Malaysia is implementing a goods and services tax (GST) in April 2015. Some people believe that it will have an extremely adverse affect on Malaysians and on the economy. Others believe there will be a 6 month slump, then things will normalize.
Rather than debating the effect of GST, I prefer to compare the experience of our neighbouring country, Singapore.
Singapore first implemented GST in 1994 despite vocal protests from consumer groups:
- 3% GST on 1 April 1994
- 4% GST on 1 Jan 2003
- 5% GST on 1 Jan 2004
- 7% GST on 1 July 2007
Now lets look at the affect on the Singapore Stock Market, taken from forecast-chart.com:
Surprisingly, I can see only minimal affect on the stock market.
Perhaps the answer to this is that Singapore government implemented GST during periods of high growth? The following chart, which plots Singapore’s GDP per capita appears to support this view:
Singapore also attempted to reduce the affects of GST on low income groups by cutting the income taxes and offset payments such as increasing subsidies for public housing and medical expenses. Despite protestations from NGOs and social activist groups, it appears that Singapore’s GST implementation was a success.
Forecasting the Effect of GST in Malaysia
Now how does this apply to Malaysia?
The Royal Malaysian Customs and the Finance Ministry have done research on the impact of GST. They estimate that the tax burden as percentage to expenditure for a household income of RM2,000 is only 2.59% (or RM 52/month) whereas for a household income of RM12,000 is 4.14%. These concur with my own calculations.
The percentage of Malaysians who pay income tax is extremely low (1 million according to NST), about 3% of the population. In contrast the percentage of Singaporeans who pay income tax is about 33% (see The Star):
1. RM300 one-off cash to BR1M recipients as household assistance. Token sum only as GST is forever.
2. Individual income tax rates reduced by 1% to 3% to increase their disposable income – 300,000 tax payers will no longer pay tax. Not relevant as the poor don’t pay taxes.
3. Families of RM4,000 household income will no longer pay tax. Not relevant as the poor don’t pay taxes.
4. Cash assistance under the BRIM is increased from RM500 to RM650 in 2014 and to increase it further in 2015. This suggests that for low income groups, the cash assistance will fully offset any GST for 2014-2015.
5. Chargeable income subject to the maximum rate of exceeding RM100,000 will be increasing to exceeding RM400,000. Current maximum tax rate of 26% will be reduced to 24%, 24.5% and 25%. Not relevant as the poor don’t pay taxes.
Conclusion
Due to small income tax collection base (1 million taxpayers), GST will be a strong boost to government revenues.
If implemented correctly, it appears that the Malaysian GST will also act as a effective dragnet for tax evaders and illegal immigrants who pay no income tax. The payments made to BR1M recipients will offset most of the GST’s impact on the poor.
However will this GST cause a general feeling of unrest among the rakyat? Quite likely this will provide much ammunition for the political opposition. I also forsee be a spending binge in early 2015 before GST is implemented, and a retail slump until the 2015 Raya holidays.
Companies that provide credit terms will have more cash flow problems due to the need to pay Customs before receiving payments. It will be more common practice to charge interest for late payment. The stock market will be more volatile, and shares in companies that produce discretionary products such as alcohol, cigarettes, candy will take a beating. IT and accountancy service shares will surge in value.
Lastly, the Singapore government rolled out GST with tail-winds as the economy was doing reasonably well. Let’s see if the Malaysian government has similar good fortune. If GST is rolled out when the economy is moving into recession, or the implementation is poor, there will definitely be unrest.
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