There is a report by Bernama yesterday which states that a tax official claimed GST will not be inflationary due to lower GST rate compared to the rates of soon to be abolished sales and services tax. It is theoretically possible and I am leaning in that direction. One statement, however, troubles me:
KUALA LUMPUR, Feb 10 (Bernama) — The implementation of the Goods and Services Tax (GST) based on current estimates, will not lead to price increases due to the offset from the abolishment of the sales and services tax (SST), the Chairman of the Tax Review Panel in the Ministry of Finance, Datuk Kamariah Hussain, said Wednesday.
She said logically, with GST, consumers would pay 4.0 per cent tax compared with the current service tax of 5.0 per cent and sales tax of 10 per cent.
“GST is progressive rather than regressive, with tax incidence at the 4.0 per cent GST rate being lower than the current SST,” she said at the Affin Investment Bank forum on GST here Wednesday. [GST Will Not Lead To Price Increases, Says Tax Official. Bernama. February 10 2010]
Is GST progressive tax?
This is the first time I have heard somebody arguing that GST is a progressive tax.
To the best of my knowledge, GST is not a progressive tax. Why?
First, GST is a flat tax. There is only one rate. Therefore, it is not progressive in terms of rate structure. It is flat.
Second, a flat tax is regressive by the very nature that those earning relatively lower income will see greater fraction of their income taxed compared to those of higher income (it can be made less regressive by introducing exemption to staple food and other ingredients like sugar and salt). This makes it not progressive in terms of welfare.
So, in what way is GST progressive?
The only way I can think of that makes GST progressive strictly in terms of welfare, is by making way too many exemptions on goods typically consumed by the middle class and lower. In other words, practically, taxing only luxury items. Is that the case here?
There is no explanation in the article.
