The Economic Implications Of GST Removal In Malaysia

Following the shocking win by Mahathir Mohamad, leader of an alliance of opposition parties in Malaysia’s general election, the newly formed government announced that it would scrap the six per cent Goods and Services Tax (GST) from 1 June 2018.

The 6 per cent Goods and Service Tax was introduced since 1 April 2015 by the then government led by Datuk Seri Najib Tun Razak. The argument given by Najib then was that more than 160 countries around the world had implemented GST and among the ASEAN countries, Malaysia’s GST of six per cent was among the lowest. Indonesia, Vietnam, Cambodia, the Philippines and Laos charge a much higher GST of ten per cent while Singapore and Thailand charge seven per cent. It was announced earlier this year by the Singapore government that it would increase GST to 9 per cent in 2019.

Unlike Singapore, where GST is applied across all goods and services, some goods and services are exempted from the GST scheme in Malaysia. These include basic food items, as well as government services such as healthcare, education and public transport.

GST – A Regressive Tax

Najib refuted claims that the implementation of GST would lead to heavier burden to the poor and low-income group. Students may have learned in economics tuition from their economics tutor, the different nature of various tax schemes. Income tax, for example, is a progressive tax, which means, the higher the income, the higher the percentage of income tax charged. On the other hand, GST is a regressive tax. The higher the income, the lower the percentage of GST charged relative to income level. This is explained in detail in the lectures notes provided by Mr Edmund Quek, a highly experienced and well sought after economics tutor in Singapore. Mr Quek, the Principal Economics Tutor of Economics Cafe Learning Centre offers economics tuition to A-Level students through his economics tuition centre in Bishan. Sign up for his economics tuition class today to benefit from his teaching. Here, I will provide a simple example to measure the impact of GST on the rich versus the poor in Malaysia. To the lowest income households in Malaysia, with an average monthly income of RM605, the GST burden as a percentage to their income is about 2.35 per cent. In contrast, the GST burden as a percentage to their income is only 1.32 per cent to the highest income households with an average monthly income of RM30,815.

Same as other taxes, the implementation of six per cent GST in Malaysia had undoubtedly dampened the spending by Malaysians, especially the poor. The removal of GST should boost consumers’ spending and stimulate Malaysia’s economic growth.

Higher Consumer Spending and Economic Growth

Consumer sentiment in Malaysia has been gradually improving, up to 91.0 in the first quarter of 2018, as compared with 76.6 in the previous year. The Malaysia government’s decision to remove GST will further raise consumer’s sentiment and fuel household spending. Analysts have expected that the removal of six per cent GST will bolster consumers’ spending by 8.2 per cent, as compared with the previous forecast of 6.5 per cent. Apart from higher spending from within the country of Malaysia, the removal of GST is also expected to attract consumers from neighboring countries like Singapore.

In addition, the populist move by the newly elected government is also expected to lead to higher quarter-on-quarter GDP growth in Malaysia this year. In consultation with your economics tutor in economics tuition, explain how higher consumer spending leads to higher GDP growth.

On the flip side, the removal of GST in Malaysia has also raised concerns about the country’s growing national debt level. Rumors have spread about a new Sales and Services Tax to replace GST. Let us await in anticipation future developments.

Linda Geng

Click to Read Next Post

 

economics tuition, back to homepage

Economics Tuition Singapore @ Economics Cafe
Principal Economics Tutor: Mr. Edmund Quek