Implementing Goods and Services Tax in Malaysia

Authors: Dr Lim Kim-Hwa, Ms Ooi Pei Qi

The Government has considered introducing the Goods and Services Tax (GST) several years ago. However, to date GST has not been implemented. In this paper, we: 1) evaluate the likelihood of GST being introduced in the upcoming Budget 2014; 2) study the impact of GST on Malaysian households; 3) assess if GST is a progressive or regressive tax; 4) estimate the total GST raised from households in perfect condition vs. realistic circumstance; 5) estimate the expected inflation spike based on the Consumer Price Index; 6) discuss the wider implications of implementing GST; and 7) assess several permutations in implementing GST.

Despite setting essential items like basic food, public transportation, education and healthcare as exempt or zero rated items, we show that GST is a regressive tax. Using 6% as the standard GST rate, the average household is expected to pay 2.52% of monthly income as GST (RM 90 per month in July 2013 values).

Households will pay higher percentage of their income as GST if they are:

- middle and low income groups (with those earning around RM 2,500 per month paying 2.63%)
- engaged as technicians, clerical and services workers, farmers and fishermen
- in single person household
- in young households (less than 24 years old)
- Bumiputera-led households
- households residing in Peninsular Malaysia.