Impact of goods and services tax and redistribution among households in Malaysia

Goods and Services Tax (GST) is imposed on goods and services. It has been implemented in most of the 160 countries in the world. Taxes are part of the government revenues and Malaysia rely more on the direct taxes particularly on petroleum income tax. However, the volatility of the oil prices gives an impact on the government revenues. As a result, government introduce GST to cushion the impact of volatility of the decline in oil-related revenue as this consumption tax is positive for fiscal strength. Nevertheless, the main question is whether the GST has led to a price increment directly caused the cost of living to increase as well. Because of this fact, the main goal of this study is to estimating the impact of GST on price and the cost of living in sustaining the economic performance in Malaysia. The introduction of GST with multiple rate is the alternative to make GST less regressive and this fact influenced the price changes and the cost of living in term of the amount of households’ expenditure from GST. Hence, this study aims to: (i) measure the impact of GST on the changes in price of goods and services; (ii) evaluate the impact of GST on the cost of living by different categories of households; (iii) determine the distribution role of zero-rating and exemptions of GST on goods and services by comparing with flat rate. Input-output method was used to achieve the objectives of this study since prices are determined simultaneously and mutually, therefore all commodities and factor markets are all together in equilibrium. The data for this study are input- output table 2010 consists of 124 commodities in economic activities and household expenditure survey (HES) 2014 that consists the data of 14838 households. Notably, the GST variable was identified as item “taxes on products (domestic)” in the input-output table. This study measured the price impact of GST using input-output price model. From the result of the analysis, it concluded that the impact of GST on price is recorded a significant price reduction of 0.63 per cent on all goods and services. This significant price reduction from GST throughout supply chains up to reduce the increasing cost of living. Meanwhile, the impact of cost of living illustrated by the average monthly expenditures reduction by different categories of households including income group, strata and ethnicity. Results show that income groups (T20, M40 and B40) benefit from the GST with the percentage expenditure reduction of 0.67, 0.71 and 0.74 respectively while at the hand of strata (urban-rural), the percentage expenditure reduction are 0.69 and 0.74 separately and also the percentage expenditure reduction between ethnicity (bumiputera and non-bumiputera) indicated amount of 0.71 and 0.68 accordingly. Furthermore, the distribution role of zero-rating and exemptions shows by price reduction of 0.63 per cent contrary to the flat rate shows the huge price increment about 9.39 per cent of total economy. In brief, the impact of GST on price and cost of living is relatively positive for the economic performance besides the supplementary measures such as zero- rating and exemptions appear for the less regressive of GST. In addition, this study output would be a great measure to assist policy-makers in evaluating the effectiveness of GST as a redistributive policy to macroeconomic problems. Nevertheless, the findings from this study did not reflect the real situation as the study only focuses on the impacts of the consumption tax. Hence, the impacts of other cost-push components such as subsidy rationalization, currency depreciation and monopolistic market structure reflected as limitation for this study. Therefore, future researcher could, for instance, investigate how these cost-push components may affect the GST performance in the economy.

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