1.0) INTRODUCTION
TO ARTICLE – SUMMARY
After the implementation of
Goods and Service Tax (GST) in Malaysia, The Star Online posted an article
about the government listing 295 products that will be inexpensive following
this implementation. These products include 273 products (such as household
items) that were previously subjected to 10% of Sales and Service Tax (SST),
have now been subjected to only 6% of GST. 22 of the remaining products (like
salted fish, dried fish and imported fruits) that were subjected to 5% SST have
now been completely exempted from GST (0%). This article also talks about the
negative response of the nation after this new implementation, despite it
rendering these products inexpensive. This is because the prices of the products
were already expensive to begin with as stated by Datuk Ahmad Maslan, Deputy
Finance Minister, therefore rendering the nation angry. How this effects the
economy is it could cause the consumers to bare a higher tax incidence. Not
only that, the elasticity of said goods also play a role in who (consumers or
producers) will end up baring this tax burden. Finally, when either one of the
party bares a higher tax burden, this could effect the consumer supply,
producer supply and could potentially create a deadweight loss in the market.
2.0) MICROECONOMIC CONCEPT – TAX INCIDENCE
Due to the
effects of the new GST implementation, tax
incidence is easily applicable in this situation as it is defined as the
actual division of the burden of the tax between consumers and producers in a
market. This would mean that when taxes have been imposed, only two outcomes
might arise: either the consumers bare the higher percentage of the tax burden,
or the producers bare the higher percentage of the tax burden. How this can be
determined is through the steepness of the demand or supply curve. A steep
demand curve would mean that the consumers are less likely to be effected by
the changes in price therefore, when the price increases, they would be forced
to bare the higher tax burden percentage. If a demand curve is shallower, this
would mean the consumers are likely to be effected by the changes in price
therefore, when the price increases, there would not be forced to bare the
higher tax burden percentage but instead the producers will. The same reasoning
applies to the supply curve as well.
From what I gathered from this
article, it is clear that this new GST implementation is in the favour of the consumers as the government had imposed
cheaper taxes on 295 products. However, a statement made by our Deputy Finance
Minister said that the main issue with this new tax implementation is not the
implementation itself but the prices of the products as they are still
expensive. For example, 22 products out of the 295 are mentioned to be
necessity goods therefore the demand is less likely to change due to the
changes in price and due to this new implementation, these products have been
completely exempted from GST (0%). Datuk Ahmad Maslan said, “We are faced with
traders who are still manipulating
the prices, but this list (of 295 products) are facts.” This would imply
that the producers are increasing the prices of these goods knowing the demand
will not or is less likely to change thus; consumers
would bare the higher percentage of the tax burden. Finally, as stated in
the article, this leaves the nation angry at the government for the increment
in prices of goods and also the tax they have to bare.
2.1) MICROECONOMIC CONCEPT – ELASTICITY
2.1) MICROECONOMIC CONCEPT – ELASTICITY
Another microeconomic concept that is
applicable to this article is elasticity.
There are 2 types of elasticity: elasticity of demand and supply and this
simply means the responsiveness of the demand or supply to the changes in
price. In other words, if a demand curve is elastic, slight changes in price
will cause a vast change in the quantities consumed by the consumers. This usually
happens to normal goods. If it is inelastic, slight or even vast changes in
prices will not cause a vast change in the quantities consumed by the
consumers. This applies respectively to elasticity and inelasticity of supply
as well.
According to this article, Datuk
Ahmad Maslan said, “The prices of majority of the products should be reduced,
so GST will bring benefits to the ‘rakyat’. The prices of cars have been
reduced, why are the prices of others have not declined?” This proves that the
273 products out of 295, which were mentioned to be goods such as cars and
clothing, are elastic to the changes in price. Besides that, as mentioned
previously, 22 products are necessity goods therefore; they are less responsive
to the changes in price. Due to this, there is no doubt from the article that
the producers are charging said goods at a higher price because 1) they are
aware that the demand for these goods are less likely to change; and even if
they do, it is very little and 2) they do not want to bare the higher
percentage of tax incidence. This can be easily described using Diagram 1 and 2
below:
From
this diagram, it is clearly displays the steepness of the demand curve and the
red arrow that shows the fall in quantity demanded (from Q1 to Q2) is very
minor despite the rise in price (from P1 to P2). This shows the inelasticity of
demand, which applies for necessity goods like the 22 product mentioned.
From
this diagram, it is clearly displays the shallowness of the demand curve and
the red arrow that shows the rise in quantity demanded (from Q1 to Q2) is vast
due the fall in price (from P1 to P2). This shows the elasticity of demand,
which applies to normal goods like the 273 products listed.
2.2) MICROECONOMIC CONCEPT – CONSUMER SURPLUS/PRODUCER SURPLUS & DEADWEIGHT LOSS
Finally, the third concept that is applicable is consumer surplus, producer surplus and deadweight loss. According to AmosWeb.com, consumer surplus is defined as the difference between the amount you pay and are willing to pay. How this works is consumers gain satisfaction from a good when the amount they are willing to pay is higher than the amount they have to pay. As for producers surplus, it is defined as the amount suppliers receive and are willing to accept. This basically means the producers receive revenues (gain satisfaction) when the amount they are willing to accept is higher than the amount they have to pay. Futhermore, deadweight loss could happen when there is an imposition of taxes where it disrupts the supply price and demand price thus creating inefficiency in the market equilirium.
In
the case of this article, there is a quote stated by Datuk Ahmad Maslan saying
that the GST will bring benefit to the nation if the prices were reduced. This
means that despite the implementation of GST that is supposed to be in the
favour of the consumers, the amount consumers are willing to pay is still lower
than the amount they are supposed to pay as the prices of products have
increased. This means that they have to pay for products at a higher price and bare the new tax implementation. In
other words, the consumer surplus have decreased thus creating an increase in
producer surplus. As mentioned earlier, when there is a disruption to what
otherwise would have been a stable market equilibrium with equal consumer and
producer surplus, it now creates a deadweight loss in the market. This
deadweight loss means the increase in prices due to the producers will cause a
portion of both consumer and producer surplus to be loss in the market. This
can be further explained in Diagram 3 and 4 as follows:
In this diagram, the area
below the demand curve and above the price equilibrium shows the consumer
surplus and the area above the supply curve and below the price equilibrium
shows the producer surplus before the tax implementation and price increment.
In this diagram, it shows the
effects of the price increment and also the new tax implementation. Previously,
consumer surplus should have been area A, C and D, but after these two
incidences, consumer surplus is only left with area A. As for producer surplus,
previously it would have been area B and E, but now it has increased to area B
and C. Area C and D are now loss in the market as deadweight loss. They do not
belong to the consumer or producer surplus.
3.0) CONCLUSION
In conclusion, this new tax
implementation will cause more damage than good. These 3 economics concepts which are tax incidence, elasticity and consumers surplus, producers surplus and deadweight loss are
proof of how destructive it can be if taxes are not implemented properly. The
nation of Malaysia is now angry with the government because of the high prices
of goods and the taxes they have to pay now as mentioned by Datuk Ahmad Maslan
in this article.
REFERENCES:
- SparkNotes: Elasticity: Elasticity. 2015. SparkNotes: Elasticity: Elasticity. [ONLINE] Available at: http://www.sparknotes.com/economics/micro/elasticity/section1.rhtml. [Accessed 04 June 2015].
- AmosWEB is Economics: Encyclonomic WEB*pedia. 2015. AmosWEB is Economics: Encyclonomic WEB*pedia. [ONLINE] Available at: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=deadweight+loss. [Accessed 04 June 2015].
- Hubbard, R.G. and O’Brien, A.P. (2015) Economics. Fifth Edition. United Kingdom: Pearson.
ARTICLE LINK:
ARTICLE:
With GST, 295 products should be cheaper.
Tuesday, 12th May 2015
KUALA LUMPUR: The government on Tuesday listed 295 items that should be cheaper following the implementation of Goods and Services Tax (GST).
The list compromises 22 products which was earlier subjected to the sales and service tax (SST) of five per cent but now have been exempted from the GST, and 273 products which were previously imposed with the SST of the 10 per cent but now subjected to the GST of six per cent.
Deputy Finance Minister Datuk Ahmad Maslan said the rakyat should have felt the impact from the reduction in product prices following the implementation of the GST.
"We are faced with a few traders who are still manipulating prices, but the list (of items) are facts.
I have given the directive for traders to reduce the price. If they don't follow the order to reduce prices as directed by the Finance Mistry and Royal Malaysian Customs Department (RMCD), this means that they have violated the stipulated acts, among them, the Ministry of Domestic Trade, Cooperatives and Consumerism's act," he told reporters after launching the 'Biasiswa Srikandi Malaysia' programme here, on Tuesday.
The list of items was given by the RMCD, he said.
Ahmad explained that traders must reduce the prices of 22 food products in the list encompassing salted fish, dried fish and imported fruits, as they have changed status from five per cent SST to goods that are exempted from the GST.
As for the 273 products that were previously subjected to 10 per cent SST, their tax should be reduced from 10 per cent to six per cent.
Besides cars, the other products on the list include household items and basic necessities such as furniture, clothing, sanitary pads, pampers, stationery, cordial drinks, car batteries and tyres.
"The discipline that should be followed is 'minus five (SST) becomes 0 (GST-exempted), minus 10 (SST) becomes six (GST)', before attaching the new prices," he said, while urging the other traders to follow Mydin, Jakel and KFC in implementing GST.
"Those that have brand names normally follow the SOP (standard operating procedure), what I'm worried are the shops in the villages," he said.
Ahmad said the rakyat is now angry at the government because of the high prices of goods and they also had to pay taxes.
"The main issue with GST is product prices. If prices could be stabilised, the GST would no longer be an issue.
The prices of majority of products should be reduced, so GST will bring benefits to the rakyat. The prices of cars have been reduced, why are the prices of other products have not declined?" he said.
For the services sector such as motorcycle workshops which imposed GST, Ahmad noted that only companies with annual sales value of more than RM500,000 must register for GST.
"The small companies need not register. If consumers are in doubt, the status of shops can be checked at the RMCD portal.", he said.
He said checks could be made at the portal: http://gst.customs.gov.my which provided links to four other portals to get information related to the GST, namely http://www.treasury.gov.my, http://www.kpdnkk.gov.my, http://gstpedia.my, and http://gstmalaysiainfo.com.
On the price of prepaid reload coupon, Ahmad said the issue was still under review at the related ministry and the telecommunication companies also give air time bonus accordingly to consumers. - Bernama
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