Public Finance

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2.3 Particular design features of GST

Goods and Services Tax (GST), which is also known as the Value Added Tax (VAT) is a multi-stage consumption tax on goods and services (Marcus, 2015). In fact, Malaysia has been implemented GST on 1st April 2015, which was on the same day with April Fool Day. Before the implementation of GST, Malaysia was implemented Sales and Services Tax (SST). SST only levied on selective goods or services. Besides, each of the goods or services has different tax percentage charged, it is means that there is no standard rate of tax charged and the coverage that pays for the SST is small compared to GST. Therefore, the sales tax in its existing form is limited in scope and has a number of inherent weaknesses which has resulted in the Government losing revenue (Marcus, 2015).

So, GST has been introduced to overcome the weakness of SST, which is also broad based consumption type where it is implemented by around 160 countries all around the world (Marcus, 2015). Therefore, GST has replaced the SST. In Malaysia, the standard GST rate is 6 per cent. It is relatively low compared to others ASEAN countries. For example, Thailand and Singapore are charged at 7 per cent of GST (IMF, 2015). Basically, government is playing around with the coverage (Quantity), the tax charge actually remain the same and does not increased. If the coverage that pays for the tax is increased, the revenue of government will increased too. That is why the government wants to implement GST to double the coverage that pays for the tax charged. [pic 1]

Figure 1. The supply from the supplier until to retailer.

Based on the Figure 1, the supply of goods and services at each stages of the supply chain from the supplier up to the retail stage of the distribution is imposed GST. However, the tax element does not become part of the cost of the product, even though GST is levied at each of the supply chain (Royal Malaysian Customs Department, 2013). The input tax incurred at the previous stage is always deducted by the business at the next in the supply chain, no matter how many steps where a particular good and services goes through the supply chain. Lastly, consumers have to pay for the standard tax (6%) for the goods or services that have charged GST. The basic concept of GST is a self-policing feature, which enable the businesses to claim their input tax credit and deduct it automatically through their accounting system. This will make the administrative procedures become more simple and easier on the part of businesses and the government (Royal Malaysian Customs Department, 2013).

Furthermore, some of the basic or essential food items will have a zero tax rate, for example vegetables and chicken, while some services which provided by the government, such as health care, education, public transport will exempt from tax as well. In addition, there are two type of company: GST Company and non-GST Company. The businesses that have annual sales turnover which has exceeded the prescribed threshold of 500,000 ringgit Malaysia (about US$ 160,000) per year have to be registered under GST Company. The registered GST Company can claim the input tax from the amount of GST charged (output tax). On the other hand, the businesses that have annual sales turnover below than 300,000 ringgit Malaysia per year cannot register as GST Company. These types of businesses usually are known as non-GST Company. Non-GST Company cannot claim for the input tax. Therefore, it will cause the cost of the production increases. However, consumer still has to pay the 6 per cent GST tax for the particular goods or services that sale by the non-GST Company.

In conclusion, the implementation of GST depends on the high-level political commitment and the readiness of tax administration. Besides, sufficient time is needed between enacting legislation and implementation the tax. Finally, the time of GST implemented is very crucial to avoid the unstable or shock in the economy and caused the inflation occurs.

2.4 Private sector responses

2.5 Efficiency Consequences

It is a term, where in the economic state all the resources used to serve every citizen in the best performance while minimizing the waste of the resources and to decrease as much as possible inefficiency. While the country’s efficiency is fully adjusted and implemented, any changes will create inefficiency in the economy of that particular country. In terms of production, goods are produced at their lowest possible cost, as are the variable inputs of production.

Efficiency consequences of Goods and Services Tax (GST) can be divided into two parts in order to understand it better, which are Income Effect and Substitute Effect.

Income Effect

In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change will impact the quantity demanded of a good or service. The relationship between income and the quantity demanded is a positive one, as income increases, so does the quantity of goods and services demanded. Which means if one’s income is increased or the price of the goods are decreased, one have more funds to spend and it will create more opportunity to spend more. But, if the income decreases or the price of the goods are increased of has less money to spend and this will decrease the purchasing power of him/her.

Goods and Services Tax is an additional cost, which is 6% to each product, which falls under category of GST goods and services. Meanwhile the income of the all the people, which are living in Malaysia, remains same, the additional cost will of GST will decrease the purchasing power of people. Income effect in current case has changed; even the income remains same after implementing tax it is actually indirectly decreased the income of the consumers.

In the graph (Figure 2.) below shown that the equilibrium price before tax is at point Qe, Pe. Where the supply and demand found equilibrium point naturally, but after government implemented GST the equilibrium point is moved from Qe, Pe to Qt, Pc. At this equilibrium point the price of the goods and services increased from Pe to Pc. While the quantity sold is decreased from Qe to Qt.

Prices are increased in two possible ways; they are GST approach and Non-GST approach. Firstly, the price of the goods will increase, because the goods and services tax paid by consumers directly and it will increase all the goods and services prices to 6%. Secondly, the companies, which are registered under non-GST companies, will pay the tax; in order