kheru2006 (kheru2006) wrote,

GST and the sandwich class

Mixed forecast on how the new tax will affect middle-income households next year

THE jury is still out on whether the sandwich class will be hardest hit when the goods and services tax (GST) is implemented in April next year.

The Penang Institute reckons that low- and middle-income households will bear a higher GST burden than high-income households. Its CEO Dr Lim Kim Hwa and his colleagues estimate that the lowest-income households, earning RM605 per month, will be paying 1.71% of their income as GST and middle-income households, earning RM2,580 per month, will be paying 2.01% of their income.

They calculate that the highest-income households, earning RM31,850 per month, will only be paying 0.96% of their income as GST.

In a press statement after Budget 2015 was announced, they noted that low-income households would receive 1Malaysia People’s Aid (BR1M) exceeding the amount of GST they would have to pay. That should leave them with additional cash of between RM607 and RM828 per year, they estimate.

The high-income households will receive income tax savings through tax cuts which will exceed the GST payable, they said, giving them additional cash of RM4,296 per year. But the middle-income households would feel the squeeze, they claimed, as they would neither receive BR1M nor benefit much from income tax cuts, but would have to pay a larger portion of their income as GST. They estimated that households with income between RM55,000 and RM110,000 would end up with about RM708 less cash per year.

Progressive tax

Royal Malaysian Customs Department GST director Datuk Subromaniam Tholasy disagrees. By his calculations, GST will be a progressive tax – with the high-income households paying the largest proportion of their income. For a family with a monthly household income of RM2,000, he estimates that GST will make up 2.35% of their expenses. For a household earning RM4,000 per month, GST would be 3.55% of their expenditure and for a family with an income of RM8,000, GST would make up 3.67% of their expenses.

But, Subromaniam stresses, GST is a consumption tax based on spending – and should be measured in terms of consumption and not in terms of income. “Low-and middle-income earners are unlikely to spend more on basic items that are not GST zero rated,” he points out. “It is usually the wealthy who spend on luxuries.”

And, he adds, many have grossly ignored the discount effect of the sales and service tax of between 5% and 10% that will be abolished when the GST of 6% is introduced.

Tags: business, gst

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