Wednesday, May 11, 2011

GST On The Cards Again?

From yesterday’s Star:

PM: Income tax may be reduced once GST is in place

PUTRAJAYA: Corporate and personal income tax may be reduced with the implementation of the goods and services tax (GST), Prime Minister Datuk Seri Najib Tun Razak announced Tuesday.

He, however, said the government was still engaging with the Public Awareness Education Programme to educate the people on the advantage of the GST.

"As far as the people are concerned, there is a growing acceptance that the GST is good," said Najib, who is also Finance Minister, to reporters after attending the Budget 2012 Consultation here Tuesday.

The people can get more details on the GST by logging on to

"When the people have fully understood and accepted, that's the right time for us to implement the GST. We will make an announcement after we have assessed the people's acceptance of the GST. I will announce when the time comes."

Seems the government is trying to lay out the groundwork for introducing GST...again. There's no doubt that it's a more "efficient" tax than taxes on income are, but whether the government can sell the concept to the people is still up in the air.

This line in the article though is highly misleading:

Even though the GST is imposed at every level of the supply chain, the tax element does not become part of the cost of the product as the GST paid on the business inputs is claimable.

GST on inputs are claimable, but sellers are still levied on their value added and the final consumer still bears the whole tax burden. The statement is true only in the sense that producers can claim a refund on GST paid on their inputs – that doesn’t change the “cost” to consumers.


  1. I disagree with what you said about consumers bearing the whole tax burden. As with all taxes, the burden of the tax is shared based on the price elasticities of demand and supply. This is basic Econ 101. The more inelastic the demand/supply, the larger the tax burden is on the consumer/supplier.

    Just imagine an extreme case of perfectly elastic demand. The burden of the tax will fall completely on suppliers. Of course, in the real world, there is no perfectly elastic demand. But it is not hard to imagine how tax burdens are dependent on elasticities. One way to think of this is that producers may have to lower their selling prices to compensate for the fall in quantity demanded, partially offsetting the price increase due to taxes.

  2. Hi Shihong,

    I was thinking in terms of purchasing price, not consumer surplus. But your point is absolutely valid - thanks for pointing that out.

  3. Dear Hisham,

    I was arguing with my best friend that GST is "fairer" to us wage earners as those involved in "underground economy", i.e. illegal DVD seller, Ah Long, Bookies etc don't pay any income tax at all.

    I quote the example where without GST, a wage earner like us, say, pay RM5K of income tax a year. Assuming, with GST implementation, the personal income tax is reduced to RM3K plus RM2K paid for the GST, resulting in a total of RM5K taxes paid.

    In the case of those involved in "underground economies" mentioned above, although they still do not pay income tax but they are "forced" to pay GST at least to an amount of RM2K per year, assuming same pattern of consumption.

    To me that is more fair to us wage earners who contribute to the Govt's revenue unlike those who have managed to "avoid" paying income tax.

    Your views, please.

  4. I don't know that I'd be overly concerned with taxing the underground economy - but you're right, they'd be subject to a GST too and will have to pay their share.

    I think the main problem with GST/VAT is that it's "regressive", or more precisely, it's not "progressive". Since everyone is subject to it, that means that low income earners will bear higher taxation relative to their incomes, since their consumption requirements take a bigger part of their incomes. Generally, the government should be zero-rating consumption essentials (like food), but there's been no confirmation of this.

    If you really want to be socially fair, we should really be talking about taxing capital gains, not just income or consumption taxes. Right now, the only capital gains being taxed is on property, and even then only for a limited number of years.

    Why should wage earners and companies bear the brunt of taxation, and shareholders and property owners get a free ride?

  5. Effectively those currently outside of the taxable income bracket will be paying tax once GST is introduced.To add insult to injury,the tax rates will be reduced for the higher income earners.
    Something is not right.

  6. Which is why a capital gains tax might be necessary - to redress that imbalance.

  7. @anon 9.57

    Turns out I've contradicted myself - your point is absolutely valid. See this post. I've also queued a follow up post on this issue later today.