BEEP 3033

ECONOMICS OF TAXATION

GROUP A
INDIVIDUAL ASSIGNMENT

PREPARED FOR
MUSZAFARSHAH B MOHD MUSTAFA

PREPARED BY
BEH CHEONG SENG 205241

The main purpose of introducing GST is for the Government to increase its revenue while
at the same time to minimize leakages in the tax system. An efficient GST must be
comprehensive in nature with a single tax rate. But a comprehensive GST will be a burden
to the poor. Discuss how the Malaysian Government should structure its GST to make it
efficient and fair to the Rakyat. Your essay must incorporate discussions on the Subsidy
Rationalization Policy and transfer payments such as BR1M since these policies will have a
profound effect on the efficiency and fairness of GST.

The goods & services tax (GST) is also known as value added tax (VAT) which is a kind of tax
that being levied on every goods and services which includes imports at every stage of value
added activity. The tax is collect at the output stage and producers are allowed to claim back the
GST that they paid when the input is bought. In this case, the cost of business would be lower
with GST and increase the competitiveness of local business in international markets.
GST is a better tax system compared to typical sales and service tax (SST). It has a broad
tax base for tax collection. GST is better in term of efficiency as it is more comprehensive and it
involves lower administrative cost in the procedure of collecting the tax. Other than that, GST is
more comprehensive and being apply to all kind of goods and services that would ensure
minimal leakage compared to SST. This would contribute to generating stable tax revenue to the
government. Currently, the proposed tax rate of GST is at 4 percent on the value of supply.
According to Royal Malaysian Customs Department the GST rate of 4 percent would cause
prices to reduce by the range of 0.08 percent to 2.71 percent. Hence Rakyat will be enjoy
consuming cheaper goods with the implementation of GST.
There are 2 forms of untaxed items which is exemption and zero-rated. For exemption,
producer is not being tax on value added or output but they are not allow to claim the input tax
that they paid for during the purchase of the input. While zero-rated tax producer does not have
to pay for the value added or output and they are allowed to claim back the input tax that they
paid. However, items wont be zero-rated from the beginning of the process of input because the
input are yet to know whether it will be used for producing expensive product that will be
consume by higher income resident or cheaper product that will be consume by low income
resident. Input used in producing expensive products would be tax as high income person have
better ability to pay tax.
However, most of the people have some misconception about GST system. They perceive
that this kind of tax system would lead to higher cost of living as the tax will cause the price of
goods and services to increase. Secondly, it will lead to the thinking of burdening the small
business and entrepreneurs. Other than that, business people will thought that implication of GST
will complicate the process of paying taxes and increase the administration cost of paying taxes.
Despite of how people think, GST in fact does not increase the cost of living and increase the
burden of small businesses.
Regarding to the statement of a comprehensive GST will be a burden to the poor. It may
be true if only if there is no zero-rated or exemption on the basic needs groceries and items. This
will solve the problem of burdening the poor as they dont have to pay tax for the consumption
of those basic needs item. In fact, if SST is to be replaced with GST then people actually have

pay less compared to the existing tax system. This is due to 4% is a lower rate compared to the
existing tax rate on sales and services tax. Secondly, replacing SST with GST can solve the
problem of double taxing on consumer and significantly reduce the burden of people.
Furthermore, existing tax system makes some businesses to pay multiple taxes as they are
obligated to pay few stages of taxes for example like cascading tax. In the end a portion of the
multiple stages of tax will be passed onto consumer based on the demand and supply price
elasticity of the goods & services. More importantly, GST is also one of the equitable taxes as
basic need items are exempted from tax and those with better ability to consume more have to
pay more. In conclusion, if Malaysia government were to apply GST then it should be in the rate
of not higher than the existing SST rate to make sure there wont be increasing burden to people
changing the tax system. Secondly, basic needs items must be exempted or zero-rated from tax in
order to maintain their welfare or reduce the cost of living of poor after the implication of GST.
According to YB Tun Daim Zainuddin, Minister of Finance Malaysia (21 October 1988)
VAT is a broad-based equitable tax that wont deal significant impact on prices of consumer
goods. (YB Dato Seri Anwar Ibrahim, Minister of Finance Malaysia, 30 October 1992) implies
that GST will not be a burden to low income groups as there will be exemption on essential
goods & services and small business within the threshold. Furthermore the rate of GST proposed
will not more than 10 percent which is lower than the existing rate of Sales Tax.
Will subsidy rationalization program affect the efficiency and fairness of GST? It is
definitely a yes to this question. As we know that the subsidy policy implemented in this Subsidy
Rationalization Program is the kind of subsidy that applies on certain goods. This would mean
that everyone include non-Malaysian will be able to enjoy the subsidy whenever he consume the
products or goods whether that person need it or not. So it is an extremely inefficient way to
compensate the low-income group as a part of the tax revenue generated from GST will flow
back to those who dont belong in low income group. In fact, this problem is quite serious in
Malaysia. A lot of products and goods are heavily subsidized in our country for example in
education sector, medical services, petrol, paddy, sugar, fisherman and many more. In year 2009
Malaysia spent a total of RM74 million in subsidies. Therefore, the subsidy rationalization
program should be forfeit to ensure the fairness and effectiveness of implementation of GST in
Malaysia. The method of compensating the low-income group to cope with GST can be replaced
by zero rating the basic needs item or redistribute income directly to the low-incomes.
Referring to Singapore, which is one of the countries that have successfully implicated
GST. Singapore main objective is to deliver the message of cost of public service is responsible
by citizens. Therefore its policy of tax is to ensure the tax base to be as wide as possible which
is to cover as many taxpayers as possible. After the implication of GST in Singapore, the
percentage of people paying taxes has increased. The increment of taxpayer includes youngster
that not yet enter the labor force and the retired who has left the labor force. They have to pay tax
as long as they consume. Therefore, implication of GST ensure that everyone in the nation to
contribute to the tax revenue. Other than improvement in tax revenue, the other rationale of
Singapore implementing GST is because this tax system is not applicable to savings and
investment. In other words, this can encourage savings that will lead to higher investments.
Despite of the idea of generating more tax revenue, Singapore also take the condition of
the low-income group into consideration. Singapore government makes an effort in launching
the GST voucher scheme to take care the welfare of the low income group. GST voucher scheme

is similar to Malaysias BR1M transfer payment but they are much stricter in setting the
qualification of who is going to receive the transfer payment. Singapore used to adopt GST credit
which is quite similar to Malaysias BR1M, it is given to all adult Singaporean from year 2007 to
2010 in the form of GST offset package with the goal of helping Singaporeans to cope with the
increment in GST. It can be concluded that the transfer payment of BR1M is not a good policy as
any student will receive the transfer payment despite of their family financial condition. .As for
the BR1M for those income ranged below RM3000 it is undeniable that more or less it will help
low-income group to cope with their living but Malaysia has no good policy in assessing the true
income level of a family or a person. This will cause leakage of the transfer payment to those
who doesnt belong to the low-income group. However, it is not the same for GST voucher that
introduced in year 2012 which has a different goal which is to secure low-income group from
GST. GST voucher have better assessment system on qualification to receive the GST voucher.
The assessments not only include the applicant assessable income and also only strictly for those
who not own more than one property.
In conclusion, overall of the GST system it has advantages in terms of efficiency and
fairness compared to existing SST. Even though there may be some downside in GST but it can
be solve by implementing other policy like direct transfer payment to low income group. Hence,
Malaysia should adopt GST as long as it did not forget about maintaining the welfare of low
incomes.

REFERENCES
Business to business GST neutrality inrelation to the cross-bordersupply of services, Policy Advice
Division, Inland Revenue, New Zealand. Retrieved from
http://taxpolicy.ird.govt.nz/publications/2012-ris-lvaerm-bill/business-business-gst-neutrality
General Information on the GST Voucher, Singapore Government. Retrieved from
http://www.gstvoucher.gov.sg/faqs.html
Goods and Services Tax in Singapore: Rationale and Implications. Retrieved from
http://choonyin.tripod.com/gst/
Goods and Services Tax (Singapore). Retrieved from
http://en.wikipedia.org/wiki/Goods_and_Services_Tax_(Singapore)
Lower Income Group Will Not Be Impacted By GST & Subsidy Rationalisation. Retrieved from
http://finance.bernama.com/news.php?id=936359
Malaysia Goods & Services Tax (GST), Royal Malaysian Customs Department. Retrieved from
http://gst.customs.gov.my/en/hl/Pages/hl_ofcl.aspx
http://gst.customs.gov.my/en/rg/Pages/rg_gen.aspx
Question on GST, National Consumer Complaint Centre. Retrieved from
http://www.nccc.org.my/v2/index.php/question-on-gst
Veerinderjeet, S. R. (1995). Towards A Malaysian Value Added Tax: What It Is, How It Works & Its
Implications.