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be naturally progressive” . In Malaysia, GST should
not be considered in isolation to the taxes that it is
replacingwhichmay be equally (ormore) regressive.
In addition, GST tends to have multiple rates which
are justified for equity reasons in developing
countries on the grounds that social safety nets are
typically not as well-developed as in high income
countries. As a result, “essential” goods such as
basic food, piped water and the first 200 units of
electricity consumption to domestic consumers
are zero-rated under the Malaysia’s GST. To further
lessen the GST impact on the poor, services such
as health, housing, public transport and education
are treated as GST exempt. Apart from not taxing
necessities, by setting the GST threshold at a level
where small businesses are excluded to account for
the tax, the low income households are somewhat
free from the burden of GST. The reason being,
low income households tend to purchase a larger
proportion of goods and services from the small
retail sector in the rural areas where the goods are
either not taxed at all, or are more lightly taxed.
Whereas, the higher income households purchase
goods and services in retail outlets in the urban
areas that are likely to fully comply with the tax
rules. As a result, the share of consumption subject
to GST for higher income households tends to be
greater than that for the poor.
Lately, we have seen many articles which basically
criticized Malaysia’s model of GST as being
regressive. Notably, some critics have made
presumptions that the poor will be taxed higher
than the rich, an income earner of less than RM2,000
would now have to pay taxes in the form of the GST
where it is going to eat into his household debts
and the assumption of the Gross Domestic Product
(GDP) to fall in 2014. The question is, is this true?
MALAYSIA
FOCUS
| December 2014
5
IS MALAYSIAN GST REGRESSIVE?
GST is to modernize
our tax system and
to overcome the
inefficiency of the
indirect tax system in
the country