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MALAYSIA
FOCUS
| December 2014
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FOCUS
Introduction
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
IS MALAYSIAN
GST REGRESSIVE?
By Dato’ Sri Khazali bin Ahmad
Director General of Customs,
Malaysia