Friday, October 17, 2014

Budget 2015: GST, BRIM and Income Tax Cuts

The implementation of the Good and Services Tax, a higher BR1M and income tax cuts are some of the key elements in the Budget 2015.

Following the Budget 2015 to widen the scope of items that will not be subject to GST, the increased in the limit of electricity consumption not subject to GST and the exclusion of retail sale of RON95 petrol, diesel and LPG, we re-computed our analysis and believe that:

The net revenue collection from GST will likely to be less than RM 690 million due to GST fraud

1) After taking into account BR1M, the Budget 2015 estimated that the net revenue collection from GST will amount to RM 690 million per annum.
2) However, if this amount is estimated before the incidence of GST fraud, we believe that the practical amount might fall short of this realistically.
3) Besides, as the enforcement and monitoring costs might not be included, the net revenue raised might be even less.
4) Given that the expected fiscal deficit is 3.5% of GDP in 2014, the actual net revenue raised from GST might only contribute marginally to the aim of having a balanced budget.

Low and middle income households will bear a higher GST burden compared to high income households

5) Despite setting essential items like basic food, public transportation, education, healthcare, higher limit of electricity consumption, petrol, diesel and LPG as exempt or zero rated items, we find that GST itself remains a regressive tax (i.e. the low and middle income households will bear a higher tax burden than the higher income households).
6) This finding is consistent with the norm in international practice (e.g. the US tax administrator’s definition of regressive tax) and with international findings [e.g. “Does Australia Have a Good Income Tax System?” published in the International Business & Economics Research Journal (May 2013)].
7) Our research shows that the proportion of income paid as GST for:
a. Lowest income households (earning RM 605 per month) is 1.71%
b. Middle income households (earning RM 2,580 per month) is 2.01%
c. Highest income households (earning RM 31,850 per month) is 0.96%
8) Our conclusion that GST is a regressive tax is robust as it was undertaken using:
a. Bank Negara’s estimates of income/expenditure
b. The latest Household Expenditure Survey 2009/2010 from the Department of
c. The stipulation that essential items like basic food, public transportation, education
and healthcare are exempt or zero rated items

The average Malaysian household pays RM 70 per month or 1.9% of income as GST

9) Our research shows that the average Malaysian household is expected to pay RM 70 per month or 1.9% of their income as GST.
10) We find that a higher GST burden (as a percentage of income) will fall on households in these categories:
a. Low and middle income
b. Single person household
c. Young (less than 24 years old)
d. Bumiputera led households
e. Clerical workers, skilled agricultural and fishery workers
f. Households residing in Peninsular Malaysia

The combined net effect of BR1M, GST and income tax cuts will benefit low and high income households as they will have more cash; but the middle income households are worse off with less cash. 

11) In the Budget 2015, a higher BR1M and income tax cuts are introduced at the same time as GST.
12) By combining BR1M, income tax cuts and GST, we find that the Budget 2015 measures will have these effect (as summarised in Figure 1):

Figure 1: Low and high income households benefit with more cash whilst middle income households will have less cash (combined effect of BR1M plus income tax savings minus GST payment)

a. Low income households will receive BR1M which exceeds the GST that will be payable. The net effect is additional cash between RM 607 to RM 828 per annum.
b. High income households will receive income tax savings due to tax cuts that will exceed the GST payable, giving additional cash of RM 4,296 per annum.
c. Middle income households will neither receive BR1M nor benefit much from income tax cuts; but will have to pay GST. Consequently, they will end up having less cash – approximately RM 708 per annum. The annual household incomes for these middle income households are approximately between RM 55,000 to RM 110,000 per annum.
13) According to the Household Income Survey 2012, the average household income in Malaysia is RM 5,000 per month (RM 60,000 per annum). Therefore, we believe that the combined effect will result in the average Malaysian household having less cash to spend.

For more information on our research and on our interactive spreadsheet detailing the impact on different households, visit:

Press statement by: 
1. Dr Lim Kim Hwa, Chief Executive Officer and Head of Economics, Penang Institute
2. Dr Lim Chee Han, Senior Analyst, Penang Institute
3. Ms Ong Wooi Leng, Senior Analyst, Penang Institute
4. Mr Tim Niklas Schoepp, Visiting Analyst, Penang Institute