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Tuesday, April 8, 2014

Think tank spells out ‘regressive’ hit in GST

APRIL 7, 2014
The Penang Institute’s study demonstrated that those on the lower
and especially middle rungs of the income ladder may see as much as 2.67
per cent of their income whittled away by the GST. — file picture
KUALA LUMPUR, April 7 — Lower income groups could pay twice as much towards goods and services tax (GST) in proportion to the rich, a recent study by a Penang-based think tank has shown.

In its examination of the effects of the new consumption tax to be implemented in April 2015, the Penang Institute’s study demonstrated that those on the lower and especially middle rungs of the income ladder may see as much as 2.67 per cent of their income whittled away by the GST.

At the opposite end of the spectrum, the country’s elite income earners — those taking home an average of RM30,815 a month — may only pay as little as 1.32 per cent of their pay towards the tax that will be levied based on spending.

“Despite setting essential items like basic food, public transportation, education and healthcare as exempt or zero rated items, the study shows that after taking into account households’ expenditure pattern and income, GST is a regressive tax,” said Dr Lim Kim Hwa, chief executive officer and head of economics at Penang institute and one of the authors of the study.

Other findings of the study include the discovery that certain household types and professions may be harder hit by the GST than others.

Those that stood to pay more than their peers include Bumiputera households, families residing in peninsular Malaysia, new families under the age of 24, and individuals living alone.

Critics of the GST, particularly the federal opposition Pakatan Rakyat, contend that the tax that will replace the sales and service (SST) next year is “regressive” in nature, meaning that it taxes lower income groups in greater proportion than the wealthy. 

In its study, the concurring Penang Institute also said that the federal government had only considered the effect of the tax on Malaysians by looking at the amount it hopes to collect and without regard for its nature.

“Whilst measuring the extent of taxation based on the absolute amount of tax paid, as what the Minister has written, is one way; it is not the norm in international practice as it does not measure the burden of taxation relative to the level of income,” Lee said.

But while the study does demonstrate that lower income groups would pay more of their salaries toward the GST, it also showed that the higher income groups would contribute more in relation to their spending.

Groups earning above RM5,000 monthly may see as much as 4.3 per cent of their spending going towards the GST, while the lowest wage earners — those paid RM500 or less — would have 2.7 per cent skimmed off.

It is also unclear if the study took into account the income tax that the middle and upper middle class is already paying; a recent study showed that just 1.8 million Malaysians pay any income tax while Malaysia’s tax structure also makes it easy to hit the maximum tier that takes taxes 24 per cent from salaries after relief and deductions.

The GST is a consumption tax, meaning all Malaysians will be taxed according to their level of spending, regardless of income. This differs from income tax that is only applicable after a certain salary level is exceeded.

It is due to be implemented at a rate of 6 per cent a year from now, at which it will be maintained until further notice.

The tax was first announced during Budget 2005 and was originally scheduled to be implemented in 2007, before it was deferred.

The GST Bill was then tabled for the first reading in 2009 for implementation in late 2011, but was withdrawn during the second reading in 2010 following fierce public resistance.

It was tabled again during the current sitting of Parliament.

The new tax is among the fiscal reforms most demanded of Malaysia by external observers and ratings firm who want the country to wean itself of a dependence on oil income and address its chronic deficit.

Malaysia runs a relatively high government debt of 53 per cent of its gross domestic product (GDP) ― just under the legal ceiling of 55 per cent ― and has one of Asia’s highest household debt levels, at over 80 per cent of GDP.

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