Monday, January 5, 2015

Tax Irrationality

Ay Caramba! (excerpt):

Cloudy with a chance of money

A NEW year means new resolutions, and maybe for some, a new look and a new home.

But for many, the New Year also ushers in new debts.

Amid the worries about possible tough times ahead – with rising cost of living, falling Ringgit, subsidy cuts and the impending implementation of the Goods and Services Tax (GST) on April 1 – many Malaysians have gone on a buying binge, especially on big-ticket items.

This is to avoid the anticipated higher prices due to the GST, according to the Malaysian Institute of Economic Research (MIER), and it expects many to continue their shopping frenzy until the April deadline.

“Buying plans for cars, furniture, washing machines, TVs, refrigerators and cookers were up in the recent quarter... and consumers are prepared to go shopping for big ticket items, encouraged by the scheduled implementation of the GST,” MIER said in its 2015 economic forecast report.

Although this expectation of a rising inflation after the tax comes into effect means that consumers will also grow cautious with their spending, there are some who worry that some of our consumers may have already over-compensated for the impending price hike and created new problems for themselves by overspending.

A newly-married sales executive who only wants to be known as Saidah* says she has bought a lot of things to set up her new home, from furniture to electrical items.

“And this is on top of what I spent on my wedding. I used my card a lot and with the fear of GST pushing prices, I have even bought some non-essentials like a new flat screen television,” she shares.

Now that she has maxed her credit card limit, Saidah is getting worried.

“I worry whether I can pay it off or if I will need to use my credit card for everyday use like petrol or groceries later.”

Young executive Chow scrambled to get a car even though he is not fully prepared financially, just so he could beat the GST.

“My parents helped me with my downpayment. I was scared that if I waited, I would never be able to afford a car.”

Whether their fears are founded – GST will not be imposed on all items – many are resorting to debt first, pay later just to stay ahead of the new tax system….

Cars? Flat panel TVs? Furniture?

GST (at 6%) affects all of them, but so does the current sales tax (at 10%). The biggest changes in prices after GST kicks in won’t come from durable goods (with the exception of housing), but with consumables like fresh food and medicines which generally don’t attract sales tax under the current regime.

The impact on car prices should be flat or slightly negative; for furniture, distinctly negative. Customs is supposed to come out with the shopping price guide next month – it can’t come soon enough, if this article is any example.

8 comments:

  1. I feel that it is too early to give comment. There are no reduce in price of consumables, in fact the food price did increase despite drop in oil price. Theories in book does not necessary translate into real life (because too many variables)

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    1. @anon 3.04

      I'm talking about GST, not input prices generally. In any case, prices of consumables should rise with GST, not fall, because most fresh food items (to take an example) currently have no tax levied on them. That will change with GST, with the exception of zero-rated items.

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  2. Whether got GST or not, the electrical items price will reduce overtime but consumables like foods will increase overtime. The GST effect is only superficial.

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  3. Precisely. People aren't thinking straight

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    1. It's the list of "exempted items" that makes me wonder if the government is really serious about what the GST is supposed to achieve.

      As one wag put it - Malaysia's list of GST-exempt items could fill a decent-sized book whereas the corresponding Singapore list could be contained in a half a page of the same book!

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    2. @bee farseer

      Funny story about Singapore's GST. My sources tell me that most of Singapore's GST revenue actually comes from fines for non-compliance (incomplete or incorrect returns), rather than taxes paid on goods sold. That makes it more of a corporate tax than a consumption tax.

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    3. That's most interesting (just added another item to the list of things I didn't know).
      To show that they're serious, the Customs will have to be pretty strict on incorrect returns, especially since the system requires the tax revenue be collected on their behalf by the merchant at the first instance: to allow the merchant to keep any of that revenue unduly would be a breach of trust on the part of both parties.
      I confess I'm coloured by my own experience in the administration of income tax deducted at source (especially the monthly p.a.y.e. deductions): I think we were justifiably more strict on those who made the deductions but failed to remit them expeditiously, than on those who made minor errors in the amount deducted.

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  4. Buying ahead in anticipation of GST. Created a new problem for themselves. Seems like a silly thing to do.

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