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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?



| December 2014



GST is to modernize

our tax system and

to overcome the

inefficiency of the

indirect tax system in

the country