CIX 1002 Principles of Macroeconomics

Session 2020/2021

Submission date: 7 January 2021

Instructor: Dr. Aidil Rizal Bin Shahrin

Alternative Assessment II (a)

Group 5 Tutorial G3

( Thursday 11am- 12pm )

No. Name Matric No.

1. LIM JIA YI U2003050

2. YAZNI NAMBIAR A/P MOHAN U2003161

3. CHEW KOK YANG U2003308

4. KHOO LIN QIAN U2003137

5. SEE ZHAO WEI U2003083

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Table of Content:

NO. CONTENT PAGE

1. Instructions 3-4

2. What is GST? 5

3. Evaluate the efficacy of GST and SST? Provide your 5-6

reasoning.

4. In your opinion, should the government introduce GST

back to increase its revenue? Explain.

(a) The disadvantages of introducing the GST during 7-8

the pandemic

(b) The advantages of introducing GST after the 9-11

pandemic and conclusion

5. References 12

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UNIVERSITY OF MALAYA ALTERNATIVE
ASSESSMENT II(a) SEMESTER 1 : 2020-2021
CIX1002 - Principles of Macroeconomics
10% of Total Assessment

Due Date : 8th January 2021 at 12:00 pm

INSTRUCTIONS

1. This is group assignment as assign through Spectrum.

2. Each assignment must be submitted through Spectrum. Only ONE student need to
click SUBMIT button before the due date above. Failure to do so, it is consider as
non submission.

3. On the front page, members’ name and matric numbermust be included.

4. Late submission will bepenalized (50% marks deduction).

5. Plagiarism is a serious offense. If ANY of the group is caught in this matter, ZERO
mark will be allocated for the assignment submitted. Definition of plagiarism
includes the followings:

• Copy and paste with model answer from any sources of references such as
instructor manual, text book, reference books, journal articles and internet
sources.
• Sharing of answer among different groups.

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Question 1

The government’s revenue is projected to drop by 14% to RM227.3 billion

in 2020, compared with RM264.4 billion in 2019, as a result of lower tax
collection, according to the Ministry of Finance (MoF) in its Fiscal
Outlook 2021 report. (Theedgemarkets, 6 November 2020)

The impact of Covid-19 to Malaysian economic is really severe. It is evidence from second
quarter 2020 growth, where it contracted 17.1 percent as compare to
0.7 percent growth in the first quarter. Resorting to Keynesian school of thought to smooth the
cycle, Malaysian government has introduced Economic Stimulus Package, PRIHATIN package,
additional PRIHATIN Package, National Economic Recovery Plan and Kita PRIHATIN package
worth RM20 billion, RM230 billion, RM10 billion, RM35 billion and RM10 billion
respectively. As any spending, it requires revenue. However, as predicted above, the
government revenue to drop by 14 percent. Beside running for deficit budget, some quarters are
suggesting to introduce back Good & Services Tax (GST) (a form of Value Added Tax or
VAT) as a way to generate higher revenue for the government. As a student of
macroeconomics, answer the following questions:

a) What is GST?

(5 marks)

b) Evaluate the efficacy of GST and SST? Provide your reasoning.

(15 marks)

c) In your opinion, should the government introduce GST back to increase its revenue?
Explain.

(30 marks)

(TOTAL:50marks)

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(a) What is GST?

Goods and Services Tax (GST) is a value-added tax charged on most goods and
services produced and sold for domestic consumption. Some of the items are exempted from
GST. For example, in Malaysia, basic daily necessities such as cooking oil, public
transportation services, education services and so on. The tax is added to the final price of
products by the firms and the consumers who buy the products will pay the sales price
inclusive of GST. After that, the tax will be transmitted to the government. It is said that the
purpose of implementing GST is to generate revenue for the government. GST is globally
used and it is known as Value-Added Tax (VAT) in some countries. Tax will bring an
indirect effect on aggregate expenditures because tax decreases disposable income first and
then only reduces consumption .

(b) Evaluate the efficacy of GST and SST? Provide your reasoning.

GST
Firstly, GST erases the cascading effects of tax. A cascade tax can be referred to as a tax
on top of a tax. A cascade tax brings a compounding effect. Within a cascade tax, products
with multiple production stages incur higher tax along the supply chain to the final consumer
than a single-stage tax. For example, consider the furniture manufacturing business. It starts
with trees. After being cut down, they will be sold to lumber mills. Lumber mills turn logs
into manufactured lumbers. These lumbers are purchased by a furniture factory that
manufactures furniture in large batches and sells them wholesale. Then the wholesaler sells it
to furniture shops nationwide for sale in individual sets. Finally, a consumer buys it. Each
transaction includes a sales tax. The sum of all taxes charged in transactions will be included
in the cost and the buyer pays based on its cost.

Besides, implementation of GST increases the threshold limit for registration. If a

firm’s sales is expected to exceed the new threshold limit, you need to register for GST. GST
also benefits the small business. Taxpayers whose turnover is in the range of Rs 20 to 75 lakh
can opt for the Composition Scheme. Under the Composition Scheme, taxes can be paid at a
lower rate. Moreover, the online procedure for GST is very easy and simple only. Businesses
can follow the guideline provided for GST registration via the GST portal. Each step is
clearly stated and all they need to do is just follow the step by step.

In addition, under GST, the number of compliances are lesser. A business owner needs to
understand the importance of being compliant with the tax department. By being GST
compliant, your business will be given a higher GST compliance rating. It is a score given by
the government and it indicates how compliant your business is with the tax department.
With a higher rating, your business is more trustworthy. There are only 3 steps to go on with
GST compliance. The first step is to file GSTR-1 and GSTR-2 on time then followed by
paying tax dues and the last step is to submit an annual return.

Furthermore, e-commerce operators are defined. Before GST was implemented, e-

commerce companies had gone through a differential treatment. Their goods sometimes were
being seized if they could not produce the documents.
5 GST enhances the efficacy of logistics.
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Logistics is the movement of goods from one place to another place. In India, before GST,
logistics players operated multiple warehouses across states to get rid of taxes like states
entry taxes and CST. However, after GST is implemented, the goods can be moved freely
among states without taxes. Fewer warehouses are built and India becomes one big single
market.

Last but not least, unorganized sectors are coordinated under GST. For example, an
organized firm needs to pay 10 percent tax while an unorganized sector which does not need
to pay tax gets a 10 percent advantage. However, if the unorganized sector is under GST as
well, the advantage blows up.

SST

The efficacy of Sales and Services Tax (SST) is that it is a single stage tax in which SST
is only imposed once during the entire supply chain during the time of manufacturing or even
when the goods are being imported in Malaysia. This will cause the cost of living to go down
for everyone in Malaysia whereby the consumption will increase and the businesses can
provide their products and services at a much competitive prices.

Other than that, there is a lot of exempted goods under SST .For example, food items,
chemicals, pharmaceutical goods, medicine, iron, steel and machinery. There will be a few
businesses which needs to registered under SST. Moreover, there are a few services
exempted from SST for example tailoring services, jewelry making ,opticians and engraving
services.This will help the small and medium-sized businesses and enterprises to grow and
improve in their services.

In addition, imported and exported services are non-taxable services under SST and
SST is adjusted as to minimize the impact on lower income groups .Last but not least, the
compliance cost have decreased with SST and the cost of doing business has also gone down.
Hence, company formation in Malaysia will be a easier and more convenient process for
those who wants to start a business.

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(c) In your opinion, should the government introduce GST back to increase its revenue?
Explain.

The disadvantages of introducing the GST during the pandemic

Taxation is one of the most important tools for a country's revenue generation. Tax-based
investment, also known as Value Added Tax (VAT) or Goods and Services Tax (GST), is a
tax on consumerism imposed on purchases of goods and services.In reality, it would trigger
the consumer to pay higher rates as the consumers are in the supply chain's final position and
they do not have the ability to claim the tax back as the manufacturer did. The consumer is
burdened by GST (taxpayer). However, the burden is felt more under the GST because it is a
broad-based tax than the Sales and Service Tax (SST) it replaced and virtually no one avoids
its influence.The main argument that has been circulated about GST is that it raises the cost
of products. As a consequence, when they have to pay higher rates for goods and services, it
becomes a liability to the public. Consumer demand will decline when the price of goods and
services rises because GST causes many individuals not to be able to pay for the high cost of
living that does not meet their income needs equally.Since GST is a type of broad-based tax,
most Malaysians who are not taxpayers right now will be affected by it. A rise in GST will
reduce the purchasing power and consumption of the household and will also reduce the
government's revenue.

In this situation of the Covid-19 pandemic, where purchasing power has already
decreased a lot as it is in the phrase of recession, many firms have cut off their output due to
lack of consumer demand, causing the unemployment rate to rise and decrease their
disposable income that can be used to purchase.

Figure 1: Value-added tax

For illustration, let’s say the following situation consists of 10% of GST or value-
added tax, a manufacturer purchases raw material for RM5.50 which consists of 10% of
GST(RM0.50). After manufacturing process, he sells RM11, which includes RM1 of GST to
the assembler. Therefore, the manufacturer will receive RM11 and he will pay RM0.50 to
the government. Since the manufacturer will keep the portion of value-added tax that he
already paid to the seller of raw materials, the manufacturer will only need to paid RM0.50
(RM1.00-RM0.50) of GST to the government. When the process continues until the last
stage of the supply chain of the product, the entire GST will be passed to the end-consumers.
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Hence, the cost of living in Malaysia will increase after introducing the GST during the
pandemic.

Next, GST will raise the cost of the operation. Business owners need to adjust their
accounting system and business processes with the implementation of GST. The business
has to opt for electronic compliance system, starting from registering to filing online returns.
Besides, the business must be prepared to institute proper accounting record keeping, train
their staff and provide sufficient software to ensure effective reporting and
recording.Therefore, the cost of filing GST returns, the cost of recognizing and keeping up
with adjustments in policies and prices, the cost of operational and consulting services for
external accountants, as well as the cost of running day-to-day GST accounting for
employees, would further increase their overhead costs. It would eventually raise operating
costs of the business as they would have to bear the extra expense of recruiting experts.

Furthermore, monetary cost for time spent are incurred when GST is introduced in
Malaysia. Although the government is taking steps to simplify the filing of tax returns, it
still take time for business, including manufacturers, wholesalers, retailers or consumers, to
correctly apply the entire process. Therefore, the rise in time spending and service costs will
burden the company during the pandemic. In this situation, the increasing of expense and
decreasing of profit will force the company to cut off more cost by reducing the employment
and also it may cause the business being closed down.

In addition, GST will have an enormous impact on certain sectors in Malaysia,

especially the property, healthcare, telecommunications and tourism sectors. Since the
developers cannot charge GST on sales of residential properties, the property market is
affected because they still need to pay GST at each point of the construction
process. Healthcare market also face a big challenge if GST is introduced. This is because,
except for certain drugs used for long-term illnesses, only 25% of the medicine on the
National Drug List was originally rated exempt. Therefore, the expense of private healthcare
and medical benefits has also risen. As domestic flights were paid with GST, the domestic
tourism sector was also negatively affected. The rising costs of these sectors would place an
unfair burden on the residents of Malaysia, especially during this pandemic, as wages and
unemployment have been reduced.

If the GST is implemented by the government during the pandemic, it will make the
whole situation worse, as the GST will reduce the purchasing power of consumer. The
recession of economy will become worse in Malaysia.

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The advantages of introducing GST after the pandemic

In fact, the government should introduce back the GST but not in the near period, as the
production of any new taxes should be done in the situation of economic stability, not during
the economy is unstable or having recession like during covid-19 pandemic period.
Introduction of new taxes system in this period will cause more harm to the economy as we
are hoping a smooth progress of economy without any disruption. Introduction of new taxes
system in this period will cause the recession become more severe. Government expect that
introduction of GST will increase its revenue, however in the recession situation which of
lack of demand, the business will decrease their production units, hence the changes of tax
system is not effective as the tax revenue that can be gained is very less. Therefore,
government should only introduce GST system when the economy is more stable, hence
government can increase revenue while won’t burden the consumers.Below are the
justifications to support our statement.

According to the news posted by The Malaysian Reserve on 30 September, 2020, The
economic experts believe that Malaysia will benefit from introducing back the Goods and
Services Tax (GST) instead of Sales and Service Tax (SST). As mentioned, GST is a more
efficient and broad-based taxation tool. Deloitte Malaysia indirect tax leader, Tan Eng Yew
suggests that Malaysia can introduce the hybrid system through broadening the SST and
give more exemption to the business before being transformed into a new GST. Therefore,
The consumers in Malaysia will only need to pay tax once at the final consumption stage at
the end of the day. Although introducing GST is a sustainable way to improve the tax
income of government, Tan also mentioned that the government should not announce the
implementation of GST during this moment as the economy is severely affected by the
Covid-19 pandemic and still in the recovery period. Meanwhile, the government should
provide the sufficient time and training for the people to adapt to the GST tax system after
the announcement.

Malaysian Institute of Certified Public Accountants (MICPA), Dr Veerinderjeet Singh

explained that the broad-based tax will bring the revenue to the country and GST is a good
option to be implemented. As the Customs will enhance its capability and use technology
efficiently, GST will have the checks and balances to lead a better compliance among the
players in the market. Furthermore, the implementation of GST will help the country not fully
rely on the income from the other resources, like petroleum and oil palm. It will indirectly
help the country to survive when the price of natural resources are unstable in the market.

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Figure 2 : Government Revenue

Based on Figure 2, we can see that government revenue consists of SST/GST which
is indirect tax, petroleum-related revenue, direct taxes that excluding Petroleum income tax
(PITA) and other revenues. Among these revenues, we can see that the indirect tax
contributes a small portion of the overall revenue in majority years, while majority of
revenue is come from direct tax and also petroleum-related revenue. Government should not
highly rely on non-taxes revenue such as petroleum revenues because such revenue is not
reliable due to the volatile price of petroleum. Therefore, by introducing GST system,
government can increase their revenue by the indirect tax resources which is much more
stable and healthier towards a country’s economy development.

To further discuss the pros and corns of the implementation of GST in Malaysia, a
comparison could be make between the GST and windfall taxes. Windfall taxes is the tax
system that suggested by Former Cabinet Minister and Muar MP, Syed Saddiq Abdul
Rahman. Windfall taxes is a one-off taxes that only imposed to a very specific and limited
industry whereby the companies have an unexpected gains during a certain period, for
example, glove manufacturers. Although both GST and windfall taxes can bring the
exceptional profit to the country, GST is more preferable to be implemented.

The reason is when the government imposed the windfall taxes to the glove
manufacturers during this moment, the glove manufacturers will unsatisfied with the new tax
policy and most probably they will move their business to other countries.

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Besides, windfall taxes would also deter the investors from moving into Malaysia and
the current investors would then go to our neighbouring countries that do not have windfall
tax. Dr Veerinderjeet further suggested that the windfall tax should not only confine to one
sector, instead, the government should apply to all industries in Malaysia. However, if the
government would like to introduce a new tax system in Malaysia, it would only cost
more.Therefore, it is better to apply GST back in Malaysia.

Moreover, the new GST introduced should have a lower rates and must be in line with
the economic situation. According to the news posted by NST on 4 August 2020, 3 percent
GST would boost the economy in Malaysia. This is because 3 percent GST rate would more
likely to be accepted in Malaysia’s struggling context. While Malaysia are now struggling
financially to keep the economy stable, a solid GST regime would give us more fiscal space
to save our economy from a free fall.

To conclude, the government should not introduce GST during the pandemic, instead
they can introduce after the economy become stable to improve the revenue of Malaysia in
the future.

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References :

Tengku Zafrul. (2020). New taxes will only be introduced when economy recovers.
Retrieved from: https://www.theedgemarkets.com/article/new-taxes-will-only-be-
introduced-when-economy-recovers-%E2%80%94-tengku-zafrul

Narayanan, S. P. P. (2018). Why the GST failed. Retrieved from :

https://www.nst.com.my/opinion/columnists/2018/08/400476/why-gst-failed

Investopedia. (2020). What Is a Value-Added Tax (VAT)? Retrieved from:

https://www.investopedia.com/terms/v/valueaddedtax.asp#:%7E:text=A%20value%
2Dadded%20tax%20(VAT)%20is%20a%20consumption%20tax,that%20have%20al
ready%20been%20taxed.

Asquith, R. (2020). Malaysia tax measures for COVID-19. Retrieved from :

https://www.avalara.com/vatlive/en/vat-news/malaysia-tax-measures-for-covid-
19.html

Quora. (2020). Who pays GST? Retrieved from: https://www.quora.com/Who-pays-GST

Corporate Finance Institute. (2020). Value Added Tax (VAT). Retrieved from:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/value-added-
tax-vat/

UZABASE. (2017). Malaysia’s GST Effect: Catalyst or Deterrent? Retrieved from:

https://asia.ub-speeda.com/en/malaysias-gst-effect-catalyst-or-deterrent/

Yahoo.(2020). Yahoo is now a part of Verizon Media. Retrieved from:

https://ca.news.yahoo.com/what-is-the-impact-of-gst-on-the-common-man-pros-cons-
062403247.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmN
vbS8&guce_referrer_sig=AQAAADEDfCW7KtJEw62ZZPztpvH1etX2QXPigFa6Qt
AHOsOULRFOzz4Z4j6j3iZ3hdObinWKYbVvcevKoGBuk6dQJMxoa80GsxoqGnIjf
CAItc8N9dW5Yn8McG_Oz97L7tHm56abhs5MXHcRNJGlJ28s6dvR0JxSdy-
ni7dG21EMSmmg

Clear tax. (2020). GST Benefits – Advantages and Disadvantages of GST. Retrieved from:
https://cleartax.in/s/benefits-of-gst-advantages-disadvantages#inc

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