Three days ago Prime Minister Najib Tun Razak unveiled the much anticipated (and feared!) Budget 2014. As many predicted (though secretly wished to be proven wrong) the Goods and Services Tax (GST) was implemented. The GST at a rate of 6% will come into effect on April 1st 2015 replacing the current Sales Tax and Services Tax (SST) which stood at 10% for Sales and 6% for Service. RAM Holdings Group Chief Economist Dr Yeah Kim Leng predicts that it will cause the prices of goods to increase by 1%. This is because the SST is not charged on as many goods and services as the GST.
However, Dr Yeah also believes that the current low inflation environment would likely enable consumers to absorb the price increase. Despite many quarters lamenting the sudden imposition of GST at the high rate of 6%, Dr Yeah believes it to be better in the long run:
"If the Government had set a lower GST rate and increased it in stages over the years, it would cause inflation to spiral upwards,"
“It is good that you have a one-off range that you can hold constant for at least 2 to 3 years, because if you do it on a staggered basis, it would create an inflation spiral. This is because there is an expectation of price increase, and that would create higher inflation,”
Nonetheless, the GST could still increase after a few years if the government were to rely on it as a stable source of revenue.
“For the Government to rely on GST as a stable source of revenue, the rate will need to be progressively raised over time. It could be increased to 8% after the first three years and to 10% three years later.
It would appear that whilst economists are looking toward the bigger picture of improving the country's fiscal rating, they have forgotten a large portion of the population who can be forgiven for not rejoicing at the prospect of a better economic outlook at the cost of GST: these are the masses who struggle simply to put food on the table with salaries that aren't increasing in tandem with the nation's inflation.
“Even with the exemption of the GST for essential goods, the poor, who spend most of their income on food, will suffer,” said (RAM Holdings Group) president SM Mohamed Idris.
With effect from June 1, 2018, the GST rate of 6% will be reduced to zero percent as per government directive.
*Picture courtesy of Sharonperry.ca