Should GST rate be lowered?

Wednesday, October 19, 2016

Malaysia's fiscal deficit is targeted to be controlled at 3.1% to GDP this year. To improve fiscal deficit, the general idea is to increase income and reduce spending.

 

One who has been following the development of global and Malaysia's economy will understand why the income part is tough. This is also why the government took a stand that GST must stay as it provides the government a fat RM39 billion to spend in 2016. The money can then be spent as injection to the economy.

 

Contrary to the beliefs of some, a cut on GST rate may do Malaysia a favour as compared to other proposals such as cut in EPF contributions.

 

One reason is the nature of GST as a consumption tax - you get taxed as you consume. While reducing GST rate may not necessarily increase domestic consumption, it will be an immediate relief to middle-to-low class income earners as well as the B40 households income group - groups that are most hit by GST.

 

Although it may seem that reducing GST rate is taking money "from left pocket to right pocket" where spending power switches from government's hand to the people's hence making no difference, lowering GST rate can be the more efficient method in boosting domestic consumption due to the inefficiency of implementation of economic policies caused by factors such as implementation lag, weak direct effectiveness on interested economic areas, wastage, corruption etc.

 

While GST can improve business transparency and accountability, its rate should be revised to complement Malaysia's heavy reliance on domestic consumption.

 

 

 

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