GST - An Economics Perspective

Recently I did a sharing on the current hot topic GST (Goods and Services Tax) with a group of pre-University students. I presented my view from 3 perspectives namely: the Government, Consumers and the Producers. It was an interesting discovering for the students and I hope to share with my readers.

GST? Didn't we had it before?
The first confusion that the general public has is that the term GST is not something new to us, we have seen it on our bills when visiting restaurants and paying legal fees. The current GST stands for "Government Services Tax", which is applicable in the service industry and its chargeable to the final consumers. Starting April 1st, it will be replaced by the Goods and Services tax which is charged on every single stage of the provision of goods and services throughout the distribution chain. Under the new system, GST will be charged from the raw materials to the wholeseller,  wholeseller to the retailer, and retailer to the customers. However, as long as you are not the final consumers, meaning you are the business owners, you may claim back your GST on most goods and services. Hence "Government Service Tax" is charged to the final consumers, while the new GST is charged at every stage of provision of goods and services.

Do consumers bear all the tax?
This is an interesting question. From the media and most internet articles we were told that the GST is a consumption tax and its a tax on the consumers alone, and that the producers (business owners) are the middle men, they collect the GST from the customers and later pass on the tax revenue to the government. However from the economics perspective, this is not true.

From the diagram above, we can see that the imposition of a GST will ultimately increase the price while the economic transactions (or output) will reduce. The blue coloured rectangle represents the tax revenue collected by the government. However this tax revenue is not borne by the consumers alone, it is infact shared by both the producers and consumers. The exact tax burden borne is actually depends on the "elasticities" of demand and supply for the goods and services which is another story that I will not cover here.

How would the producers bear the tax, isn't it tax on the spending?
Precisely! Tax on spending! Whether you are a producer or consumer, you are taxed on the GST. The only difference is that producers can claim back their GST paid if they are a GST registered company.  However, some small items like furnitures or A4 papers are not claimable. Hence, cost of doing business will increase ultimately.

Inaddition, there is the "Compliance Cost" that most business owners have to face. Depending on your company's turnover, some may need to submit GST to the authority every month! To cater for this change, companies need to install special softwares and they may even hire more staffs to work on this compliance. Hence, this accounting burden is on the wholesellers and the retailers in general.

Does the economy as a whole benefit from GST?
From the above diagram, the red triangle represent "Deadweight Loss" (DWL) which means there is a loss in economic welfare due to the imposition of the GST or any indirect taxes such as sales tax, import tax and excise duty. This loss in welfare is translated into inefficient allocation of resources and the loss of consumers and producers surplus (benefits).

Is GST progressive or regressive?
Many people say that GST is good because it is progrogressive, meaning the rich pay more taxes, the poor pay less. However, as a percentage of income, this may not be true. Although the high net worth people pay more GST because they can afford more luxury goods, however, their spending on GST accounts only a small fraction of their household income. Whereas the lower income group spend more on GST as a percentage of their income. Hence it is regressive in nature!

If it is bad, why 160 countries in the world impose GST?
The biggest benefit is that it is a good source of revenue for the government. In some EU countries, GST revenue account for 15% - 30% of the total tax revenue. This will definitely elleviate our budget deficit problem. In the past, as an oil producing country, our Petroleum Income Tax revenue accounts for 14% - 30% of our federal tax revenue. Given that the oil price has plunged dramatically, it is the right time to implement the GST to elleviate the burden from the government.

In addition, with the imposition of GST, it is believed we can recover some tax revenue from the "black economy", economic activities that were under-declared previously.

Hence, from the macro level, the imposition of a GST will benefit the whole country because it is definitely a good source of revenue for the government, it can reduce our budget deficit and hopefully with the extra tax revenue, the people can benefit from it, be it in the form of better infrastructures, healthcare systems or educatuon systems.

On the micro level, business owners and consumers are likely to suffer in the short term to medium term as this is a sudden cost to the business community, they will experience a squeez in their profit margin, this will take some time for them to adjust, maybe one to three years time. As for the consumers, the lower income group will feel the pain more as the tax is unavoidable and it will increase their cost of living.