GST targets a bigger group but poor hit most, say economists

Putrajaya’s decision to finally introduce the Goods and Services Tax (GST) is a regressive move that would largely hurt poor and debt-ridden Malaysians, say economists.

While they lauded the government's move to abolish the Sales and Services Tax (SST) for the GST, the economists argued that the consumption tax of 6% effective April 1, 2015 would in fact do more harm than good in the long run.

“This is a regressive tax where the poor would be taxed more than the rich,” said Lim Mah Hui, from the Socio-economic and Environment Research Institute (SERI).

The lower income group would have to fork out a bigger chunk of their wages in terms of percentage compared with the rich, forcing the poor to pay a bigger percentage margin to the government in the form of the GST, he told The Malaysian Insider.

But Prime Minister Datuk Seri Najib Razak said during his Budget 2014 speech yesterday the GST would be a “fair and comprehensive tax system that would benefit all Malaysians”.

"More than 160 countries have already implemented the GST. This clearly demonstrates that GST is proven to be a transparent, effective and fair tax system,” said Najib, who is also the Finance Minister.

"The vast majority of nations in the world would not have implemented GST if it is disadvantageous to the people and the country," he added.

Deputy Prime Minister Tan Sri Muhyiddin Yassin said after Najib's budget speech that the lower income group would not be burdened.

"The effect to this group is neutral," he told a press conference in Parliament.

Economists said that a low income household earning roughly RM1,800 a month would have to spend more of their pay for necessities, a fact which Bank Negara noted in its Outlook and Policy 2013 report on the BR1M.

The report mentioned that based on analysis, “lower income households are more sensitive to income shocks” and that the poor “tend to have lower savings as most of their expenditures are for necessities”.

By pushing forward with the GST, the government would reinforce investor confidence but burden the people in the long run.

“With a definite GST rate, the market would receive it positively,” said Edward Lee, regional chief economist at Standard Chartered.

Influential former prime minister Tun Dr Mahathir Mohamad had said earlier this year that the GST should be implemented in stages.

“Everything should be done in stages, slowly, not the full amount at the same time, for the benefit of the people," he said during the Perdana Leadership Foundation CEO Forum in June.

Institut Rakyat economist Azrul Azwar Ahmad Tajudin said Putrajaya deserved credit for abolishing the SST instead of running the taxes in parallel but added that the government needed to ensure that it can enforce the GST effectively.

“I'm not certain if the committee tasked to oversee the implementation of GST would have the teeth to enforce the GST on traders, manufacturers so as to curb inflation,” Azrul said.

“In the past, the trend with enforcement has been lacking in Malaysia. It makes you think if enforcement would be better now than it is in the past.”

The GST would require an input and output of tax to be enforced at every level of the supply chain, a tedious and complex task which pundits have said may not work in Malaysia.

But more importantly, the brunt of the tax will be spread out to the consumers, a harsh reality that many Malaysians would not appreciate, they added.

“While this is an efficient tax, we must remember that 80% of Malaysian households are in debt,” Lim from SERI cautioned.

According to financial analyst Jesse Colombo, a columnist at Forbes magazine, Malaysia’s ratio of household debt to GDP hit a record of 83% – the highest household debt load in Southeast Asia.

With the GST, Lim believed that Malaysians would continue to spend more than they earn – a prediction that does not bode well for a country that has 41% of its population between the ages of 25 to 54.

The economists’ warning brushes off the government’s insistence that the GST would reduce the tax burden on the people, especially the low income group, through tax exemptions.

“What's the need to give the BR1M RM300 one-off payment if the government insists that there won't be an inflationary impact?

"If you don't foresee any burden on the low income group then why give the one-off cash assistance?” asked Azwar, referring to the one-off payment the government would pay to the poor when the GST takes effect.