that were previously under researched.
Ph.D., Senior Lecturer, School of Accounting, Faculty of Economic and Management, Universiti Kebangsaan Malaysia, 43600 Bangi, Selangor, Malaysia. Email: email@example.com, firstname.lastname@example.org Postgraduate student, Faculty of Economic and Management, Universiti Kebangsaan Malaysia, 43600 Bangi, Selangor, Malaysia. Email: email@example.com
1.0 INTRODUCTION Goods and Services Tax (GST) is a consumption tax imposed on the sale of goods and services. In some countries it is also called Value Added Tax (VAT). It is a new tax instrument introduced by the Malaysian government soon, estimated in 2012 would be the soonest year of implementation (Customs Department, 2010). The introduction of GST in Malaysia has called many arguments from various parties including academics, professionals and the nation (would become the taxpayers) on how GST affect goods prices-increase or decrease. The onus of GST is to replace the current Sales Tax and Service Tax in line with the government policy of conforming policies of AFTA.
Sales tax is a form of indirect taxation imposed on consumers, collected by business entities and accountable to the Royal Customs and Excise Department and would be imposed on manufacturer upon sale and importer of taxable goods (Fatt, 2010). The rates are 10% for all taxable goods; 5% for fruits, food and building materials; and 20% for alcoholic drinks. Service tax is also an indirect tax 5% imposed on customers who consume food or services in places such as restaurants, hotels, or engaged on professional services such as audit and legal firms (Fatt, 2010).
The International Monetary Fund (IMF) has long recommended the introduction of GST as a way of raising the efficiency of the Malaysian tax system and ultimately increase the tax collection. Malaysia plans to introduce a 4% goods and services tax in 2012, in a bid to diversify national revenues (IRBM Annual Report 2008). The GST is intended to compensate with the direct tax collection – personal and corporate taxes. The Malaysian government felt the introduction of GST would provide the government with the opportunity to reduce corporate and individual income tax rates.
It is generally perceived that the introduction of GST of 4% replacing the Sales and Service tax would decrease the prices of goods (i.e. foods, fruits etc.) (because the rate is lower than Sales and Service tax) subject to the willingness of business entities to lower the price after excluding the sales and service tax element on those particular goods. However, can we imagine what happen to the prices of goods if the business entities (retailers) refused to expel the sales and service tax but at the same time surcharged the customers with the GST? Past experiences had shown that Malaysian retailers are very reluctant to decrease the prices even though the Government has announced to do so, and definitely the price of such goods would increase by 4% at least. Moreover, will the government impose a 4% GST while the cost of collecting GST itself is expected to be merely to 3% - producing only 1% net tax collection for the government (Singh, 2010). Other developed countries implemented VAT (GST) at 17.5% (United Kingdom); 19% (France, Belgium and Germany) (Tait, 1998).
The consumers are worrying of the significant price increases on basic needs when the GST has fully implemented. With the relatively high living costs particularly in big cities like Kuala Lumpur, Penang and Johor Bahru, significant price increases due to GST is considered as another burden for middle class and lower income earners. Therefore, the main objective of this study is to identify the impact of GST on middle and lower income earners particular on their purchasing behaviour (consumptions), savings and future financial planning. This study is expected to suggest a proposal to the relevant authorities on the social and economy impacts on those groups.
2.0 HISTORY OF THE GST Goods and Services Tax (GST) was introduced in France in 1950s and has been adopted by more than 120 countries, including all member states of the European Union (EU). Goods and Services Tax (GST) is a percentage tax on value added (the difference between sales and the cost of purchased material inputs) at each stage of production. There are three basic types of value added taxes (VAT) depending on how the investment is treated in the tax base, GDPtype GST, consumption-type GST, and income-type GST. Under the GDP-type GST system, no deductions are allowed for capital investment and depreciation of capital when calculating the tax base. The tax is equivalent to a sales tax applicable to both consumer and capital goods. Under the consumption-type GST system, capital investment is subtracted from the value added in the year of purchase. The tax is equivalent to a sales tax applicable to consumer goods.
Under income-type GST system, the tax base excludes the depreciation of capital. The tax is imposed on net domestic product, which is close to national income. Almost all countries that have established the Goods and Services Tax (GST) system adopt the consumption-type GST in which all purchases of capital goods from other firms are deductible from a firm's sale (Shoup, 1990). However, some countries such as Argentina, Peru and Turkey have adopted the incometype GST, and countries such as China, Finland, Morocco and Senegal have employed a GDP-type GST. GST rates vary significantly among countries. The standard GST rates range from 25% (Denmark, Hungary, Sweden, and Norway) to 5% (Singapore). Reduced rates and tax exemption are applied to certain goods and services. Revenues from GST account for a significant portion of government revenue in many countries. Of total central government revenue, general sales tax and GST accounted for 33.25% in Greece in 1998, 31% in U.K.
in 1999, 28% in France in 1997, 42.58% in Argentina in 2000, 35.7% in Hungary in 2000, 30.20% in Russia, and 33.7% in Ukraine in 2000.
3.0 TYPES OF GST Currently, three types of GST are in use around the world. Each differs primarily in its method of handling the tax on investment (capital) expenditures. The most common method, the consumption type, permits businesses to deduct immediately the full value of the tax paid on capital purchases. A second approach, the national income type, allows only a gradual deduction of the GST paid on capital purchases over a number of years, much like depreciation. If no allowance is given for the tax paid on capital purchases, the tax is called the gross national product type, because its base is approximately equal to private GNP. Because of its equal tax on profits from labor and capital and the resulting promotion of capital formation, the consumption method is the type most often discussed.
Theoretically, a GST with one uniform rate is completely neutral with respect to all forms of productive inputs. However, political, economic, and social considerations have demanded modified systems with multiple rates and exemptions. Most nations currently using a GST apply a reduced or zero rate to necessities, such as food, shelter, and medical care. Also, because of the difficulty in computing their value added, some specific services such as banking and insurance are usually exempt. The most significant variation from the uniform rate, however, is the zero tax rate on exports. Because exports may be taxed upon entry into another country, typically a GST on the final selling price of export products is not collected. Of course, to assure that imports fairly compete with value-added taxed domestic products, the GST is applied to imports.
Together, these two features strengthen a nation’s sale of exports relative to its purchase of imports. An improved balance of trade results.
4.0 WHY GST IMPLEMENTED?
The Government has never been as aggressive when it comes to consolidating its financial position until recently. From ongoing efforts to restructure the various subsidy schemes in the country, and the removal of them in some cases, to the proposal of introducing a new tax format, called the goods and services tax (GST one thing is clear – the Government is intent on putting up mechanisms that can trim its persistent financial deficits and rising debt burden to hunt for that elusive surplus and build up its savings to prepare for rainy days ahead.
The country cannot continue raising debts to finance its deficits; otherwise, it will go into a debt trap. The Government needs to build surpluses, so that it can have more leeway in adopting measures that can stimulate and develop the domestic economy in the future, particularly when market conditions turn unfavourable.
The agonizing fact is, Malaysia has been stuck with fiscal deficits for more than a decade. The budget deficit is projected to have ballooned to a record high of more than 7% of the country’s gross domestic product (GDP) last year, although the Government is determined to bring that level down to 5.6% of GDP this year, and less than 4% of GDP by 2015.
A GST is applied to the difference between a business’s sales of goods and services and its purchases of goods and services (excluding wages), therefore taxing the value added by each business. (United States Government Accountability Office, 2008). Before the introduction of GST, Warren et. al. (1999) and Johnson et. al. (1999) thoroughly evaluated the revenue, efficiency and equity effects of the indirect tax changes associated with the government’s tax package. They suggested that in the long run both reductions in personal income tax and increases in social security rates could sufficiently attenuate the average price rises among broad groups of households.
Unlike the existing sales tax and service, GST is imposed on the value added to goods or services by each separate processor in the production and distribution chain. The value added is the value that a producer (whether a manufacturer or distributor, etc) adds to its raw materials or purchases before selling the new or improved product or service. Upon selling the product or service, the manufacturer or distributor will include a charge for GST at the relevant rate on the value of the supply made. The manufacturer or distributor will pay the GST collected on its sales (also known as output tax), to the Royal Malaysian Customs, but after deducting the GST it suffered on its purchases (also known as the input tax). And the cycle goes on. Hence, in reality, GST is a multi-stage tax on the increase in the sales price of the goods or services as they pass through the chain. But the main concern of the Malaysian public about GST implementation is whether the new scheme could result in a spike of the final prices that they have to pay for goods and services. After all, GST is essentially a tax on consumption, and not production; hence, the tax burden ultimately falls on the consumers. According to economists, the inflationary impact depends on the manner in which GST is implemented. Depending on the structure of the scheme, the GST may result in price increases of certain products and in other cases, reductions. One of the ways to minimize the inflationary impact on the economy, they point out, is to introduce an initial low rate for GST, and then, progressively increase the rate over the years, as in the case of Singapore that has managed its inflationary pressures well. At 4%, the consensus view is that the initial rate for GST in Malaysia is appropriate.
A study by the University of Queensland, Australia, found that GST had a significant but transitory impact on inflation only in the quarter to September 2000 after the implementation of the new tax scheme at 10% in July 2000. During the quarter under review, the study claims that inflation in the country as a whole showed an average increase of 2.6%. In the case of Australia, there was evidence of a spike in domestic consumption in the months leading to GST implementation as consumers rushed to purchase products, particularly those that they believe would be substantially more expensive once the new scheme came into effect. Domestic consumption and economic activities declined once the GST came into effect, and resulted in its economy contracting during the first quarter of 2001. But consumption returned to normal soon after.