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Understanding Goods and Services Tax in Malaysia: Impact, Calculation, and Recommendations

This source discusses the implementation of Goods and Services Tax (GST) in Malaysia, highlighting key issues, household impact, and revenue sources. It delves into the GST rate, expenditure patterns, burden on various demographics, measures in the budget, and proposed solutions to make GST less regressive. The text explores the challenges faced in the fiscal reform process, foreign capital dynamics, and wider economic implications. It also provides insights into improving tax efficiency and addressing middle-income concerns.

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Understanding Goods and Services Tax in Malaysia: Impact, Calculation, and Recommendations

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  1. “Implementing Goods and Services Tax in Malaysia” Lim Kim-Hwa & Ooi Pei Qi 30 Oct 2013 www.penanginstitute.org/gst

  2. Structure

  3. Key Issues

  4. Key Issues

  5. Key Issues

  6. Household Impact Latest Household Expenditure Survey (2009/2010) • Average household pays 3.80% of expenditure or 2.52% of income • 0% rated and exempted items • 6% standard rated items • Clothes & footwear • Restaurants & Hotels • Household equipment • Tobacco & alcohol • RM 90 per month • Essential food • Basic non-value added items • Healthcare • Public transportation • Education

  7. GST rate (%) • Health, Education (0.00%) • Food and non-alcoholic beverages (1.66%), housing, water, electricity, gas and other fuels (1.42%) Spending pattern  GST payment • Transport (5.39%), recreation services and culture (5.73%), miscellaneous goods and services (5.74%) • Restaurants and hotels, furnishing, household equipment and routine household maintenance, clothing and footwear, communication, alcoholic beverages and tobacco (6.00%)

  8. Higher GST burden if you are: • Low and middle income • Single person household • Young (less than 24 years old) household • Bumiputera-led households • Clerical workers, skilled agricultural and fishery workers • Peninsular Malaysia

  9. Calculating GST burden (GSTI)

  10. Income – expenditure relationship (from Bank Negara estimates)

  11. Higher GSTI:Low and middle income household Worst hit: monthly income RM2,579

  12. Higher GSTI:Single person household

  13. Higher GSTI:Young (less than 24 years old) household

  14. Higher GSTI:Bumiputera-led & non-Malaysian household

  15. Higher GSTI:Clerical & services workers, Farmers, Fishermen

  16. Higher GST contribution:Peninsular Malaysia

  17. Our interactive spreadsheet:www.penanginstitute.org/gst

  18. Measures in the Budget

  19. Annual Household Income

  20. Budget’s measures:Income tax cuts, BR1M & GST

  21. Income tax savings + BR1M – GST:Middle income worse off Middle income: worse off

  22. Budget: households with current annual income RM 30k- 150k to pay more tax More tax

  23. Mitigate negative effect on middle income 1: Our proposed income tax rates Bigger cuts at lower income Smaller cuts at higher income Expenditure efficiency improvements to make up any revenue shortfall

  24. Budget vs. Our Proposal:Income tax savings + BR1M – GST Highest income: less better off Middle income: less worse off

  25. Total GST Revenue from Households • Perfect condition: RM 6.5 billion • Simplify tax administration • (GST register if > RM 0.5m sales) • Practical condition: RM 6 billion • GST Fraud? • Realistic condition: Less than RM 6 billion • Simplify tax administration • (GST register if > RM 0.5m sales)

  26. GST RevenueSource

  27. Mitigate negative effect on middle income 2: Make GST less regressive

  28. Why target Transport? Transport as % of income increases as income rises 2% 6.7% 5.8%

  29. Raise same amount of revenue but make GST less regressive? Difficult – middle income groups still pay higher GSTI • Income Tax rate cut, refundable tax credits • Simple, effective tax regime • High GST rate on only some items • Raise billions • Multi-tiered GST • Broaden tax base

  30. Base 6% vs:Multi-tiered, High GST rate on selected items Cannot make middle income pay less GSTI than highest income

  31. GST is a strongly regressive tax • Higher income households still pay lower GSTI • GST is intrinsically regressive • Middle income households still pay higher GSTI • Hence, need income tax reduction, refundable tax credits/rebates

  32. Why was GST predicted to be in the Budget? • High debt • Sovereign: RM 519 billion (Q2 2013) • Household: 80.5% GDP (2012) • Foreigners hold • RM 126 billion • Malaysia Government • Debt • Low US interest rates about to end • Now: 2.6% • 1999-2008: 4.7% • Credit rating downgrade risk • Fiscal deficits since 1998 • First Budget after GE13 GST Introduced • Government’s credibility

  33. Foreigners’ holdings inMalaysia Government Debt Jul 13: RM 126 billion Jun/Jul 2013: Foreign capital withdrawn Jan 05: RM 9 billion

  34. Foreign Capital withdrawnBorrowing Costs Increase (3.4%4%) Jun/Jul 2013: Foreign capital exert significant influence

  35. Significance • Sovereign Debt: RM 519 billion (Q2 2013) Low US interest rates end • Fiscal Deficit Deteriorates • 1% higher interest rate • Credit Rating Downgrade • Slower Economic Growth • Additional RM 5.19 billion interest • Borrowing Costs Increase • Foreign Capital Withdraw

  36. Wider Implications • Inflation per CPI • Spike up 1.32% additionally (ignore secondary effects) Credit rating agencies & foreign capital reassured? • Measures sufficient to insulate Malaysia from QE taper risk? • Economic growth • Higher domestic spending due to BR1M and front loading of spending • Ringgit uncertain • Fiscal reform, wider tax harmonisation • Property prices • Overall effect uncertain Narrowing window for fiscal reform

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