Page 1 of 12

Advances in Social Sciences Research Journal – Vol. 11, No. 9.2

Publication Date: September 25, 2024

DOI:10.14738/assrj.119.2.17400.

Kamarudin, S. N., Ahmad, N., & Loganathan, N. (2024). The Influence of Taxation on Consumer Burden in Malaysia: A Revisit on

GST. Advances in Social Sciences Research Journal, 11(9.2). 01-12.

Services for Science and Education – United Kingdom

The Influence of Taxation on Consumer Burden in Malaysia: A

Revisit on GST

Siti Nurhazwani Kamarudin

Faculty of Accountancy, Universiti Teknologi MARA Terengganu,

Dungun Campus, Malaysia

Norsiah Ahmad

Faculty of Business and Management, Universiti Sultan Zainal Abidin,

Terengganu, Malaysia

Nanthakumar Loganathan

Faculty of Management, Universiti Teknologi Malaysia,

Johor, Malaysia

ABSTRACT

The implementation of Goods and Services Tax (GST) in Malaysia for a short period

(2015 to 2018) remarked a significant tax reform in the country. However, despite

successful GST implementation in various countries, Malaysians were still skeptical

of the policy leading to its cancellation. Therefore, the inquiry of such a relationship

becomes crucial to affirm whether taxation has a significant impact on consumers'

burden in both the short and long term. The study uses quarterly secondary data

from 1996-2016 by analysing the Autoregressive Distributed Lag Error Correction

Model (ARDL-ECM) estimation and combined cointegration test to testify the

cointegration effects on the variables. The Toda and Yamamoto Granger causality

analysis is also employed to identify the direction of causality among the variables.

The result from this study provides evidence on the existence of a long run

relationship between taxation and consumer burden via direct taxation proxy.

Nevertheless, the study failed to establish a short run association between taxation

and consumers’ burden. The study revealed that indirect tax does not lead to

consumer burden, hence suggesting that GST might be an effective policy in

increasing government’s revenue without pressuring the public. However, direct

tax policy might need to be revisited as it leads to an increase in consumers' burden

in the long run. Notwithstanding, the government shall be more careful and

sensitive in formulating future tax reforms or introducing new policies to ensure

consumers will not be negatively affected.

Keywords: GST, Consumer burden, Taxation, Government policy.

INTRODUCTION

After several times of delaying implementation of GST, the Malaysian government introduced

GST effective on 1 April 2015. During this period, GST was seen as a crucial reform in the

country which experienced widening fiscal deficits and high debt burden. In order to minimize

fiscal deficits, the government needed to reduce public spending and try to boost public

revenue at the same time. However, this appears as a difficult task as the government has

Page 2 of 12

2

Advances in Social Sciences Research Journal (ASSRJ) Vol. 11, Issue 9.2, September-2024

Services for Science and Education – United Kingdom

substantial public expenditure engagement as severe trim on their spending may interrupt

ongoing major projects and hamper their development aspirations. Similarly, external

borrowing is not a good option as the government needs to commit their already limited

amount of resources for debt interest and do not wish to broaden their debt commitments. In

2023, Malaysia's debt reached as high as RM1.5 billion or 80 percent of its Gross Domestic

Product [1]. Following this, the call for GST in future years might recur as an alternative to inject

more funds for the government. When GST was abolished by the Pakatan Harapan (PH)

government, it was a political decision based on an election promise that was not based on

sound economic principles [2]. The PH manifesto stated that the main objective of the abolition

was to put more purchasing power in the hands of the Rakyat, particularly the lower to middle

income earners.

Nevertheless, in a tax reform, the interest of the governments is to ensure that their taxation

system can meet the public policy aspirations. It is crucial for the tax system to raise sufficient

revenue for the government, ensure the burden is spread equitably and avoid the misallocation

of resources. The tax system should balance out the pattern of production, trade, consumption,

saving and investment. Finally, a sound tax system should be efficient in monitoring compliance

and collection of money. It seems challenging to meet these objectives simultaneously, hence

tax reform is considered as a matter of trade-offs [3]. Various countries have successfully

implemented GST in several stages and revised the tax rates. As of 2020 there are 170 countries

in the world that have implemented this broad base tax [4]. The GST has replaced numerous

kinds of trade, sales and manufacturing taxes and become an important source of revenue for

many governments [5]. Furthermore, The European Union (EU) has made GST a requirement

for its membership while other international organizations are also moving towards that

direction with a standard set of rules set at international level such as the Gulf Cooperation

Countries (GCC) [6, 7].

Additionally, Table 1 illustrates some developing countries with their GDP per capita and

current rate of GST implementation. Some countries have implemented GST since the early

1970s such as Indonesia while the majority of the developing countries adopted GST in the

1990s.

Table 1: Selected developing countries and the current rate of GST in each country

No. Country GDP per capita Year of implementation Current rate (% of GST)

1 Thailand 5,480 1992 7.0

2 Indonesia 3,557 1974 10.0

3 Philippines 2,587 1998 12.0

4 Vietnam 1,755 1999 10.0

5 Ghana 1,605 1998 12.5

6 India 1,503 2005 12.5

7 Laos 1,417 2009 10.0

8 Pakistan 1,257 1990 16.0

9 Cambodia 944 1999 10.0

10 Bangladesh 752 1991 15.0

11 Malaysia 10,432 2015 6.0

Source: Royal Malaysian Custom’s website (www.gst.customs.gov.my)

Page 3 of 12

3

Kamarudin, S. N., Ahmad, N., & Loganathan, N. (2024). The Influence of Taxation on Consumer Burden in Malaysia: A Revisit on GST. Advances in

Social Sciences Research Journal, 11(9.2). 01-12.

URL: http://dx.doi.org/10.14738/assrj.119.2.17400

Since the introduction of GST, the issue of consumer burden has become the main topic of

discussion among citizens from all income groups. The price increase has widespread from

petrol and toll fares which then leads to escalation in public transport fares inclusive the school

bus fees, the properties, to electricity tariffs as well as other groceries and consumable items.

Many Malaysians have expressed their concern on the rising cost of living in the media (see [8,

9]). The current economic uncertainty makes the situation tougher and increases the pressure

on the end consumers. Although the impact of increasing cost of living is not significant to the

Malaysians high income group, the upsurge in consumer burden definitely is being felt by the

low-income group.

GST in Malaysia was unfavorable during the introduction stage and later was declared to be

zero rated by the newly elected government in June 2018. Apart from the political influence on

the decision, it is questionable whether the GST has caused an increase in consumer burden as

rumored by the public. The GST has soared public concern in which the majority of Malaysians

perceived that this new tax system would cause inflation in the country and hence put more

burden on their daily expenses [10, 11]. Such a scenario led to the motivation of the study which

is to examine the influence of taxation on consumer burden. The Malaysian economy has

experienced some adjustments with the continuous implementation of fiscal reforms by the

government. These reforms have a huge impact in supporting and maintaining sustainable

growth of the nation’s economy. The result of this study is important to shed light to the tax

authority in proposing future tax reforms and have a win-win situation; to generate revenues

yet minimizing the burden on consumers.

LITERATURE REVIEW

Tax reform is a systematic mechanism to create a fiscal balance and stable environment for the

economy to function well and attain economic growth [12]. This can be done by modifying the

tax policies which play a significant role in innovation, harmonizing and rationalizing trade

mechanisms as well as promoting investments, all which spark for higher revenues [13, 14, 15].

Nevertheless, tax policy also is one of the macroeconomic factors that may have some positive

or negative pressure on consumers’ burden. Vegh and Vuletin [16] stated that taxation policy

in developing countries is more volatile than in the developed nation as developing countries

alter their tax rates by larger amounts than developed countries. Specifically, the volatility of

tax policy ranges from 35 to 100 percent higher in developing countries than in the developed

countries [16]. This pattern is also consistent with real government spending, in which

developing countries scored 60 percent higher than the industrial economies.

One of the recognised doctrines in the economics world is that the burden of taxation of the

entire tax system, be it the federal, state, or local taxes is proportional to income [17]. Thus, any

tax changes undertaken, or new policy implemented will impact consumers differently

according to the income group. In practice, any changes in the tax policy will affect the

disposable income of consumers and thus the level of living standard they can acquire. For

example, a reduction in the personal income tax will boost disposable income of households

and ease their financial burden while the introduction of consumption-based taxes will put

extra burden on their plate depending on the consumption patterns. Therefore, a fundamental

way of reforming a tax system is that the government should consider methods of raising tax

revenue for the country without compromising the taxpayers’ burden and jeopardizing the

economy.