The Impacts Of Goods And Services Ta Tax (GST) On Middle Income Groups in India Introduction of GST
India has called some arguments from various parties including academics, professionals and the nation (would become the taxpayers) taxpa yers) on how GST affect goods prices-increase or decrease The consumers are worrying of the important price raices on basic needs when the GST has fully fully implemented !ith !ith the relatively high living costs particularly in main prime cities li"e #umbai, $elhi,%alcata, %hennai, significant price increases due to GST is considered a s another burden for middle income groups Therefore, the main ob&ectives of this study is' first, to obtain a comprehensive overview on consumer readiness, perceptions and acceptance of GST' and secondly to analyse the households potential consumptions (purchases) behaviour if GST is introduced $ata was collected through a structured survey among middle income earners The proposed monthly income threshold is between #*,+++ (S$.) to #/,+++ (S$0,111) as suggested by 2an" 3egara 4nnual eport *++5 espondents were chosen randomly from various organi6ations including government and private sectors from various locations in 7uala 8umpur, #alaysia This study is expected to suggest a proposal to the relevant authorities on the social and economy impacts on those groups so that the authorities could develop strategies in order to reduce the financial burden of middle income earners in #alaysia if GST is implemented This study is also expected to ma"e a contribution to the tax administration and policy developments literature by demonstrating the impact of a new tax policy in a developing country in order to facilitate low income earners to survive in competitive environment This study further contributes by providing comprehensive overview on consumer readiness, perceptions and acceptance of GST in a developing country, particularly particularly in 4sian 4sian countries that were previously under researched 9:8 %odes; #*,#/,<*,<1 and T4 4>T4 0 ?h$, Senior 8ecturer, 8ec turer, School of 4ccounting, >aculty of :conomic and #anagement, niversiti 7ebangsaan #alaysia, /1++ 2angi, Selangor, #alaysia :mail; mr@palilAu"mmy, mr@palilAu"mmy, paleelAhotmailcom * ?ostgraduate student, >aculty of :conomic and #anagement, niversiti 7ebangsaan #alaysia, /1++ 2angi, Selangor, #alaysia :mail; "eris+1Agmailcom ?alil B Ibrahim 0C1 Sales tax is a form of indirect taxation imposed on consumers, collected by business entities and accountable to the oyal %ustoms and :xcise
$epartment and would be imposed on manufacturer upon sale and importer of taxable goods (>att, *+0+) The rates are 0+D for all taxable goods' ED for fruits, food and building materials' and *+D for alcoholic drin"s Service tax is also an indirect tax ED imposed on customers who consume food or services in places such as restaurants, hotels, or engaged on professional services such as audit and legal firms (>att, *+0+) The International #onetary >und (I#>) has long recommended the introduction of GST as a way of raising the efficiency of the #alaysian tax system and ultimately increase the tax collection #alaysia plans to introduce a /D goods and services tax in *+0*, in a bid to diversify national revenues (I2# 4nnual eport *++5) The GST is intended to compensate with the direct tax collection F personal and corporate taxes The #alaysian government felt the introduction of GST would provide the government with the opportunity to reduce corporate and individual income tax rates It is generally perceived that the introduction of GST of /D replacing the Sales and Service tax would decrease the prices of goods (ie foods, fruits etc) (because the rate is lower than Sales and Service tax) sub&ect to the willingness of business entities to lower the price after excluding the sales and service tax element on those particular goods
rance, 2elgium and Germany) (Tait, 0CC5) The consumers are worrying of the significant price increases on basic needs when the GST has fully implemented !ith the relatively high living costs particularly in big cities li"e 7uala 8umpur, ?enang and 9ohor 2ahru, significant price increases due to GST is considered as another burden for middle class and lower income earners Therefore, the main ob&ective of this study is to identify the impact of GST on middle and lower income earners particular on their purchasing behaviour (consumptions), savings and future financial planning This study is expected to suggest a proposal to the relevant authorities on the social and economy impacts on those groups * rance in 0CE+s and has been adopted by more than 0*+ countries, including all member states of the :uropean nion (:) Goods and Services Tax (GST) is a percentage tax on value added (the difference between sales and the cost of purchased material inputs) at each stage of production There are three basic types of value added taxes (=4T) depending on how ?alil B Ibrahim 0C/ the investment is treated in the tax base, G$?-type GST, consumption-type GST, and income-type GST nder the G$?-type GST system, no deductions are allowed for capital investment and depreciation of capital when calculating the tax base The tax is euivalent to a sales tax applicable to both consumer and capital goods nder the consumption-type GST system, capital investment is subtracted from the value added in the year of purchase The tax is euivalent to a sales tax applicable to consumer goods nder income-type GST system, the tax base excludes the depreciation of capital The tax is imposed on net domestic product, which is
close to national income 4lmost all countries that have established the Goods and Services Tax (GST) system adopt the consumption-type GST in which all purchases of ca pital goods from other firms are deductible from a firmJs sale (Shoup, 0CC+) inland, #orocco and Senegal have employed a G$?-type GST GST rates vary significantly among countries The standard GST rates range from *ED ($enmar", rance in 0CC., /*E5D in 4rgentina in *+++, 1E.D in rom ongoing e fforts to restructure the various subsidy schemes in the country, and the removal of them in some cases, to the proposal of introducing a new tax format, called the goods and services tax (GST one thing is clear F the Government is intent on putting up mechanisms that can trim its persistent financial deficits and rising debt burden to hunt for that elusive surplus and build up its savings to prepare for rainy days ahead The country cannot continue raising debts to finance its deficits' otherwise, it will go into a debt trap The Government needs to build surpluses, so that it can have more leeway in adopting measures that can stimulate and develop the domestic economy in the future, particularly when mar"et conditions turn unfavourable The agoni6ing fact is, #alaysia has been stuc" with fiscal deficits for more than a decade The budget deficit is pro&ected to have
ballooned to a record high of more than .D of the countryKs gross domestic product (G$?) last year, although the Government is determined to bring that level down to ED of G$? this year, and less than /D of G$? by *+0E 4 GST is applied to the difference between a businessKs sales of goods and services and its purchases of goods and services (excluding wages), therefore taxing the value added by each business (nited States Government 4ccountability Hffice, *++5) 2efore the introduction of GST, !arren et al (0CCC) and 9ohnson et al (0CCC) thoroughly evaluated the revenue, efficiency and euity effects of the indirect tax changes associated with the governmentKs tax pac"age They suggested that in the long run both reductions in personal income tax and increases in social security rates could sufficiently attenuate the average price rises among broad groups of households nli"e the existing sales tax and service, GST is imposed on the value added to goods or services by each separate processor in the production and distribution chain The value added is the value that a producer (whether a manufacturer or distributor, etc) adds to its raw materials or purchases before selling the new or improved product or service pon selling the product or service, the manufacturer or distributor will include a charge for GST at the relevant rate on the value of the supply made The manufacturer or distributor will pay the GST collected on its sales (also "nown as output tax), to the oyal #alaysian %ustoms, but after deducting the GST it suffered on its purchases (also "nown as the input tax) 4nd the cycle goes on
who may not en&oy the benefits of lower income taxes as most li"ely they are already exempted from such payment in the first place - are not worse off with GST, 6ero-rating some basic essential products and providing other targeted assistance programmes are necessary measures to help them 2ounds within the Tax Theories 7eynes was determined to give government intervention in the economy a much broader role This meant that there was no longer any effective limit to the role the government might and should p lay in the running of the economy
perceptions and acceptance of GST' and b) to analyse the householdsK potential consumptions (purchases) behaviour if GST is introduced 5 8iterature eview The literature on the GST is surprisingly sparse Hn theoretical aspects, while there is of course a large literature on the optimal design of taxes on final consumption, few contributions concern themselves with the crediting and refund mechanisms (and their potential imperfections) that ma"e the critical difference between a GST and, for example, a retail sales taxQand which are therefore the distinctive source of any efficiency gain or loss associated with the GST The literature establishing conditions under which uniform commodity taxation is optimal, for instance, is &ust as applicable to any other form of consumption tax as it is to the GST :mpirical wor" on the GST is also scant 4 few papers have sought to model the revenue raised by, and compliance with, ?alil B Ibrahim 0C5 the GST, often with a view to estimating a revenue-maximi6ing rate $esai and
GST chain is bro"enFas, for many reasons, it commonly isFproduction inefficiencies may be created, which could in principle offset the benefits of greater assurance of revenue collection The GST has also proved vulnerable to high profile criminal attac"; Rcarousel fraud,K for example, which exploits arrangements for the taxation of intracommunity trade within the :uropean nion, has amounted to around 0EF*ED of net revenue, or more, in the nited 7ingdom (7een and Smith, *++) 4nd imperfections in the refund system, andPor excessive statutory exemptions, may have meant that the GST has in practice functioned largely as a tax on exports and intermediate production, and so tended to reduce exports and national output (this ?alil B Ibrahim 0CC being one potential explanation of the $esai-or example, by eliminating the allowances for credits and deductions present in the current income tax structure, hori6ontal euity could be improved nli"e current approaches, which reduce the tax burden for
certain debt or loan-financed purchases in comparison to goods purchased from saved income, the GST taxes the same total consumption at approximately the same amounts 4nother freuent criticism focuses on the probability that the GST will generate a net increase in prices, resulting in inflation inally, because almost all states impose a sales tax on final goods, critics fear the GST will interfere with and negatively affect this more Mlocal‖ tax Hpponents believe it will destroy one of the statesK ma&or sources of funding 2ut as stated by ocus will be given to residents of big city as this would represent the entire population of the state (see 2ryman and 2ell, *++1' ?alil, *+0+) >urthermore, residents who live in cities are having a uniue consumption ?alil B Ibrahim *+0 behaviour in response to
the introduction of GST compared to respondents who are living outside cities This would increase the external reliability, reduce sampling errors and enrich the data (Se"aran, *+++' Se"aran and 2ougie, *+0+) Since this survey represents respondentsK acceptance, readiness and their behaviour in response to the introduction of GST, enumerators are needed to obtain responses ?resence of the enumerators is expected to establish two-way interactions in explaining the spirit of GST and answering any problems pertaining to the uestionnaire 4lthough this data collection method (using enumerators) might be costly compared to other data collection methods such as postal surveys and interviews, however, as for exploratory research li"e this particularly exploring the impacts of a new government policy (GST), this is the most suitable method in obtaining a valid, reliable and independent data (2lac", *++0) The survey instruments was developed based on 9unainah (*++*) and divided into two main sections The first section consisted of demographic variables including gender, age, monthly income and their political affiliations The second section consisted of four sub sections which cover uestions related to respondentsK readiness, acceptance, perceptions and their purchasing behaviour towards GST 9unainahKs study was related to the respondentsK perceptions, awareness and readiness toward implementation of a new tax system in #alaysia "nown as the Self 4ssessment System (S4S) The S4S in #alaysia was first introduced in *++/ while 9unainahKs stud y was conducted two years before the implementation of S4S Therefore, using similar instrument and approach as used by 9unainah is relevant in this study as GST will be implemented in near future >or the purpose of this study, 1C respondents were analysed to answer the research uestions and ob&ective of this paper The next section will discuss the results of this study by outlining the descriptive evidence of respondents as well as comparing means through t-test and one-way 43H=4 0+ esults The results of this study are divided into four sections which begin with respondentsK bac"ground followed by respondentsK readiness, acceptance and perceptions espondentsK behaviour toward the implementation of GST and further ana lysis to describe the relationship between the demographics bac"grounds and variables tested are also discussed in the later part of this section 0+0 espondents 2ac"grounds The respondents comprised of * females, 01 males, *. respondents were aged less than 1+ years old, 00 respondents were between 10 F /+ years old while only one respondent aged more than /+ years old The distribution of respondents are eually li"ely for the fact that *+ respondents are wor"ing in government sector while another half (0C respondents) are involved in private sector Hn their monthly income, the ma&ority of the respondents (* respondents) are earned between #*+++ F #1+++ (S$. F S$0+++) while the remaining respondents are earned less than #*+++ (S$.) per month ?alil B Ibrahim *+* 0+* eadiness, ?erceptions and 4cceptance of GST The study suggested that the ma&ority of respondents (ED) were not satisfied with the information provided by the government pertaining to the introduction of GST In addition, /D of the respondents also not ready to support the government when GST is implemented urther analysis revealed that although half of the respondents were ready, however,
.*D of the respondents are worried that the GST will increase the goods prices in near future, 50D of respondents were also believed that living costs would also increase significantly when GST is implemented Hn the other hand, /1D of the respondents were remain unclear and not sure what would happen when GST is implemented Hn average, .D of the respondents perceived that GST would increase living cost in #alaysia The levels of acceptance of GST among respondents were also low evidenced by 1+D of the respondents were disagree with the implementation of GST >urthermore, only 0*D of the respondents could accept GST as they believed that GST would decrease their living costsHn top of that as they are aware that the implementation of GST is beyond their control, therefore this study suggested that 1CD of respondents have to accept GST and have to reschedule their consumptions behaviour to conform with the impact of GST 0+1 ?otential Impacts on %onsumptions 2ehaviour This study suggested that E01D of the respondents were not affects their consumptions behaviour although they perceived that the GST would increase the goods prices /0D of the respondents will still purchase the goods but with prudence considerations while /0D will reduce their purchases in line with their income Hnly *+D of the respondents were li"ely to increase their consumptions behaviour if GST is implemented 0+/ >urther 4nalysis The previous three sub sections (0+* F 0+1) uncovered that the ma&ority of the respondents were considered dissatisfied if the implementation of GST could increase the goods prices and finally increase their living costs particularly in big cities 4ccording to Table 0, the T-test evidenced that there is no significant gender differences for all variable tested (readiness (t *//.C), perceptions (t 15511), acceptance (t //1*5) and behaviour (t /EE/*)) which mean that male and female were having indifferent opinion upon these variables ?alil B Ibrahim *+1 Table 0 F Independent samples T-test between gender and readiness, perceptions and acceptance of GST t df #ean $ifference Std :rror $ifference :4$ *//.C 15 10CE5 *05E+ ?:%:?T 15511 15 1/*.1E 0*/C 4%%:?T //1*5 15 1*/C 0*11* 2:<4=IH /EE/* 15 1**0*0 0**00 >urthermore, 4ccording to Table *, the t-test also revealed that there is no significant political affiliation (for party elected in previous general election) differences, for all variable tested (readiness (t .0*), perceptions (t 01CE), acceptance (t 551) and behaviour (t *000) which mean that regardless of their affiliation (2arisan 3asional, ?arti Islam se#alaysia o r ?arti 7eadilan a"yat (the 2arisan 3asional are current ruling party in #alaysia while ?arti Islam Se#alaysia and ?arti 7eadilan a"yat are examples of the opposition parties), they have indifferent opinions which means that whatever their political affiliations are, they are not satisfied if goods prices were increase when GST is implemented Table * F Independent samples T-test between political affiliations and readiness, perceptions and acceptance of GST t df #ean $ifference Std :rror $ifference :4$ .0* 0E *C1+ /0E55 ?:%:?T 01CE 0E ///// 105E+ 4%%:?T 551 0E 0/1E* 0*/C 2:<4=IH *000 0E 11*11 0*+*0 The one-way analysis of variance (43H=4) as illustrated in Table 1 also suggested that there is no significant differences among respondentsK age for all variable tested, except for b ehaviour (readiness (> *+*), perceptions (> 0+*C), acceptance (> 0.1*) and behaviour (> *1**) which means that regardless how old the respondents are, they have similar opinions and consumptions behaviour towards the implementation of GST in #alaysia ?alil B Ibrahim *+/ Table 1 F Hne-
way analysis of variance (43H=4) among respondents age and readiness, perceptions and acceptance of GST Sum of Suares df #ean Suare > :4$ 2etween Groups /C1/ / 0*11 *+* !ithin Groups *+11. 1/ EC5 Total *E*.0 15 ?:%:?T 2etween Groups 0*/ / 10* 0+*C !ithin Groups 0+*C5 1/ 1+1 Total 00E// 15 4%%:?T 2etween Groups 010 / 1/+ 0.1* !ithin Groups .C 1/ 0C Total 5+/+ 15 2:<4=IH 2etween Groups *0/ / E/ 1.0+U !ithin Groups ECC+ 1/ 0. Total 5+/ 15 U significant at p V ++* 00 $iscussions and %onclusions In considering the impacts of GST in #alaysia, there is almost a b lind belief by the general public that there will be an increase of at least /D in prices across the board for end consumers This study suggested that many respondents were worried on their pu rchasing power particularly among the middle income earners The implementation of GST in #alaysia if of course to increase the efficiency of the tax collection system as well as become a ma&or source of indirect income to the government In comparison with 4ustralia, in the first year of GST in *+++ with the rate of 0+D until today, net GST collections amounted to 4W*/ billion and this increased in the second year by almost 0ED to a little over 4W*. billion 2y *++., total collections had increased to 4W1CE billion, ma"ing up almost 0 of the total tax collected for that year (Singh, *+0+) 9udging from the results of this study it seems that respondents received less information and promotions from the relevant authorities #any people still unsure on how the GST will be implemented The government should promote GST more through media so that people are ready for the impacts Secondly, due to less information, in current peopleKs mindset, GST will increase goods prices Therefore, the government should convince that GST will not increase goods prices significantly and if GST increases the prices, the government should have alternatives planning to reduce the burden of lower and middle income earners such as lowering the income tax rates or increasing exemptions for individuals Thirdly, as this study suggested that peopleKs consumptions behaviour would change significantly due to the implementation of GST, it is believed that respondents would be more prudence and selective in their ?alil B Ibrahim *+E purchasing behaviour This would potentially distort the economic growth particularly on aggregate demand Generally spea"ing, #alaysia should implement the GST in near future as an alternative approach to increase the government revenues although at the early stage of implementation there would be many operational problems and acceptance issues from various parties such as traders and consumers 8oo"ing at other developed countries such as nited 7ingdom (0.ED) and 3ew Xealand (0*ED - 0ED), the introductions of GST has improved their tax revenues and efficiency provided that #alaysia received a considerable support and cooperation from all parties not only from business entities but also from consumers li"e us eferences 2an" 3egara #alaysia *++5 4nnual eport, viewed 1+ #ar*+00, 2ar"er, ?4 0C.*, R=alue 4dded Tax, the cost to the businessmanK, 9ournal of 4ccountancyY, September, pp .E-.C 2lac", 7 *++0, 2usiness Statistics; %ontemporary $ecision #a"ing 1rd :d Hhio; South!estern %ollege ?ublishing 2ryman, 4 B 2ell, : *++1, 2usiness esearch #ethods Hxford; Hxford niversity ?ress 4dams, % B !ebley, ? *++0, RSmall business ownersK attitudes on =4T compliance in the 7K, 9ournal of :conomic ?sychology, vol **; pp 0CE-*0* $esai, #4, B
#odern =4T International #onetary >und, !ashington $% :mran, S# B Stiglit6, 9: *++E RHn selective indirect tax reform in developing countriesK, 9ournal of ?ublic :conomics, vol 5C, pp ECCF*1 Godwin, # 0C.5, R%ompliance costs - the cost of paying taxesK, Hmega International 9ournal, vol , no E, pp 15C-1C5 reebairn, 9 B Scutella, 0CCC, :valuation of the Governments Tax ?ac"age, #elbourne Institute of 4pplied :conomic and Social esearch, niversity of #elbourne, #elbourne 9unainah, 9 *++*, RSelf assessment system; 4 case study on perception of personal taxpayers in 7ota 7inabalu, SabahK #aster thesis, niversiti 7ebangsaan #alaysia, #alaysia ?alil B Ibrahim *+ 7een, # B 8oc"ewood, 2 *+0+, RThe value added tax; its causes and conseuencesK, 9ournal of $evelopment :conomic, vol C*, pp 015-0E0 7een, # B Smith, S *++, M!hat do we "now about =4T evasionK, 3ational Tax 9ournal, vol 8IZ, pp C+EFC*5 3ellor, $ 0C5., The effect of value-added tax on the tax ratio I#> !or"ing ?aper, vol 5.P/. International #onetary >und, !ashington ?alil, # *+0+, Tax compliance determinants in self assessment system in #alaysia ?h$ thesis niversity of 2irmingham ?ar"er, S7 0C., R%ompliance costs of the =alue 4dded TaxK, Taxes, 9une, pp 1C- 15+ ?iggott, 9 B !halley, 9 *++0, R=4T base broadening, self supply, and the informal sectorK, 4merican :conomic eview, vol C0, pp 0+5/F0+C/ ?ope, 9 0CC1, RThe %ompliance %osts of Taxation in 4ustralia and Tax Simplification; The IssuesK, 4ustralian 9ournal of #anagement, vol *1, pp C-C+ iscal Studies, Hccasional ?aper no . Sandford, %T, Godwin, #,
