2.

On the same principle that a tax on corn would raise the price of
corn, a tax on any other commodity would raise the price of that
commodity. If the commodity did not rise by the sum equal to the
tax, it would not give the same profit to the producer which he had
before and he would remove his capital to some other employment.
Write an essay that considers the above statement by David Ricardo
in Principles of Political Economy and Taxation in reference to the
proposed Goods and Services Tax (GST) to be introduced in Malaysia
with effect from 1 April 2015. Do consumption taxes always work in
this way? What are the desirable and undesirable characteristics of
such a tax?

Tax on corn will raise the price of corn. Yet, even if the corn has risen by the
sum equal to the tax, the producer will not get the same profit as which he
had before, in an overall view. As price and demand are negatively related, a
corn producer will ultimately suffer from loss of profit when demand falls as a
result of tax imposition.
Consumption taxes are indirect tax, for which the tax will be collected by an
intermediary from the person who bears the ultimate economic burden of the
tax1. The ultimate tax burden bearer as mentioned can apparently refers to
the buyer who pays for the tax, yet indirectly refers to the intermediary
himself who had also suffered from the tax consequences. Thus,
implementation of new consumption tax is critical, as it has to ensure that
the new tax system could generate benefits in excess to its costs and
consequences suffered by many parties.
Goods and Services Tax (GST) is nothing new to the world of indirect tax, as
most developed countries had introduced similar kind of value-added tax and
proven its effectiveness. This multistage consumption tax is designed to tax
on the value added amount at every stage of production process, to ensure
that goods and services will not be taxed more than the standard rate of 6%
as announced by the government. Thus, customers can enjoy the fair pricing.
In comparison with Malaysia current practice of Sales and Services Tax (SST),
double taxation may occur when both of the sale and service taxes apply to a
same supply. Although Sales Tax are merely imposed at manufacturers level
and prescribed to tax on single stage only, yet a licensed manufacturer
cannot be guaranteed to obtain tax-free materials from other manufacturers.
They are required to apply for exemption, either through the Ring System,
Refund System or Credit System which involves different procedures and
hence causes administration difficultty.2

In contrast, GST system practices a more clear and concise process. A

registered person, who incurred input tax on purchases, can offset it against
output tax on sales and remit only its difference to government 3. This will
help eliminate double taxation and tax cascading, while enabling government
to improve collection of revenue in a manner that is more comprehensive and
effective. Moreover, this self-policing mechanism possessed an in-built cross
checking feature that would probably improve tax compliance. Tax invoice is
to be issued for each sale by a registered person to create a paper trail,
making the system harder to defraud 4. Both supplier and purchaser require a
copy of the tax invoice to claim for their output or input tax credit. This is
where the cross checking occurs. Taxpayers are also compelled to maintain
orderly accounts and hence there is less scope for tax evasion.
In consideration to the effect of GST imposition, Malaysia Government has
prepared to make a concession on reducing corporate and individual tax rate,
so to relief the additional tax burden borne by the people. Once direct tax has
gradually shifted to indirect tax, government tax base will probably increase
as GST system can help reaching out to a broader group of people. In fact,
this is the best alternative for government to expand its sources of revenue
as the country can no longer be dependent on direct taxation since only
minority of the workforce is eligible to pay income tax, nor can the
government relies on oil receipts which will not be sustainable in the future.
The similar tax restructuring strategy had long been adopted by Singapore
Government on the recommendation of Economic Committee, since the year
of 1994 5. Its purpose is mainly to shift its reliance from direct tax to indirect
tax. Undeniably, lower rate of direct tax will foster investment and stimulate
people to increase income, thus causing economic growth in long term. On
the other hand, increase of consumption tax will effectively encourage
savings instead of consumptions. Therefore, Singapore is able to maintain its
competitiveness in the global market after the tax reform. In consideration of
these factors, Malaysia Government has sufficient rationales to implement
GST.
In fact, current Sales and Services Tax which stand at the rate of 10% and 6%
respectively will be abolished and replace by tax rate of 6% upon introduction
of GST system, which may result in reduction in price of certain taxable items
due to lesser tax paid. However, many non-taxable items under current SST
system will probably be subjected to 6% tax once GST put into effect, due to
the fact that Goods and Services Tax is a broad based tax that said to cover
everything under the sun. As the main purpose of tax reform is to increase
government revenue, this patently means that more tax has to be paid by the
taxpayer. Therefore, it will be unreasonable to claim that implementation of
GST system will not burden the people. Although the concession has made to
lower the rate of some direct taxes, yet it does not help alleviate the tax

burden borne by people of certain social classes. This is due to the reduction
of individual or corporate tax rate will bring more benefit to the higher
income group, whereas increase of consumption tax will affects more on
lower income group, as their share of consumption in total income is larger.
Consequently, poor people will be suppressed more by the new tax system.
However, in addressing this matter, GST system had encompassed different
tax treatment for standard-rated, zero-rated and exempt supplies to ensure
that certain essential items will be exempt or excluded from tax 6. Basic
necessities such as foodstuffs, livestock supplies, agriculture products etc.
are categorized under zero rated supplies, which consumer will literally pay
GST at a rate of zero percent. Besides, exempted goods and services that
include public transport, highways toll, private healthcare and education,
and residential property will only be taxed on input but not supplies.
Theoretically, consumers will not suffer from tax consequences when they
expense on essential items.
Yet, a drawback on this inherent feature of GST system is that it increases the
complexity and probably the compliance and administrative costs. Generally,
zero-rated supplies are goods and services that have no tax charged on
consumers, as firm can claims credits for its inputs and charge no tax on
outputs. However, exempted supplies had included input taxes. Producers of
exempt supplies do not receive a credit for the GST incorporated in their
input costs and charged no tax on their outputs 2. Hence, price might increase
by a little to compensate the extra costs incurred. In short, exempt supplies
will still conceal some GST under the price tag, but at a lower effective rate in
comparison with the original 6%. This might give rise to transparency
problem as the effective tax rate of exempted supplies will go untraceable by
the public. In a more critical situation, traders might take advantage of
consumers by using GST as an excuse to raise the price of goods for the
purpose of making excessive profits.
In fact, many countries after implemented GST system had experienced an
overall inflation on goods and services. Besides the reason as mentioned,
inflation can also due to high cost of compliance borne by businesses when
dealing with new GST system. For instance, a registered business will need to
incur training costs or acquire new accounting software to account for GST
and file in the returns. Failure to submit the returns within certain timeframe
will then results in penalties or loss of input tax credit, thus causing the
business to be less competitive. Although government has proposed to
provide grants and financial assistance to firms during the transition period of
adopting the new tax system, yet firms will still incur those extra costs in long
run. Probably, these costs will be passed to consumers through price hikes, in
addition to the GST imposed. For businesses with annual sales turnover below
the threshold of RM500,000, although there is no compulsory registration and

thus the cost of compliance can be excluded, yet they are not entitled to
claim input tax credit on purchases that have been taxed, nor can the extra
costs be recovered through charging GST on the taxable supplies. Hence,
these businesses will either choose to increase their product price or
voluntarily register under the GST system, which will anyhow result in
inflation.
Its an undeniable fact that GST system will cause one time price hikes to
most supplies once implemented, owing to its broad based tax feature. Its
implementation can never be detached from the economic consequences
that it is going to bring about. As price of goods and services ascent, an
individual real income will be lessened, thus causing ones purchasing power
to deteriorate. The same force acted on a corporate, where the real profit will
shrink after adjusted for inflation. Therefore, a business faces the challenge
to keep its gross profit margin ahead of the inflation rate, in order to remain
its profitability. This well explains why a business that does not subject to
input or output tax might also increases their product price, thus add on to
the burden of final consumers.
Yet according to Economy Watch, the introduction of VAT, can never, by itself,
lead to a sustained increase in the rate of change in the price level. Some
economists even insist that this one-time price hike for overall goods and
services caused by consumption tax cannot be defined as inflation, since
there is no continuous increase in average prices over time. However a new
tax system will never stand-alone by itself, as well as the GST system that is
soon to impose. The potential tax consequence can be varied base on many
other economic factors. If consumers react passively to the arbitrary price
increase by firms, the price hikes will definitely grow more severe. Contrarily,
governments effective controls and policies will tend to reduce the inflation
to normal rate. Yet in fact, even though inflation may taper over time, the
GST system will anyhow increase the cost of living if overall incomes do not
keep pace with the tax hike and price increase.
In short, GST is a potent tax system that will help a country to boost its tax
revenue and rein in national deficit, if and only if, it is effectively
implemented. Be that as it may, there are many underlying challenges to its
implementation. The complex process involves in auditing the paper trail will
probably elevate the risk of return losses, as experienced by many developed
countries. Besides, firms will tend to fraud by underreporting sales or
conducting underground businesses to avoid being taxed. Potential inflation
might also lessen consumption and caused a sharp fall in GDP, thus
diminishing tax revenue. Hence, Government must prove that its measures to
react with these problems will be effectively performed as claimed.
Otherwise, revenue increased by GST imposition will not be sufficient to cover
its high cost of implementation, nor will it able to promote social

development in compensation to the tax consequences born by general

public.
As proclaimed by Prime Minister Datuk Seri Najib Razak, while likening GST to
antibiotics, In the journey for the country's transformation, we need to
swallow the medication and be confident that the outcome will benefit all of
us and see a successful nation 9. Indeed, taking medicine is necessary for
one to recover from illness, yet identifying its causes is similarly essential,
since prevention is better than cure. As a matter of fact, Malaysia is
financially sick due to the excess government spending, subsidization and
perhaps other factors of inefficiency. Although GST itself is a favorable tax
system to be implemented, yet its implementation by government should
always be questioned and challenged to ensure its effectiveness. Thereby,
GST system will be used to generate maximum revenue to lessen the
national deficits as well as support countrys growth, not against loss to
corruption.

1.
2.
3.
4.
5.
6.

http://en.wikipedia.org/wiki/Indirect_tax
Text book
http://gst.customs.gov.my/en/ib/Pages/ib_pay.aspx
http://www.gst.gov.bz/downloads/what_is_gst.pdf
http://en.wikipedia.org/wiki/Goods_and_Services_Tax_(Singapore)
http://www.freemalaysiatoday.com/category/nation/2014/05/05/gst-willnot-burden-rakyat-assures-najib/
7. http://www.cch.com.my/MY/MiscPages/MiscPage.aspx?ID=844
8. http://gst.customs.gov.my/en/rg/Pages/rg_con.aspx
9. http://www.malaysiakini.com/news/261835
10.https://www.pwc.com/my/en/assets/press/july2013-consult-the-experts(gst).pdf
11.
http://savemoney.my/gst-in-malaysia-how-the-goods-and-services-tax-affectsyou
http://gst.customs.gov.my/en/rg/SiteAssets/specific_guides_pdf/Revised/TAX
%20INVOICE%20AND%20RECORDS%20KEEPING%20revised%20as%20at
%20301013.pdf
http://gst.customs.gov.my/en/ib/Pages/ib_pay.aspx
http://en.wikipedia.org/wiki/Goods_and_Services_Tax_(Malaysia)
http://www.gst.com.my/what-is-gst-goods-and-services-tax.html#GST-scope
http://www.theedgemalaysia.com/first/186247-vat-or-gst-and-itsimplications.html
http://www.nbc.com.my/blog/gst-main-cause-higher-inflation-2015/
http://www.pwc.com/my/en/assets/press/july2013-consult-the-experts(gst).pdf