GST implementation in Malaysia, good or bad?

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The introduction of the Goods and Services Tax (GST) will reduce the Government’s dependence on income tax and oil revenue as well as reduce the size of the country’s shadow economy, says Finance Ministry tax division under secretary Datuk Siti Halimah Ismail. “With the GST, it will disincentivise the entities to continue operating under the shadow economy. It is expected that some of these businesses will eventually come under the GST regime and contribute more revenue,” she says. According to Budget 2015, revenue from GST in 2015 estimated at RM23.2 billion and the government will have a balance revenue of RM5.6 billion after deducting RM3.8 billion for GST exemption. A report by Alliance Research also suggested that the introduction of the goods and services tax (GST) is timely to cushion any fall in the Government’s revenue collection amid falling crude oil prices. 

"The GST which has long been practised in most developed countries, has had a positive impact on economic development, and the people in general. The tax collected by the government through the GST system will generate income for the country's coffer and is for development to benefit the people. As responsible citizens who want to see the country progress, we should therefore not see the GST as a burden, but support its implementation," the president of the Federation of Sabah Manufacturers (FSM) Datuk Wong Khen Thau said. 

However, there are claims that GST could bring negative impact to the economy and the citizens as well. Kluang MP Liew Chin Tong has asked that the impending goods and services tax (GST), scheduled to kick in next year, be postponed as the economy is now fragile. Citing Japan as an example, Liew said the Japanese economy had turned negative after it raised its national sales tax which is its version of the GST. He said "raising the sales tax from 5% to 8% reduced consumer spending and killed any potential for growth in Japan." Like Japan, he said, Malaysia's economy depended on domestic consumption. He also indicated that if consumption is taxed, it will chip away at "disposable incomes of the consumer" and this will put a damper on demand. In the past decade, particularly after the 2008 global financial crisis, the global economy has become acutely concerned about income inequality - the gap between the haves and the have nots. 60% of Malaysians are eligible for the BR1M financial aid, meaning to say 60% of Malaysian families earn less than RM3,000 a month. They are already struggling to make ends meet. They do not pay taxes because they are below  the tax-paying threshold. 

While recognising that Malaysia’s tax system does no favours to the middle income bracket who earn between RM5,000 and RM10,000, the cure is not the introduction of GST. This unfortunate fact of high tax for middle income bracket should be rectified by tax adjustments to reduce the burden of the middle income families, shifting the focus to the super-rich. Malaysia’s GST is not like in the UK, Australia and other developed nations where top income tax rate were 50% and above before the introduction of the GST. For them, tax cuts were the natural course of action after the introduction of GST. There is little room to manoeuvre for a tax cut with the Malaysian income tax rate which is not that high by comparison.

Apart from the government’s expenditure, domestic consumption comprises the money spent by ordinary citizens, mostly via debt. Malaysia’s household debt is the second highest in all of Asia. Should the bubble burst, we will have many casualties. GST by nature is designed to tax those who cannot afford to be taxed in the first place. The 60% of citizens who are eligible for BR1M aid will now be taxed by GST, shrinking the domestic consumer market - i.e. the disposable income that could have been spent buying goods is now taken away by tax. In this scenario, imposing GST at this stage will have negative impact on the affordability of Malaysians. It would not be far fetched to imagine the worst case scenario of GST not as the feared monster of inflation, but the falling demand that precedes a recession.

The GST is effective from April 1, 2015 and the rate has been fixed at six per cent. So whether it will bring prospect for the nation or it will cause negatively to Malaysia, the answer will be knew next year, after the implementation of GST.