Is the Malaysian GST Progressive or Regressive?


GST, the goods and services tax, which is viewed to be rather regressive than progressive by some, is a new taxing system that will replace the current sales and services tax in Malaysia. GST or also known as VAT (Value-Added Tax) is a broad-based consumption tax that is currently practised in more than 160 countries around the world.

Let’s begin with a clear understanding on regressive tax. According to investopedia, regressive tax is “a tax that takes a larger percentage from low-income people than from high-income people”. This kind of taxing system applies greater impacts on individuals with lower income. Due to this problem, the regressive nature of GST is considered to be a burden for poor families especially, which is often a major concern to policy-makers. Countries such as the UK, Australia, and Spain for example, have experienced this problem –the lower, middle, and higher income groups have to face the minimal zero rating of basic essentials and exemptions after the implementation of the VAT. Such scenario also exists in countries such as Japan, Colombia, and Peru, of which VAT is implemented but with very little effect from exemptions. Developing countries such as Vietnam, Pakistan, and Ethiopia on the other hand have experienced progressive VAT.

With GST, consumers from any level of income can enjoy zero-rated life essentials such as basic food, piped water, and the first 200 units of electricity consumption. Apart from that, services such as health, housing, public transportation, and education are treated as GST exempt. As for small businesses, business owners can have their business excluded from tax burden, which indirectly benefits low-income households.

Basically, GST is a consumption tax –which means, consumers only pay for what they consume –the more spending, the higher the tax charged. As the buying power among the low and middle income is also low, they are more likely to save more on non-basic items that are not GST zero-rated or exempted. To ensure that the low income individuals are not severely affected upon the implementation of GST, the Malaysian government has designed a compensation package in order to offset any additional tax burden. With this package, BR1M recipients will receive a RM300 one-off cash as household assistance and enjoy tax rates reduction by 1% to 3% to increase their disposable income, which also means that 300,000 tax payers wouldn’t have to pay for tax anymore. Apart from that, families of RM4,000 household income will also not have to pay for tax anymore, and cash assistance under the BR1M is currently increased from RM500 to RM650, which will then be increased in 2015. Finally, chargeable income subject to maximum rate of exceeding RM100,000 will increase to RM400,000. The current maximum tax rate of 26% will be reduced to 24%, 24.5%, and 25%.

With the benefits that GST has to offer, Malaysia will experience better tax system that will overcome the inefficiency of today’s tax system.

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