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This article first appeared in The Edge Malaysia Weekly on April 9, 2018 - April 15, 2018

IT might be natural to think that the Goods and Services Tax (GST) is regressive, where the burden on the poor is heavier since they pay the same amount of tax as those who earn a lot more. And it is hard to escape the tax net.

The reality, however, could be different.

Granted, the bottom 40% of the population (B40) are adversely affected by the extra tax that was introduced in April 2015, but they may not be the hardest hit.

The B40 have benefited from various forms of aid, such as cash transfers under the 1Malaysia People’s Aid (BR1M) and a special one-off cash assistance for BR1M recipients in 2015 during the “GST transition period”.

On top of that, more than 20 different food groups and basic necessities have been zero-rated, making the list of GST-exempted supply the longest in the region, if not the world.

“We can’t definitively say that the B40 are worse off because of GST since the list of zero-rated supply makes the tax less unfair to them,” says Adli Amirullah, an economist with the Institute of Democracy and Economic Affairs.

He opines that the list is enough to cover basic necessities that must remain affordable for the B40, such as livestock, meat and poultry, fish, salt, cooking oil and rice.

Moreover, says Adli, compared with the middle and high-income earners, the B40 spend a significantly larger portion of their income on food and non-alcoholic beverages, the prices of which have shown no discernible spike since GST was implemented (see chart).

According to Customs Department Director General Datuk Seri Subromaniam Tholasy, internal studies done before the implementation of GST showed that low-income households spent 33% of their monthly income on “basic food” compared with less than 9% for high-income households.

“The zero-rated supply list has taken care of the low-income earners,” he tells The Edge. “Some 67% of their consumption is not taxed. For example, we don’t charge GST on water or on the first 300 units of electricity.”

However, others have different views on the matter.

“Everyone is affected by GST, whether you are in the top 20% or the bottom 40%, depending on what you consume,” says Socio-economic Research Centre executive director Lee Heng Guie.

Although there is insufficient data to determine the precise impact of GST on the B40, Lee says they are not entirely exempt from paying the tax as they may choose to occasionally eat out and shop for new clothes.

Dr Yeah Kim Leng, professor of economics at Sunway University Business School, says: “If we assume that half of the spending by low-income households, which are not paying income tax, is subject to GST, then they will be contributing about 3% of their total income to GST revenue.”

He notes that while zero-rated supply is intended to reduce the regressive impact of GST on low-income households, such goods and services are also consumed by the rich. “It could be more equitable and efficient to offset the regressive effects on the low-income households through direct income transfers, as have been implemented through BR1M.”

 

The most hurt

The middle-income conundrum — too rich to receive government aid but too poor to frequent favourite restaurants on a regular basis — has become more obvious since the implementation of GST. The rising cost of living, which is fuelled by a combination of factors, including weaker purchasing power due to a weakening ringgit, has made it worse for this group.

The middle 40% of the population (M40), especially the lower middle-income households earning between RM3,000 and RM6,000 a month, could be the biggest losers.

Eating out is a source of strain for the M40, which spend a bigger chunk of their income on food away from home compared with the B40 and even the top 20% (T20) of Malaysians. A 2016 Household Expenditure Survey by the Department of Statistics shows that people in the middle-income group, who earn an average of RM6,502, spend 11.2% of their monthly income on eating out compared with 9.7% for the B40 and 10.7% for the T20.

Unfortunately for the middle class, the price of eating out increased more on average in 2015 and again in 2017 compared with the prices of basic food items. Data compiled by the Khazanah Research Institute (KRI) shows that on average, the prices of food away from home grew 3.95% while that of basic food items grew 3.68% in 2015.

And despite lower-income households spending a larger percentage of their monthly income (25.5%) on food compared with the M40 (19%), the latter pay higher prices for groceries that are not zero-rated.

A closer look at the KRI data shows that the prices of chocolate, sweets, honey and jam rose sharply after GST was imposed in 2015 compared with no change in the price of sugar, which is zero-rated.

The M40 have to think twice about buying that box of imported chocolates or pack of quinoa.

On top of that, says Yeah, the middle-income households also have to pay income tax, thereby increasing their overall tax burden.

A person earning RM3,500 a month would have a chargeable income of RM26,180 after accounting for tax relief of RM15,820 (inclusive of medical insurance and Employees Provident Fund contribution). He would be entitled to a tax rebate of RM400 as the chargeable income is below RM35,000. He will need to pay an income tax of RM59 at an effective tax rate of 0.1%.

Meanwhile, someone earning RM6,500 a month, whose chargeable income is RM58,500 after accounting for tax relief of RM19,500, may end up paying an effective tax rate of about 4.82% or RM3,760.

“The M40 are the ones who must change their consumption patterns and cut back on certain luxuries,” Adli says, adding that fresh graduates, especially, are among the most affected.

He points out that at least half of (the M40’s) expenditure is on basic needs, such as housing and food. The rest is on things like their daily mode of transport and telecommunications, which are subject to GST.

“These may not fall under basic needs like food and shelter but they cannot be neglected; you still need them to survive in the city,” Adli explains.

The M40 urban folks are expected to feel the heat even more. Compared with their rural counterparts, these households spend a much larger portion of their income on items that are subject to GST, including transport, utilities, healthcare and education, the Department of Statistics survey shows.

Although there is nothing wrong with this group of people preferring pricier food, for instance, they need to ensure that they can afford it, Adli says.

But is GST the root cause of the price increases?

 

Soft ringgit driving up prices

It is unfair, however, to blame just GST for the increase in prices and the higher cost of living in Malaysia. Stagnant wage growth and higher house prices could be other factors that influence what people can afford these days, says Adli.

More importantly, after GST was implemented in April 2015, the ringgit depreciated to a record low of 4.415 against the US dollar that October.

According to Subromaniam, an internal regression analysis by the Customs Department shows a 70% correlation between the ringgit and the price of crude oil, which had fallen from about US$60 per barrel in June 2015 to under US$27 in early 2016.

The weak ringgit made imported goods more expensive at the time, he explains.

“It doesn’t make sense to say that GST increases the cost of living,” says Subromaniam, adding that indicators such as the CPI indicate that things have stabilised.

An economist with a local bank points out that the prices of certain goods should not have increased but fallen instead as certain taxes, such as the Sales and Service Tax (SST), were removed. “Traders who benefited from lower costs at the time could have cut their prices and passed on the benefits to consumers.”

For example, the 10% SST was replaced by the 6% GST. Given the lower tax rate, the prices of many taxable consumer items should have come down theoretically.

Yeah concurs, saying that the lingering issues over the implementation of GST include unscrupulous traders either not filing for GST or profiting by keeping their prices high.

Some quarters observe that opportunistic traders had taken advantage of the Price Control and Anti-Profiteering Act that was enforced in January 2015, three months ahead of the implementation of GST.

These traders increased their prices before the Act came into force, and have had a lucky escape.

Adli, however, explains that prices are typically “sticky downwards”, meaning that they are much less likely to fall than to rise. “The Ministry of Domestic Trade, Cooperatives and Consumerism has been cracking down on many of these traders,” he adds.

 

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