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| December 2014




A broad based tax, such as goods and services tax is

generally considered to be a regressive tax. Before

we go further, let us understand what regressive

actually means. In simple terms, a regressive tax

imposes a greater burden (relative to resources)

on the poor than on the rich — there is an inverse

relationship between the tax rate and the taxpayer’s

ability to pay as measured by assets, consumption,

or income. Any consumption taxes including the

Goods and Services Tax (GST) generally regarded as

regressive because the poorer households spend a

greater proportion of their income on consumption

compared to higher income households. The issue

of regressive nature of any consumption tax is often

a serious concern to the policy makers. Despite the

regressive nature of tax, GST or better known as

VAT (Value Added Tax) has been introduced in more

than 160 countries in the world.

Experience of Other Countries

Over the years, many developed countries such

as the United Kingdom, Australia, Germany and

Spain have experienced a regressive nature of VAT

amongst the lower, middle and higher income

groups.The reason for this is theminimal zero rating

of basic essentials and exemptions that have been

practised by these countries when implementing

the VAT. For example, a study conducted on the

distributional impact of the VAT / indirect tax

package in Australia showed that the VAT impact

was equivalent to a burden of 4.4% of income for

the bottom 20% of households compared to 1.4%

of income for the top 20% of households. The result

was the same for Japan, Colombia and Peru as the

VAT was found to be regressive, with little effect

from exemptions.

On the other hand, several developing countries

such as Vietnam and Ethiopia have experienced

progressive VAT as they adopted the zero

rating of basic essentials and exemptions when

implementing the VAT. In Pakistan too, the VAT

was found to be progressive owing to exemptions

(especially of in-kind consumption)

Is Malaysian GST Really Regressive?

The introduction of a GST often raises the concern

that it is a regressive tax, meaning that the tax

represents a higher burden for lower-income

households. “A broad based consumption tax,

such as a value added tax or GST, is generally

considered to be a regressive tax. This conclusion,

however has not taken into account the fact that

in developing countries the commodities on which

poor households spend most of their income, is

not taxed. When this factor is considered, VAT can



By Dato’ Sri Khazali bin Ahmad

Director General of Customs,