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Friday, May 9, 2014

Preparing for GST

Published: Friday May 9, 2014 MYT 12:00:00 AM 
Updated: Friday May 9, 2014 MYT 7:57:11 AM

The great debate is on : Is the Goods and Services Tax (GST) good for the people?

The government, being the proponent, has been promoting this new broad-based consumption tax for a few years and it finally succeeded in getting the Goods and Services Tax Bill 2014 approved by both the Dewan Rakyat and the Senate on May 5 for implementation on April 1, next year.

The passage of the bill sets into motion a new system to tax all goods made and services rendered in Malaysia including imports except those that are “zero-rated” or exempted from GST.

But I think the debate, with the government on one side and the people on the other, will go on.

The Government’s main contention is that the GST is part of its tax reform programme.

It is careful to explain that although the new system is a multi-stage consumption tax on goods and services, the tax element does not contribute to the cost of the product.

It maintains that the GST of 6% is lower than the combination of 10% Sales Tax and 6% Service Tax that will be replaced and therefore is better.

Wider Net

It also draws strength from the fact that 160 countries in the world have implemented this kind of tax, also called Value Added Tax, and so it must be good.

I agree that it is an efficient system to collect and increase tax revenues because it casts a much wider net to haul in all goods and services unless exempted compared to the current system of taxing specified goods and services that are deemed not essential.

But GST is levied at each stage of the supply chain from the manufacturer to the retailer, each charging 6% tax on the selling price. When the product reaches the consumer, the price will be very much inflated by the tax.

It will not be surprising to see a product leaving its manufacturer at RM100, passing through a wholesaler and a distributor, each adding RM100 for profit plus RM6 for tax, and ending in the hands of the consumer at RM318 (Selling price RM300 plus GST RM18).

Essential items are mostly zero-rated or exempted. Examples are rice, sugar, table salt, flour, cooking oil, vegetable, meats, public transport, healthcare, education and electricity consumption up to 200kwH (about RM50) and 35 cubic metres of water to domestic users per month. The sale and leasing of property are also exempted from GST.

But people do not live on essential items only; they need variety.

Incidentally, many food items sold in supermarkets which we eat daily are not categorised as “essential” and thus subject to GST.

Also, we need to buy clothing, shoes, food supplements, skincare products, household appliances, drinks and gifts during festive seasons, movies and snack on titbits while watchingTV, cookies, repair our cars, and change our laptops and mobile phones.

Consumers will have the burden of paying extra money for the new tax on these important yet non-essential items.

Price hikes

I have no doubt that GST will raise the prices of many items which any average family will spend money on, with the result of erosion of saving for the future.

In fact, the government has admitted that GST will raise the Consumer Price Index by 1.8%. That is an indication that prices may rise and lead to inflation.

Understandably, the people are fearful of yet another round of price hikes after suffering from raised prices of flour, sugar, petrol, cooking oil, electricity, school-bus fares, vegetables, fruits and lately, medical fees.

The monetary aids given by the government do marginally help those of lower income but they are temporary measures whereas the GST is a permanent fixture in the government machinery to generate income.

Government protects small businesses whose annual turnover is below RM500,000 - they are not required to charge GST on their goods and that may attract customers to them.

But the low business volumes put them at disadvantage against supermarkets who command very low wholesale prices.

In the end, people will still shop at supermarkets because their prices, even with GST, are still lower than those of small businesses.


This tax system seems to go counter with established principles of taxation.

One of the objectives of taxation is to collect tax from the rich to help the poor and taxing consumption, presumably of the rich, is sensible and noble. But under the GST system, even the poor are similarly taxed.

Even The World Bank has acknowledged that “Value Added Taxation” or “GST” is inherently regressive and that exemptions and zero-rates are ineffective.

So, it appears that we are adopting a regressive tax regime.

Could it be the GST system was effective during the 1980s and 1990s but lost its efficacy in the present due to changes in economic and other conditions?

Moreover, part of the income which has been subjected to income tax will be taxed again by GST if it is spent on non-exempt goods, resulting in double taxation of income.

The worst scenario is that countries implemented GST, but raised them over the years and some of them are now charging as high as 25%.

This, I believe, is the greatest fear of the people. And they will continue to protest the implementation of GST until the next April Fool’s Day.

Examples of how GST works can be found at

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