‘Low-income groups may not be able to withstand shocks from GST’

Business & Markets 2014

Written by Levina Lim of theedgemalaysia.com 

Thursday, 03 April 2014 10:18

KUALA LUMPUR: Low-income households may not be able to withstand economic shocks if the goods and services tax (GST) is implemented during a period of rising inflation, said Institut Rakyat, an independent policy think tank established by Parti Keadilan Rakyat (PKR).

Minimum household income has not reached a level deemed necessary and adequate to absorb shocks to purchasing power due to GST implementation, the think tank said. 

“With rising inflation due largely to subsidy rollbacks and a likely economic recession by 2016, Institut Rakyat is concerned that low-income households will not be able to withstand economic shocks if GST is implemented,” it said in a policy brief by economist Azrul Azwar Ahmad Tajudin. 

“Only 1.8 million people earn enough to pay personal income tax, equivalent to only 28% of the total 6.4 million registered individual taxpayers or 14% of the overall workforce,” it pointed out.

The policy brief is the first in an occasional series of policy briefs, and aims to set out the policy and financial challenges posed by the GST to the Malaysian public. 

A 6% GST is due to be levied on consumption from April 1, 2015. 

“The introduction of GST during a period of rising inflation is a very risky strategy and could amplify downside risks to economic growth,” said Institut Rakyat, adding that the GST could be a justification for businesses to raise prices, charges, or tariff on their goods and services.

“Lack of stringent enforcement could compound the effects of galloping inflation — a double whammy,” it said.

The think tank also cautioned that untimely GST implementation will bring an adverse impact on aggregate demand and hence overall GDP growth, particularly if consumers choose to adopt “a very cautious spending stance for an extended period pre- and post-GST implementation”.

“There are many other out-of-the-box options to diversify the revenue base and/or broaden existing revenue sources (of the government),” said the think tank. 

It added that there is a need to cut down spending and eliminate leakages, wastage and corrupt practices to ensure fiscal sustainability without introducing the GST.

The policy brief also noted that GST will be regressive as low-income earners pay a higher proportion of their income as tax than higher income earners, which will widen income inequality and the gap between the rich and the poor. 

This article first appeared in The Edge Financial Daily, on April 3, 2014.