Real impact of GST on cost of living

Published: Monday October 21, 2013 MYT 12:00:00 AM 

Updated: Monday October 21, 2013 MYT 9:22:58 AM

BY RAJA KUMARAN AND TIM SIMPSON

WHEN most people hear of a possible introduction of the goods and services tax (GST) at say 6%, they assume that their cost of living will increase by 6%. This is an understandable assumption, but how true is it?

GST is a broad based consumption tax which will generally be applicable on all goods and services.

This means that we pay tax only on what we consume. To ensure the tax is only imposed once, any registered business charging GST will be allowed to offset the GST it pays against the tax it collects before remitting the balance to the government. This is known as an “input tax credit mechanism” – it generally allows businesses to operate with no tax cost. The final 6% tax is borne by the end consumer.

Recognising that this increased cost may be a burden to the consumer, the Government has proposed that certain essential goods such as unprocessed meat, cooking oil, and sugar will not be taxed. Also, education, healthcare, tolls, financial services and life insurance, will be exempt from GST.

So setting all this aside, will the cost of everything else rise by 6%?

Implementing GST

First, let’s consider how the current consumption tax regime works. Most will be familiar with service tax which is charged at 6% on selected services, for example those provided by hotels and restaurants.

A second consumption tax, possibly less familiar to many, is sales tax which is charged on certain manufactured or imported goods and is, in many instances paid before the goods reach the consumer. Sales tax is in some circumstances hidden from the consumer. For example a carbonated drink is subject to a sales tax of 10%, but the tax is not generally itemised to the end user. If the drink costs RM11, RM1 is tax. However, as far as the consumer is aware, he is buying a drink for RM11, not RM10 + tax.

The existence of two consumption tax systems can lead to a tax on tax. Consider for a moment the carbonated drink example. (see table 1)

Not only does the consumer pay an additional RM1.08 in tax under the current system, the hotel’s profit carries a 6% service tax on the sales tax charged by the manufacturer.

The problem of double taxation is addressed in GST through the input tax credit mechanism. The tax paid by the hotelier is recoverable as input tax credit and does not form part of the cost to him.

So did the carbonated drink become 6% more expensive? Under the current system, the drink costs the consumer RM14.58. Under GST, the drink will cost the consumer RM13.25, that is 9% (or RM1.33) less!

The example is a rather simplistic view and ignores the longer supply chain and the potential cascading effect of the embedded sales tax cost. Sales tax is paid once at the manufacturer/ import level, whereas GST will apply on the value added at each stage of the supply chain.

Another impact to be considered is that input tax credit will not be available for exempt supplies (like healthcare or education, in the table below). This means, while the consumer won’t have to pay a GST on these items, the final price they pay may still be higher than before. This is because the actual cost of making these exempt supplies may still increase due to the GST incurred on materials etc. The higher costs may be passed on to the consumer in the form of increased prices, albeit not by as much as 6%.

Therefore, we cannot expect to pay 9% less for drinks in fast food restaurants under GST. So what will we pay?

The Price Control and Anti-Profiteering Act 2010 makes it illegal for businesses to increase prices by 4% across the board with the introduction of GST (assuming GST is introduced at a rate of 4%) and any pricing decisions made by businesses must be justifiable otherwise stiff penalties may apply.

The Tax Review Panel in their presentation to the business community forecast that a 4% GST would potentially show a reduction of 0.10% in the consumer price index. They also provided an assessment of potential price changes on a range of goods and services based on an assumed GST rate of 4%. (see table 2)

As well as excluding specified basic necessities from the GST net, the Government has indicated that direct assistance will be given to lower income groups and changes to personal tax rates are also expected to reduce adverse price impact upon implementation of GST. The introduction of GST won’t automatically make everything more expensive. What it will do is change the way we pay tax and provide a more transparent, streamlined and fairer tax based on our consumption patterns.

Raja Kumaran and Tim Simpson are executive director and consultant of PwC Taxation Services, Malaysia respectively