Home 2010: 1 Action stations! “No” to the regressive GST!

Action stations! “No” to the regressive GST!

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Malaysians could suffer even more with the introduction of the Goods and Services Tax (GST). GST-driven inflation would be a calamity that the struggling lower-income group could do without, says Jeyakumar Devaraj.

The Barisan Nasional Government has decided to push ahead with the regressive GST (the Goods and Services Tax). The GST Bill was tabled in Parliament at the end of the Budget sitting that ended on 17 December 2009. At its first reading, the bill was just mentioned, but there was no explanation of the bill or any debate. The second reading is when the bill is open for debate and proposed amendments. This may come as early as March 2010 for the GST Bill. Once approved at the “second reading” – and this is a certainty given the BN majority in Parliament – the new tax can be implemented as early as 2011.

The government has already started its propaganda in support of the GST bill. The front page of the Sunday Times on 20 December, for example, had these headlines: “BIGGER $avings – Pay less for phone bills, food and beverages under the GST.”  It is therefore very important that we put the facts clearly before the Malaysian public.

A regressive tax

First, the GST is a regressive tax in that it burdens the ordinary rakyat more than the richest 20 per cent of society. The adjacent table lists the government’s tax revenue for 2008 which contributed RM112.9 billion or 70 per cent of total government revenue.

Government Tax Revenue in 2008

  • Personal Income Tax             RM 15.0 bil
  • Company Tax                         RM 37.7 bil
  • Petroleum Tax                       RM 24.2 bil
  • Export and import duties       RM   5.4 bil
  • Excise duties                         RM 10.7 bil
  • Sales and Services Tax         RM 11.7 bil

As shown in the table, the biggest source of tax revenue is company tax, which at 26 per cent of declared profits currently brings in RM37.7 billion into government coffers. Petroleum tax makes up the second biggest tax item while the tax levied on the 1.5 million individuals who are now currently paying personal income taxes in Malaysia makes up the third biggest. All these taxes are deemed progressive for they tax the richest individuals and the companies that are making profits. Progressive taxes do not burden the poorer sectors of society. Progressive taxes tend to equal out income differences between the rich and the poor in society.

Regressive tax regimes, on the other hand, burden the poor. Sales taxes are generally regressive as they tax consumption and not income. But sales tax in Malaysia has different rates for different types of goods and the government can make them less regressive by levying sales taxes exclusively on good that are consumed by the richer sectors of society such as expensive cars, big houses, overseas travel, expensive restaurants and other luxury items.

The Goods and Services Tax, however, is even more regressive for it is levied at a flat rate on a very wide range of products including many items that the poorer people need to buy. It will lead to a rise in prices and will definitely hit the poorest the hardest. The government has been downplaying this effect.  Let us tabulate some of the arguments that the government has been advancing as well as the fallacies behind these arguments.

The government’s spin

Government Argument

Counter Arguments

The rich consume more. Therefore the GST will burden them more. So it is a fair tax.

The rich consume a smaller portion of their income. Lets say a man earning RM10,000 saves or invests 50 per cent of his income, he only pays GST on the 50% that he spends.

The poor tend to spend all their income. So the percentage of their income that they pay to the government as GST is double the percentage of the income that the rich man pays as GST.

Basics like rice, flour, fresh food and medicines will be exempted.

But the inputs into rice production such as fertiliser, electric charges for the milling, plastic for the bags, diesel for transport, electricity for the stores retailing it, will all attract the GST. Therefore the price of rice will go up even though there is no direct tax on rice!

The current sales tax of 5-20 per cent will be abolished.

The current sales tax is more progressive than the GST as it tends to tax luxury consumption.

Another important point is that most governments have introduced the GST at low levels to reduce the resistance to it. But after a few years they hike up the rates. This happened in Singapore – the GST came in at 3 per cent. Now it has risen to 7 per cent. In New Zealand it has been pushed up in stages to 20 per cent!

Malaysia must introduce the GST so that it can attract foreign investments.

Here the government seems to be acknowledging that the GST will slowly shift the tax burden to the ordinary citizens permitting the government to reduce company tax rates.

Investors come in for a whole lot of reasons including a good multilingual work force, good infrastructure, an independent and fair legal system, and clean and efficient government. Why can’t we work on these aspects?


At a panel discussion on the 2010 Budget (reported in NST Biznews B9 on 29/10/09) the speaker from Earnest & Young spoke the truth when he commented that the GST would benefit business. “The strategy would be to start at a low rate and pull it up every few years,” he is reported to have said. “As in most countries with the GST in place, a reduction of corporate tax and personal tax will follow suit.” This then is the real reason that the GST is being brought in – to make Malaysia more “business friendly” by cutting corporate tax (which has already been reduced markedly from the 40 per cent level in 1988 to its current 26 per cent). The tax burden is to be shifted to the marhaen!

60% of populace mired in financial hardship

Monthly Income

% of Households

< RM1,000


RM1,001 – 2,000


RM2,001 – 3,000


RM 3001 – 5000


RM 5001 – 10,000


> RM 10,000


Malaysian income distribution 2007

Source: PM’s Department in an answer in Parliament

The official government position is that Malaysia has virtually overcome poverty. The poverty rate according to the government is now only 2.3 per cent – down from more than 40 per cent in 1976. Very impressive, at least until one finds out that the government defines poverty as household incomes of less than RM720 for a family of five in Peninsular Malaysia!

However in a rare moment of candour, Datuk Raja Nong Chik, the new Federal Territories Minister, opined, “If you have three children and your household income is less than RM 3,000, you are almost at the poverty line.”

“The number of urban poor and slum dwellers in the cities is rising” he added. (The Star, 26 October 2009, N14). If the Minister’s RM3,000 level is taken as a cut-off point, then the level of poverty in Malaysia is still about 58 per cent – not much better than that of the 1970s.

The inflation that would be unleashed by the implementation of the GST would  aggravate the economic problems of the families earning less than RM3,000.

Curbing waste and corruption first

The Government says that we have a large budget deficit and the national debt is growing. This is why the country needs another tax – according to government estimates, the a GST of 4 per cent will bring in RM11 billion per year at the current level of consumption. But what about the wastage and the leakage of public funds into the pockets of the well connected. We have heard of RM25 screw-drivers being bought through tender at a price of RM200; commissions running into millions of ringgit for the purchase of Sukhov jets and submarines; and billions swallowed in the PKFZ scandal. The sums involved are astronomical! Then we have newly built hospitals that cannot be used, court room complexes with ceilings about to collapse and stadium roofs that collapse in the absence of even a small earthquake! Wastage and leakage of public funds make up a significant portion of the federal budget.

The Federal Government Budget for 2010 came to a total of RM196.3 billion, with the breakdown as follows –

Operating Expenditure

  • Emoluments                       RM42.2 bil
  • Services and supplies        RM20.8 bil
  • Grants and charges           RM73.9 bil

Development Expenditure RM 53.2 bil

If it can be assumed that the true costs of the provision of services and supplies as well as the development expenditure are unreasonably inflated by an average of 30% by the crony companies that the government is dealing with (and this is a very conservative estimate!), then a sum of about RM22 billion [(20.8 + 53.2) x 0.30] is being siphoned off from the Federal Government Budget every year.. This sum itself is much higher than the RM11 billion annual revenue that is expected from a GST of 4 per cent.

The amount of wastage due to corruption and incompetency could be much higher than RM22 billion per year if there is also similar misuse of the RM74 billion allocated for ‘grants and charges’ (73.9  x  0.30 = RM22.2 billion!).

This hemorrhaging from Government coffers must be staunched first before the government decides to introduce a tax that will burden the ordinary Malaysian. Failure to tackle these serious leakages from the public purse to private pockets will only encourage those involved or responsible for public funds to continue raiding public funds to produce super-profits for a small number of well-connected companies. We should demand that there be no new taxes until the widespread pilfering of public funds is stopped!

The poorer 60 per cent of Malaysians – those with family incomes of less than RM3,000 per month – are still struggling to adjust to the drop in income due to the effects of the economic slowdown of 2009. (Many workers have lost overtime income. And when  workers’ income shrinks, small-scale businessmen are also affected, as workers make up a large portion of their market.)

At the same time, these poorer families have to contend with price-hikes of petroleum and basic foodstuff. Many of them have had to borrow and are now tottering under the burden of high interest payments. A GST-driven inflation is a calamity that they can do without.

Dr Jeyakumar Devaraj, an Aliran member, is the Member of Parliament for Sungai Siput.

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The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.

AGENDA RAKYAT - Lima perkara utama
  1. Tegakkan maruah serta kualiti kehidupan rakyat
  2. Galakkan pembangunan saksama, lestari serta tangani krisis alam sekitar
  3. Raikan kerencaman dan keterangkuman
  4. Selamatkan demokrasi dan angkatkan keluhuran undang-undang
  5. Lawan rasuah dan kronisme
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