Progressive
tax is referring to a direct relationship between the percentage of
income taxed and the size of the income, in short, higher income
entities pay larger fraction of their income in taxed than those
lower income entities.
Whereas,
Regressive tax is referring to an inverse relationship between the
percentage of income taxed and the size of the income, in short,
taxes imposes greater burden on the lower income entities than those
higher-income entities.
There
are many arguments about whether the Malaysian GST is progressive tax
or regressive tax and this is always a serious concern for policy
markers. There are some factors to be considered whether the GST can
be naturally progressive or regressive. First, it has to take into
account the fact that how GST has different impact on well developed
countries such as UK, Australia and developing countries such as
Vietnam. This is because the different on expenditures pattern of
various income groups between the well-developed countries and
developing countries as GST is a consumption tax which mainly based
on spending, higher spending will lead to higher tax charged.
Secondly, the range of exemptions item from GST is one of the factor
that has to take into consideration in deciding the nature of GST
whether progressive or regressive.
Progressive
Tax:
Malaysian
GST is argue to be progressive tax because the lower-income entities
will be protected by the exemptions of essential goods from GST such
as sugar, flour and so on. GST is a consumption tax, therefore the
more they consume, the more they will have to pay regardless of their
income level. Thus, the rich people will have to pay more tax as long
as they consume more due to their stronger purchasing power compare
to the poor people. In order to lessen the GST impact on the poor,
essential goods and other services such as health, housing, public
transport and education are treated as GST exempt, therefore GST
would be the progressive tax as the exemptions of basic needs do not
have much impact on the rich people. Based on the data compiled about
the expenditure pattern of different income level of Malaysians,
lower-income household spend more on zero-rated item and lesser on
items that subject to GST where else higher-income households spends
lesser on zero-rated item and spend more on the items that are
subject to GST. Therefore, tax burden as percentage to expenditure
for rich is much more higher compare to the poor.
Besides,
low and middle income household are unlikely to spend more on non
basic items that are subject to GST and even if they did spend on
its, the volume is not as high as wealthy people because of their
limited purchasing power. Malaysian GST can be a progressive tax
because it is usually the rich is the ones who spend more on luxuries
which is subjected to the GST. In addition, low income households are
tend to purchase basic goods and services from the small retail
sector in the rural areas where the goods are either exempted from
tax or lightly taxed. Whereas, high income households tend to
purchase goods and services in retail outlets in the urban areas that
are fully comply with the tax rules.
In
addition, Government has designed various cash-aid schemes, such as
BR1M (1Makaysia People's Aid) to help the poor by lessening the
impact of GST on the poor. This compensation package is designed to
offset any additional tax burden that might affect the low income
citizen when GST is implemented and government is not taxing or
taxing lightly on the goods and services which the poor spend most of
their income in order to protect the life underprivileged and would
not hurt by the GST.
Regressive
Tax
This
means that the poor will be paying higher percentage of their income
in GST compare to the rich ones and increased prices of the goods
will make the poor suffer further. The poor people would pay more in
GST because they tend to spend 100% of their income on basic
expenses, whereas the rich people pay GST in proportion of their
income only because they spend much smaller proportion on living
expenses in their income proportion and they tend to spend more on
the investments or saving more.
The implementation of GST is to replace the
existing Sales and Services tax (SST), however the poor will be
affected by GST but not Sales and Service tax (SST). This is because
Not many people paying for Sales and Service Tax (SST) on a regular
basis as the Sales and Service Tax (SST) is implemented in upmarket
restaurants & hotels only whereas the GST will tax on daily basis
due to much more goods and services are failing under the
jurisdiction of GST. Therefore the GST is the regressive tax form as
the poor will be taxed under GST even they are excluded under the
existing Sales and Service (SST) system and this certainly will
burden the poor people as their daily purchases will be taxed.
Conclusion
In conclusion, although many people is arguing
that the GST is regressive form, it can be progressive form in the
total fiscal structure as the revenues raised from GST can be
distributed to the poor and lower-income households receive more
transfers than the taxes they pay. Besides, GST is regressive tax
because the poor people will be taxed under GST even they are
excluded under SST, however, there are many exemptions on the basic
goods and compensation package in Malaysia, therefore the Malaysian
GST could be progressive tax as low income households are exempted
from the GST on the basic needs. There are many developed countries
such as UK and Australia have experienced regressive nature of GST as
the minimal zero-rated of essential goods and little exemptions that
have been practised when implementing the GST. Therefore, Malaysian
GST is progressive tax in the developing countries as the government
has designed various of compensation packages and the exemptions of
essential goods from GST to protect the low income households.
