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Lim Kim- Hwa & Ooi Pei Qi 30 Oct 2013 penanginstitute/gst

“Implementing Goods and Services Tax in Malaysia”. Lim Kim- Hwa & Ooi Pei Qi 30 Oct 2013 www.penanginstitute.org/gst. Structure. Key Issues. Key Issues. Key Issues. Household Impact. Latest Household Expenditure Survey (2009/2010).

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Lim Kim- Hwa & Ooi Pei Qi 30 Oct 2013 penanginstitute/gst

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  1. “Implementing Goods and Services Tax in Malaysia” Lim Kim-Hwa & Ooi Pei Qi 30 Oct 2013 www.penanginstitute.org/gst

  2. Structure

  3. Key Issues

  4. Key Issues

  5. Key Issues

  6. Household Impact Latest Household Expenditure Survey (2009/2010) • Average household pays 3.80% of expenditure or 2.52% of income • 0% rated and exempted items • 6% standard rated items • Clothes & footwear • Restaurants & Hotels • Household equipment • Tobacco & alcohol • RM 90 per month • Essential food • Basic non-value added items • Healthcare • Public transportation • Education

  7. GST rate (%) • Health, Education (0.00%) • Food and non-alcoholic beverages (1.66%), housing, water, electricity, gas and other fuels (1.42%) Spending pattern  GST payment • Transport (5.39%), recreation services and culture (5.73%), miscellaneous goods and services (5.74%) • Restaurants and hotels, furnishing, household equipment and routine household maintenance, clothing and footwear, communication, alcoholic beverages and tobacco (6.00%)

  8. Higher GST burden if you are: • Low and middle income • Single person household • Young (less than 24 years old) household • Bumiputera-led households • Clerical workers, skilled agricultural and fishery workers • Peninsular Malaysia

  9. Calculating GST burden (GSTI)

  10. Income – expenditure relationship (from Bank Negara estimates)

  11. Higher GSTI:Low and middle income household Worst hit: monthly income RM2,579

  12. Higher GSTI:Single person household

  13. Higher GSTI:Young (less than 24 years old) household

  14. Higher GSTI:Bumiputera-led & non-Malaysian household

  15. Higher GSTI:Clerical & services workers, Farmers, Fishermen

  16. Higher GST contribution:Peninsular Malaysia

  17. Our interactive spreadsheet:www.penanginstitute.org/gst

  18. Measures in the Budget

  19. Annual Household Income

  20. Budget’s measures:Income tax cuts, BR1M & GST

  21. Income tax savings + BR1M – GST:Middle income worse off Middle income: worse off

  22. Budget: households with current annual income RM 30k- 150k to pay more tax More tax

  23. Mitigate negative effect on middle income 1: Our proposed income tax rates Bigger cuts at lower income Smaller cuts at higher income Expenditure efficiency improvements to make up any revenue shortfall

  24. Budget vs. Our Proposal:Income tax savings + BR1M – GST Highest income: less better off Middle income: less worse off

  25. Total GST Revenue from Households • Perfect condition: RM 6.5 billion • Simplify tax administration • (GST register if > RM 0.5m sales) • Practical condition: RM 6 billion • GST Fraud? • Realistic condition: Less than RM 6 billion • Simplify tax administration • (GST register if > RM 0.5m sales)

  26. GST RevenueSource

  27. Mitigate negative effect on middle income 2: Make GST less regressive

  28. Why target Transport? Transport as % of income increases as income rises 2% 6.7% 5.8%

  29. Raise same amount of revenue but make GST less regressive? Difficult – middle income groups still pay higher GSTI • Income Tax rate cut, refundable tax credits • Simple, effective tax regime • High GST rate on only some items • Raise billions • Multi-tiered GST • Broaden tax base

  30. Base 6% vs:Multi-tiered, High GST rate on selected items Cannot make middle income pay less GSTI than highest income

  31. GST is a strongly regressive tax • Higher income households still pay lower GSTI • GST is intrinsically regressive • Middle income households still pay higher GSTI • Hence, need income tax reduction, refundable tax credits/rebates

  32. Why was GST predicted to be in the Budget? • High debt • Sovereign: RM 519 billion (Q2 2013) • Household: 80.5% GDP (2012) • Foreigners hold • RM 126 billion • Malaysia Government • Debt • Low US interest rates about to end • Now: 2.6% • 1999-2008: 4.7% • Credit rating downgrade risk • Fiscal deficits since 1998 • First Budget after GE13 GST Introduced • Government’s credibility

  33. Foreigners’ holdings inMalaysia Government Debt Jul 13: RM 126 billion Jun/Jul 2013: Foreign capital withdrawn Jan 05: RM 9 billion

  34. Foreign Capital withdrawnBorrowing Costs Increase (3.4%4%) Jun/Jul 2013: Foreign capital exert significant influence

  35. Significance • Sovereign Debt: RM 519 billion (Q2 2013) Low US interest rates end • Fiscal Deficit Deteriorates • 1% higher interest rate • Credit Rating Downgrade • Slower Economic Growth • Additional RM 5.19 billion interest • Borrowing Costs Increase • Foreign Capital Withdraw

  36. Wider Implications • Inflation per CPI • Spike up 1.32% additionally (ignore secondary effects) Credit rating agencies & foreign capital reassured? • Measures sufficient to insulate Malaysia from QE taper risk? • Economic growth • Higher domestic spending due to BR1M and front loading of spending • Ringgit uncertain • Fiscal reform, wider tax harmonisation • Property prices • Overall effect uncertain Narrowing window for fiscal reform

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