Monday, 20 January 2014

GST in Malaysia (2015)

Sorry for the long, long holiday from updating this blog. It has been a while because I was on vacation and also CNY is just around the corner, so there's ALOT of cleaning to do. If any of you who is familiar with Toastmasters, I am scheduled to speak my 7th project speech which requires me to research on my topic. Thus, I chose this topic as it is highly debated of its implementation impact in Malaysia, from the parliament to the roadside mamak shop.

What is GST?
Basically, the new Goods and Services Tax (GST) will replace our existing Sales and Services Tax (SST) in April 2015. Both of these taxes are consumption taxes, which means consumers opt to pay more in tax as they consume more. The main difference between this two taxes is how they work. Our current system, the SST, taxes are collected at the end of the supply chain. For the GST, however, taxes are collected at every stage of the supply chain. Currently, the disclosed rate at the beginning of the implementation of GST is at 6% to replace both 10% Sales Tax and 6% Service Tax. The government did clarify that the proposed rate of 6% will not be raised for at least 2 to 3 years, citing that it will take time for its impact to stabilize [ to which extent this statement is true, the consumers should be prepared for an 'alternative' event ]

How does the GST work?
To explain this, I've found some very good diagrams from savemoney.my.

diagram 1
source : savemoney.my

If we study the diagram closely, we can note that the GST is a value-added tax, unlike the SST which is levied on the final goods. Under GST, the tax will be levied at every stage of the supply chain. That may sound as if the tax burden will increase proportionately depending on the number of stages, but fortunately it does not work that way. A value-added tax means that for tax only applies for every increase in sales value along the supply chain, leaving the amount which have been taxed at previous stages unchanged.

To be more detailed, let us refer back to the above diagram. The manufacturer, under 4% GST, will first charge tax of RM0.40 [RM10 x 4% ] to its bill, therefore total paid by the coffee shop to the manufacturer will be RM10.40 for its supplies of coffee. The government will then collect RM0.40 from the manufacturer. In the second stage, the coffee shop ( must be registered under the GST program, only those registered can claim and charge GST ) charges its customers RM15 for the cup of coffee. The tax levied will only be of 4% from any addition to RM10 previously taxed, which is RM5. Coffee shops registered under this GST will first claim the RM0.40 from the taxation office when they prepares annual taxation. Then they will pay 4% out of their sales, RM0.60 ( RM15x4% ). The effective tax paid by the coffee shop will only be RM0.20 (RM0.60 - RM0.40), therefore eliminating double taxation on the same goods. 

Why do we need GST?
According to various sources, including the official Government Transformation Programme (GTP) website, implementing the new GST system will be able to solve the multiple weakness of our current sales and service tax system, other than being a more business-friendly tax system. A few examples of it would be double taxation, double transactions, as well as being rather opaque. Most people did not realise that the goods they bought from retailers or hypermarkets have indeed been taxed at the manufacturer's level. Another main reason for this move is that GST is a broader base taxation. Unlike the SST, GST will cover significantly more areas and products or services. Even services such as giving tuition can be taxed under the GST. This will provide higher revenue for our government. For decades, Malaysia relied highly on revenue from our oil reserves and also income taxes. Income sources from natural resources are highly unsustainable. To make matters worse, official reports showed that an average of only 2 million paid income taxes out of the rough estimate of 8 million working population (I might research this topic in the next few posts). So, the new taxation system will try to reduce the problem of lack in revenue, and this will also help in curbing tax evasions. 

Inflation?
When the news of GST broke out in tabling of the 2014 budget, the first question to ask would obviously be the impact of such move. Will inflation kicks in hard? Senior officials from one of the subunits of GTP in charge of GST who was interviewed on bfm radio said that according to data and research, the likely inflation rate of implementing GST would be 1.8% ( I am not sure if this is a direct or indirect impact of it ). That seems rather mild and reasonable. There is one particular interesting question asked to the official ( he did not have enough time to answer it )

"Why even at 6% proposed rate, which is lower than the original 10% sales and 6% service tax it will cause prices to go up? Shouldn't the price drop instead? "

Bare in mind that GST is after all a broader tax system, which means more goods and services will be levied a tax. Some goods will be cheaper while some will be more expensive. [refer diagram 1 above] Goods that were previously taxed under 10% sales will definitely see a reduction in tax, but there are also many goods not taxed by the 10% sales tax but are now under the GST [refer diagram 2 below]. Reports from media claimed that the current system exempted goods runs down to almost 250 pages, while zero-rated items under the GST (essential items) is only about 21 pages [we assume the pages are rather same in length and also the zero-rated items will not increase significantly in the near future ].

diagram 2
source : savemoney.my

With many goods that will fall into being taxable, we shall see a rise in prices of certain goods we normally consume. However, we do not know if the prices of those goods which are taxed at a lower rate will see a decline. There is a general tendency of prices to stay rather than falling even if the cost of production goes down. The statistic given by official might not have taken into consideration of expected inflations and also the ripple effect of such move ( or a contagion if it gets serious ). Business may expect prices to jump, thus increases its price proportionately not only due to fear of losing profit margin, but also the fear of rising cost of living as well as herd mentality allows business to increase prices together. Some even claimed that even if the cost does not rise, business can and normally do take this as an excuse to raise prices. The government thus assured that the Anti-profiteering Act will be revised to prevent business from raising prices as one pleases to. Though, we do not know how effective and efficient of this Act, especially in preventing such business practices amongst Small and Medium Enterprise (SME).

Conclusion
We should expect a higher rate of inflation! Besides, it would make no sense to implement if the government gets less revenue in return. Even at a neutral rate of 4%, they are expecting to collect at least the same amount as our current tax system. We cannot be sure of how much higher it will get as it depends on our government's move to curtail the rising expectation of inflation. Thank you very much for reading this long long post :) feel free to comment if I've made any mistakes or errors.

Tuesday, 10 December 2013

Theory of Marginal Utility!

One of the very first chapters which caught my attention when I was in secondary 4 is this chapter, marginal utility theory. In economics, utility simply means satisfaction. Higher utility means higher satisfaction and vice versa. Then the term marginal utility refers to the additional satisfaction gained when a product or service is consumed / used / bought.

Theory of Diminishing Marginal Utility

Yes, study of economics deals with a lot of statistics. So we will be seeing plenty of tables, charts, and graphs. As you can examine from the table, the satisfaction gained from eating an additional burger
[ *YumYum*LovesBurgers* ] will result in a lower satisfaction compared to the burger previously. The theory ( and common sense ) suggests that the more you eat, the less satisfaction you will gain at a margin until there is a point where it becomes negative satisfaction ( eating more will make you uncomfortable etc. ). So if we draw a graph on this table, we will see something like this :


As you can see the downward sloping curve of marginal utility, economist then modelled the demand curve based on marginal utility curve. Thus the marginal utility curve is actually also the demand curve! This too explains why as price increases, quantity demanded of an item decreases. If consumers believe that the additional price they are paying is not equal to the additional satisfaction that they will receive, then they will obviously not pay for an extra of it!

The Paradox of Value
- Diamonds vs Water
Ever wondered why water, despite its necessity, is not seen as a precious thing? Diamonds, on the other hand, are highly priced even when it has very little in terms of use. The concept of marginal utility helps to explain this. Water is abundant, while diamonds are relatively scarce. Hence owning an extra diamond will give you higher satisfaction than getting an extra cup of water ( provided you are not in a dessert of course ) because one diamond is extremely valuable no matter how many you have while water becomes less valuable as quantity increases. This shows that marginal utility is the key factor to an item's price rather than its value in use.

Soda vs Newspapers Vending Machines
In western countries ( sadly not in Malaysia yet ), newspapers are sold in vending machines. When the consumers pay for the price of one newspaper, the lid opens up for them to take their morning paper. Unlike the soda machines which only dispense one-for-one, consumers can take as many newspapers as they want from the paper machine. Why wouldn't the newspaper companies worried about that? The concept of marginal utility can be used in this case. Newspaper unlike sodas, has very short shelf life. It just becomes useless overnight but sodas can be kept for years! Therefore, sodas have high marginal utility since you can drink it whenever it will yield the highest satisfaction. Newspapers have low marginal utility as it cannot be kept and reselling it is just not worth the time as there is abundant of supply if everyone does so. Newspaper companies therefore rely on the trust that consumers will only take as much as they need.

Monday, 9 December 2013

Introduction to Supply

In theory, supply refers to the quantity of goods that producers are willing and able to supply at various prices over a given time period. Unlike a demand curve which is downward sloping, supply curve would be the total opposite. A common supply curve would be as follows ; 

Price-Supply relationship

Why upward sloping?
Imagine if under a contract, you were given a piece of land. You must produce a combination of potatoes and carrot and maximize your profits. Let say that both of them are priced the same and uses the exact same amount of land per acre to produce a kilo of produce, thus you would be utilizing the land to produce both equal in quantity ( assumes that there is no extra cost involved for both the products ). If the price of carrots were to increase, it would make sense for the producer to shift most of his land to plant carrots hence selling more carrots. Therefore the quantity supply in the market would increase as the price of a product goes up because it is more profitable now than before to produce that product, all others being equal.

In this globalized economy, where there's consumer demand there will be a supply ( of course, the demand must be logical and attainable at the same time ). To which comes first is still debatable. According to Say's Law ( Named after Jean-Baptiste Say ) , supply creates its own demand. The idea is that when people produce any commodities (supply) and earn money from it, the money is useless if it is not used. Therefore money gained from selling a product is used to buy another product which they want (demand). Though this law became a conflict for the two main schools of economics, the classical and Keynesian as the former believes that production will lead to a growing economy while the Keynesian argues that growth comes only from increased demand.






Sunday, 8 December 2013

Introduction To Demand


I'm pretty sure that most of us knows what 'demand' is, therefore I will not go much into details of the long and tiring explanations given by textbooks. So everyone has our own needs and wishes to afford something. Etc. food, clothing, home. Basically in economics, demand means the quantity of an item which is desired by a person while quantity demanded is the amount which the person is willing, and at the same instance, afford to buy it in a given time period. The table below shows the common relationship between the price of a good and the quantity demanded by consumers ( in a free market ).

The price-demand relationship

As shown in the diagram, the common demand curve shows an inverse relationship between price and its quantity demanded. This is true according to the Law of Demand ( states that the quantity demanded lowers as price increases, all others being equal ). Mainly because of  2 reasons ; the substitution effect and the income effect.

Substitution effect :
 In classical economics, we commonly assume that all humans are rational and will try to maximize our satisfaction* [utility]. To illustrate this, let's say you are given choices between two vegetables, the carrot and the cabbage, and say that both of them will give you the same amount of satisfaction (per kilo). 
If the carrot is originally priced at $1 but later on increased to $1.50, which product will a rational man buy? If that man had been buying carrot all along, then now he would substitute carrot with cabbage because it is more worthy to do so at a given fixed income. Therefore, as the price of a product is increased, people will demand less of a product, substituted by another product. This is given that that particular product has fair / close substitute. The recent rise in the price of sugar ( up roughly 30cent ) due to subsidy rationalization in Malaysia did less to reduce its demand as sugar unlike most commodities has very less substitutes ( expensive artificial sugar eg. aspartame ) We will discuss the responsiveness [elasticity] of consumers to the price in the coming posts.

Income effect :
According to 2012 labour force survey of Malaysia, there is a roughly a total of 20mil working labour. Of these working labours, mainly are employed at a fixed rate of wage thus most of us have a limited disposable income to spend on goods and services per month. Therefore, we make choices everyday to fully make use of our hard earned money. As a product got more expensive than before, consumers will cut back on its consumption because they cannot afford to buy the same amount since there is no increase in wages. With only $10 to spend  on vegetables, will you be able to buy 10 carrots as you did before the price hike?

Both of these effects cause the quantity demanded by consumers to fall as price increases. But there are circumstances which the demand curve shows a positive relation between price and quantity demanded which violates the Law of Demand.



Such goods, which are rather rare, are called Veblen goods ( Named after US economist Thorstein Veblen ). These goods are mainly driven by psychological factors such as fear and status-seeking. Another example of goods which follow such demand curve would be Giffen goods ( Named  after Scottish economist Sir Robert Giffen ). However there are considerable debates on its existence. I too shall cover these topics in coming posts.

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The topic 'Demand' is a very large chapter , and it will be a few posts before I can cover most of it. Do subscribe and  look forward to future posts. To be honest, microeconomics is not my strong point but it is very interesting. Anyway, thanks for reading and again feel free to to comment to add or to point out any mistakes. 

Updated :
Today , I went to an incredibly big book sale called 'The Big Bad Wolf' , in Mines Convention Centre.


As you can see the numbers of people there, sales are great! The main reason why is there such huge crowd is that all books were priced at 75-90% discount ( very worthy indeed even though they are not newly published, I bought only 4 books ). Explained earlier, a very low price ( relatively ) will indeed attract huge demand for it.

Saturday, 7 December 2013

=Me=101=



''It always seems impossible until it's done."
-Nelson Mandela-


Passed away peacefully on 5th December 2013, Nelson Mandela is one of my favorite role models in life. His legacy of fighting oppression and gaining an equal ground for all inspired me. To begin with, this blog was created as a holiday project of mine to summarize and go in depth into the many topics of conventional economics in layman terms. The reason I touched on Mandela is because I too adore the concept of an egalitarian society. Economics, on the other hand have been a great passion since I'm 16. Thus, in the future I wish to pursue a degree in economics as a stepping stone, somewhat hoping to make a difference in this highly capitalist society. I have recently completed my A-level studies and decided that by making this blog I will be able to enhance my knowledge on economics as well as a great way to pass my 10-months' holiday till the next university intake in Sept 2014. Do take note that I am not the best writer and neither do I have a great proficiency in English. I have yet to step foot into any university but I will try my best to give the best of information I could as I am sure there are a lot more for me to learn. If there's any mistakes, errors, additional info etc. , feel free to comment. The posts will be mainly a summary of economic terms, ideas and occasionally some examples from Malaysian economy.