International Research Journal of Finance and Economics

ISSN 1450-2887 Issue 41 (2010)

© EuroJournals Publishing, Inc. 2010
http://www.eurojournals.com/finance.htm

Indirect Taxation: Awareness and Impact on Undergraduates

Matthew Chang Keng Yan

KBU International College, MALAYSIA
E-mail: mcool007@hotmail.com

Lawrence Arokiasamy
Universiti Tunku Abdul Rahman, MALAYSIA
E-mail: lawrence@utar.edu.my

Cristal Lee Ah Suat

KBU International College, MALAYSIA
E-mail: cristallee@kbu.edu.my

Abstract

The global shift in paradigm in such whereby the focus point is moving towards an
indirect taxation policy as it changes from a direct taxation policy. Direct taxation which
usually only affects individuals who have a earning capacity is now slowly being taken
over by the indirect taxation policy which will lead to almost any individual who purchases
good or services to be taxed regardless of the earning status. Hence, an understanding of
how indirect tax has impacted and affected undergraduates who do not earn yet disburse
income in the form of indirect taxation daily needs to be established. Asides from creating a
sense of awareness, the extent to which undergraduates have been affected can be
ascertained and thus a concrete conclusion can be concocted. Their views are pivotal as
they will be the next in line to enter into the corporate world in which they’ll be eligible to
both direct taxation and indirect taxation. Therefore, this article examines the awareness
and impact of indirect taxation among undergraduate. Further, this article prevails to better
understand why they are being charged indirect taxation in the form of service charges, and
government charges. Finally, this wills recommendation for proper financial planning
initiatives were put forth.

Keywords: Indirect taxation, awareness level, student perspective

1. Introduction
In today global market, companies and individuals are required to pay taxes. Malaysia has been
practicing a fiscal-like system for quite a substantial number of years. Therefore, Malaysia’s
government has implemented a mixture of direct taxation whereby individuals who gain wages and
salaries are taxed under the personal income tax policy, as well as indirect taxation whereby sales tax
and service tax among many others are involved. In the year 2001, about 76 percentage of the revenue
that the Malaysian government obtained was from taxation alone with a 46 percentage from direct
taxation and a 30 percentage from indirect taxation.
Therefore, indirect taxation plays a vital role in total revenue in the country. Hence, this study
will attempt to analyze with more details about the taxation policies that Malaysia has been practicing
International Research Journal of Finance and Economics - Issue 41 (2010) 44

as well as the shift of policies and how it affects the country’s economy as a whole and the impact of
indirect taxation on undergraduates in Malaysia.
The upcoming trend of shifting from a direct taxation to more of an indirect taxation approach
is being implemented in the current Malaysian trend and the impact of this on Malaysia as the
researcher focuses on undergraduate’s awareness and impact levels.
This literature–based paper begins by defining the concepts of indirect taxation. It then explores
the awareness level and impact of indirect taxation towards undergraduates. In the final section we
develop the model and conclude the significance of the indirect taxation as a pillar in the economic
planning.

2. Research Problem
Problems arise when the individuals who are affected by taxation policies are unaware of the current
trends and they do not respond to it. The general thinking is that indirect taxes such as service tax and
sales tax are charged by manufacturers, producers and suppliers alike to increase revenue when in
actual fact, is it not the case.
Manufacturers are actually charged service taxes and sales taxes on their products. Therefore, in
order to cover the cost of the taxes, it is transferred to the primary users, which are the consumers
which includes undergraduates as well. Indirect taxation does not only affect individuals with income,
but to the general population as a whole.
Thus, this study aims to create awareness among the undergraduates about how the taxation
policies will affect them and why knowledge on the subject matter is necessary. This is also to gain
their opinion on how it has affected the economy as a whole and any future implications that might
arise.

3. Research Objective
The objective of this is to gain an opinion on how indirect taxation has affected Malaysian
undergraduates in particular and whether it has any effect on their spending habits. Therefore this study
will create awareness of indirect taxation and impact in financial planning for undergraduates.

4. Research Significance
Most of the time, taxes are charged and figures are calculated without knowing how the taxation is
affecting the economy as a whole. Regarding the policies being implemented by the government, the
effect on the people and the economy has yet to be ascertained in detail. The effects of shifting towards
the indirect taxation policy have to be researched and how it has helped overall economically and
whether it has affected Malaysians, more specifically undergraduates and their purchasing power.
Moreover, the researcher hopes to help create a sense of awareness among taxpayers as well as
to obtain an opinion on what Malaysian undergraduates think of the current taxation system and
whether it will prove to be beneficial in the long run. This will give an insight into the structure of the
taxation system to Malaysians as well as insight on the level of acceptance on the current taxation
policy.

5. Definition of Indirect Taxation

Indirect tax is defined as “taxes that are charged on goods and services that are purchased by
consumers from producers who are being taxed which leads to a higher output prices.” Indirect tax
consists of ad valorem, service charges, sales tax, excise duties, and a few other taxes just to name a
45 International Research Journal of Finance and Economics - Issue 41 (2010)

few. In today’s economy, indirect taxation is being emphasized more as service takes priority over
manufacturing.
6. Literature Review
Taxation in general is said to influence the behavior and the economic decisions of various individuals
on whether to work, to save, or even invest (Monsingh & Kerr, 2001). Whether it may be direct
taxation or indirect taxation, users will still be affected with the only difference being the magnitude in
which their income and spending power is affected. Therefore the opinions of those affected have to be
taken into account to come to a conclusion on the effectiveness of either policy, in this case indirect
taxation.
Indirect taxation is said to play an important role in determining the price of some commodities,
products and services alike. Logically idea, taxation charged on products or to the first hand users
brings about the same effect. The only differences are the factors that affect the economic decisions,
with one being the product itself and the other being the available income for consumers to spend.
Hussain and Naheed (2005) stated that the efficiency and level of output in terms of the manufacturing
sector were affected by taxation policies which have been implemented by the government. Control of
indirect taxation by the government will therefore affect output and ultimately prices of products and
services which in turn will affect consumers and their decisions, including undergraduates.
According Edgeworth paradox theory (cited in Cardenete & Sancho, 2002) argues that an
excise duty on one good would lower the price of that good and other goods as well showing that
indirect taxation does bring about changes in prices which affects the economy. Dixon and Rimmer
(1999) offered their opinion and implied that indirect taxation in general has the ability to increase the
prices of lower taxed commodities and products as well as to decrease the prices of highly taxed
commodities and products. This is especially visible when the government decides to shift the taxes
from the higher taxed commodities and products to the lower taxed commodities and products.
Dixon and Rimmer (1999) are also in line with Edgeworth paradox theory with suggestions that
a combination of both consumer taxation and cost reductions can shift and severely affect the
purchasing decisions of consumers as the tendency is to shift from highly taxed products and services
to lower taxed products and services. Using the law of supply and demand, the conclusion would be for
demand on higher taxed products to decrease and thus causing an overflow of supply. However, as the
demand shifts to the lower taxed products; the sudden demand will surely cause a demand-pull
inflation as there will be a shortage of supply for the lower taxed products.
Conclusively, this would mean that prices will shoot up as well as potentially a decrease in
terms of quality. Therefore this could lead to the reverse effect of the actual purpose of indirect
taxation assumed to be studied in this research, and that is to show that indirect taxation provides a
more stable effect on the economy as well as bringing about a more redistributive effect on the
economy as a whole. Thus, will effect the buying power of undergraduates.
In addition, Dixon and Rimmer (1999) ponder that the prices of commodities and they state that
the indirect taxation should work towards increasing the prices of commodities that are currently being
taxed at a low rate compared to commodities that are taxed at a higher rate. Logically speaking, this
would mean an increase in lower tax rates as well as a reduction of higher tax rates in their respective
areas in order to achieve such an objective. This would create a more balanced effect to the purchase
and selling of commodities and taxes according to the value of the commodity.
However, the possibility of commodities that are taxed lower to further reduce in the tax rate as
well as the possibility of commodities that are more heavily taxed to further increase is possible in
certain cases. This could bring about the reverse effect to what is being strived to achieve if such cases
have a high probability of happening. Moreover, Jenkins, G. (1989) found that a lower tax does play a
role in encouraging economic growth. He observed that the gross domestic product (GDP) increases
when taxes are generally shifted from direct taxes to indirect taxes, using Sri Lanka as his base for
study. In addition, Marsden, K. (1990) agreed with Jenkins when he analyzed that lower taxed
countries boast a higher GDP than those countries that charge a higher tax.
International Research Journal of Finance and Economics - Issue 41 (2010) 46

Koretz, G (1999) also shows further support whereby a study on the implementation of indirect
taxation which raised the price by 3%-5% of cigarettes showed a reduction in per capita consumption
of cigarettes. Moreover, consumers reduced by smoking fewer cigarettes to counter the increase in
prices, thus showing that indeed indirect taxation plays a major role in determining prices of goods and
services.

6.1. Effects of Indirect Taxation

The general known idea of taxation is to generally balance the economy in terms of the redistribution
of funds and income from the rich to the poor. One of the objectives of the Malaysian government
especially is to redistribute the income from those of the higher earning capacity to those of the lower
earning capacity. Therefore, indirect taxation will have to be ascertained to have such an impact on its
economy in this research as the researcher strives to prove that the indirect taxation will contribute
towards the objectives of the Malaysian government.
Decoster and Van Camp (2001) made a comparison and states that direct taxation (or more
specifically, personal income tax) is progressive whereas indirect taxation is noted to be of a regressive
manner. By the word ‘progressive’, they simply imply that direct taxation brings about a positive effect
to one’s economy in terms of performance on a long term scale and results and the word ‘regressive’
brings about the exact opposite of ‘progressive’. Cremer, Pestieau, and Rochet (2001) begged to differ
as they state that the nature of indirect taxation (which includes commodity taxes) brings about a
redistributive effect which contradicts the fact that is stated by Decoster and Van Camp’s on its
regressive nature. If the indirect taxation is indeed regressive, a redistributive effect would not have
such positive effects. However, we must take into account that Decoster and Van Camp’s research
states that indirect taxation is regressive in light of the decrease in global taxes when there is more
reliance on indirect taxation which is another perspective altogether.
Rele, H.T (2007) research supports the opinion of Cremer, at el., (2001) on the redistributive
nature of taxes among the rich and poor which clearly shows that indirect taxation when included in
the equation and analyzed; it shows that to a certain extent it does indeed play an important role in the
redistribution of income.
Saez, E. (2004) argues that manufacturing in Pakistan begs to differ in the sense that his study
focuses more on the effects of a redistributive effect which incorporates solely the direct taxation
policy. In short term, author mention that the indirect taxation policy helps in redistributing the income.
However, he goes on to state that in terms of long term, a redistributing income would be more
effective if depended solely on a direct taxation policy.
Cardenete and Sancho (2002) study found that indirect taxation in Andalusia supports Saez, E.
(2004) in concluding that indirect taxation would prove more to be an obstacle in promoting economic
growth rather than providing a strong foundation for further growth. They stated that a reduction in
indirect taxation would lead to price competitiveness which will promote economic growth, as well as
increase the level of employment. They also further stated that a reduction in indirect taxation and an
increase in direct taxation will would help to balance the tax basket.
However, the opinion on indirect taxation being regressive and unable to redistribute income
might not be able to be generalized to the Malaysian economy as a whole due to the fact that the
economy differs in many ways. The researcher would like to justified that whether indirect taxation is
really regressive when applied to the current Malaysian economy and its policies that are in use.
Though there are mixed opinions about this, the researcher believes that a reduction of direct
taxation and more reliance on indirect taxation will bring about positive changes and a progressive
purpose in moving towards an economical growth in the long run if all factors are considered. Though
Decoster and Van Camp (2001) has researched and came up with a table that shows a drop in the total
global taxes when there is more reliance on indirect taxation, the researcher feels that a more balanced
redistribution of income will ultimately bring about economic growth as a whole.
47 International Research Journal of Finance and Economics - Issue 41 (2010)

Freebairn, J. (1997) points out that generally speaking, the indirect tax is higher on products
that are consumed by the low or medium earning class instead of products for the higher earning class.
This again is another viewpoint of the indirect taxation that has been implemented which contradicts
the fact that it brings about a redistributive effect on the economy. If this is true, then redistributing the
income will only be a more illusion as the opposite happens and thus causing an adverse effect on the
economy instead of bringing about a positive change in the economy.
The Goods and Services Tax (GST), one of the many modes of indirect taxation brings about a
different perspective where it is said to have a crushing effect on the lower income group, as the shift
of taxation on goods will certainly not be favorable to them since more of their income is spent on
consumption. This again supports the fact that it brings about an adverse effect as opposed to the
redistributive effect which was mentioned earlier.
According to Freebairn, J. (1997), the heavy reliance and dependence on the successful
implementation of indirect taxation will collect less revenue if there is a decline in the share of national
expenditure, or to be more specific, a decline in Gross Domestic Product (GDP). The reason behind
this is simply because when there’s a decrease in the GDP, it means that the purchasing of products has
decreased a great deal. Since indirect taxation is charged on products and services, therefore a
decreased in GDP will greatly affect the revenue the government earns from indirect taxation.
Moreover, the rates charged on goods and services have to be charged accordingly to the status of the
economy and the GDP.
Moreover, indirect taxation is said to be charged at different rates on different goods and
services which influences the decisions made by consumers on the consumption of products and
services as well as decisions made by producers on which products and services to provide. This draws
the comparison to Dixon and Rimmer (1999) and confirms that indirect taxation does ultimately affect
pricing which in turn affects and influences the economic decisions made by consumers and producers
alike.
Note that previously, the focus had only been on consumers and producers on how indirect
taxation plays the role in affecting prices as a whole as well as the profit gained by producers.
According to Freebairn’s (1997) research, indirect taxation is said to bring about less revenue than
direct taxation. Therefore, we see that indirect taxation is unable to bring about benefits for consumers,
producers, and the government without affecting one party or the other somehow or rather.
However, a major benefit that arises from the implementation of indirect taxation is the fact that
since indirect taxation can be enforced by the law, therefore the problem of evasion of taxes will not
arise (Watrin & Ullmann, 2008). In the case of direct taxation, evasion has been a major concern and
has been happening quite rampantly. The authorities have faced such problems and it is indeed a main
concern.
If Personal Income Tax (direct taxation) can indeed be evaded with ease, then the government
will lose out on a whole lot of revenue and this could bring about a negative effect on the economy in
the long run. Therefore one of the reasons a heavier reliance and emphasis is given to indirect taxation
is to solve this problem whereby indirect taxation is mandatory and the chances of evading such taxes
are very much slimmer than those of the Personal Income Tax category.
Interestingly enough, Keen, M. (1998) touching specifically on the ad valorem tax states that
the ad valorem tax is able to satisfy the needs of consumers who are looking for higher quality
products at lower prices, producers who are looking to maximize their profit, as well as government
seeking higher revenue from taxes. However, this is only of course due to the satisfaction of
prerequisites or certain criteria’s with the example given being in a monopoly scenario, or a case of a
single producer.
However, such scenarios are highly improbable and the chances of it happening are slim if not
remote. As much as the local tax authorities strive to achieve a situation whereby the consumers,
producers and the government benefits, it is quite difficult to believe that such a scenario could be
possible.
International Research Journal of Finance and Economics - Issue 41 (2010) 48

Among the other possible benefits of a government implementing an indirect taxation system is
that added factor for foreign direct investment as well as to encourage more international trade. This is
seen possible whereby an efficient and effective optimal taxation system will add gloss to a country’s
investment prospects.
Looking at tax from a different angle, Feldstein (1982) proposed that direct taxation has a
negative relationship with investment. His studies showed that if direct taxes were to be increased,
there would be a decline in investment. The question that remains to be answered is whether this
relationship also applies to indirect taxation as investment would ultimately affect a country’s
economy, in this case Malaysia. Therefore, this study will look at the impact of indirect taxation on the
economy as whole and being an undergraduate how they affected.

7. Theoretical Framework
The framework has been developed based on the literature review whereby the variables are indirect
taxation is the dependent variable which is connected to the purchasing power of undergraduates, the
decision making and expenditures of undergraduates, and price of goods and services of
undergraduates which are the independent variables.
This research is out to shows that changes in the independent variable will affect the indirect
taxation rates that will be charged as the tax rate is dependent all these factors which contribute to the
economy.

Figure 1: Research framework

Purchasing Power

Indirect Taxation Decision Making

and Expenditures

Price of Goods
and Services

8. Implications
This study has to understand the indirect taxation policy in a more detailed manner, as well as to create
awareness among undergraduates on the policy. Often, they do not give it much thought but knowing
the reasons behind such policies will place them in a position to voice out their opinions and their point
of views on the or disadvantages of the policy.
Moreover, this research will also help in administering the right balance of taxation in
considering the effects on undergraduates and incorporating that into producing a tax system that is not
too taxing and yet brings about an economic growth and a positive effect.
As such, not much focus has been given on the indirect taxation policy as the need for it before
this was not seen. However, this research exposes the very essence and gist of the policy and helps
perhaps local tax authorities to administer proper tax rates that will bring about benefits in the long run.
Hence, the objectives of this research which are to understand the indirect taxation policy, its
effects on undergraduates, as well as to create awareness have been achieved through this research and
to help better decision making regarding indirect taxation in the future.
49 International Research Journal of Finance and Economics - Issue 41 (2010)

9. Recommendations
Hence, indirect taxation has been shown to have an effect on the economy and thus the indirect taxes
that are chosen have to be administered at the right rates. A change in the rates can bring about an
effect on those who are charged the tax, which includes almost everyone who make purchases on
goods and services.
Indirect taxes that are charged should be charged according to the necessity of the goods and
services. Charging a high indirect tax will affect not only undergraduates, but consumers as a whole
which ultimately will lead to a domino effect on the economy. Careful thought and consideration
should be given in order for the indirect taxation to have its desired effect of redistributing the income.
A decrease in direct taxation and an increase in the reliance of indirect taxation might not
necessarily bring about positive effects. Having the right balance will however ensure that the effects
are comprehensively positive and the possibilities of having a reverse effect are minimized.

10. Conclusion
A proper taxation system that incorporates a reasonable and carefully planned indirect taxation policy
will improve a country’s economic status and the standard of living as well as the welfare of its
inhabitants. The purchasing power, as well as the price of goods and services should be taken into hand
as important factors in order to come up with a reasonable tax rate.
Therefore, it is necessary for careful planning and procedures to be carried out in dealing with
such policies. Awareness has to be spread in order to inform all consumers about the direction and
objectives the authorities wish to achieve by administering the indirect taxation policy.
International Research Journal of Finance and Economics - Issue 41 (2010) 50

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