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Tuesday, October 18, 2005

GST and Income Tax

What is the difference between GST and Income Tax?The main different is Income tax is a tax impose on your income whereas GST is tax when you spend.


Income Tax
Government will send you Form B for you to report your income to the government. Base on what you report, government will tax you on your income. How much you pay tax is generally determine by how much income you received in a particular period. Regardsless of whether you spend it or not. Often, it is better you spend it and if you able to prove that your spending is wholly and exclusively generating your income, you might able to deduct against your income.

On the other hand, GST would not tax you on your income. You would not be tax when you received your income. As long as you never spend it. You would be tax when you decide to buy something ...... Like, you want to buy cigarette, you would pay "sin" tax to government indirectly. If you decide to buy a car, you might have to pay 200% tax to government on amount you spend, indirectly, included in the purchase price.

Thus, GST is call indirect tax as you pay tax indirectly included in the purchase price. Income tax is call Direct Tax as you pay directly to the government.

Which one is fair?

As you can see above, income tax is a tax base on your income. How much tax you pay depend on how much your income is regardsless of how much you spend.

Under GST system, you would not pay government tax no matter how high your income is if you never spend it. You would be tax if you try to buy something.

Now, which one is fair? Especially to poor people.

They is no definite answer. In UK, some services like healthcare does not impose GST or they call VAT, thus, poor people can enjoy such service without paying tax. In Malaysia, if you buy luxury car, you have to pay as high as 200% on amount you spend. Thus ,is depend on execution.

Are we ready?
In order for us to start implement GST from year 2007. Everybody have to get use to it now. Government has reduce the 10% Service tax to RM150,000 per year few years ago. Divide by 12 month. Thus, a coffee shop with monthly sales RM12,500 is subject to Sales Tax. Thus, unlike previously, only you go to high class restaurant only you pay plus 10% Service tax (or fast food). Under current legislation. Even if you go to coffee shop is subject to Service tax.
If every coffee shop register to custom and obtain a Service tax license now. By 2007, majority of the coffee shop has register to custom and they might have a system to collect the service tax and pay the tax to custom.
However, now, majority of the coffee shop owner is yet to implement this system. With current inflation cause by high oil price. Government also face difficulty in control inflation if they want to force those coffee shop owner to register.
It look like by 2007, custom and tax department would have difficulties in implement it. Custom and tax department would unable to process large volume of registration and license application. Small business owner also do not have a system to monitor the money collected on behalf and summit to government every two months.
We see how Finance Minister solve this problem then?

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Jean said...

uh.. how do u compare GST and Income Taxes when they are taxing you on different things? Isn't that like comparing an apple and an orange? Are they not on different grounds? =\

xaverri said...

agree with Jean.. Anyways not very sure Malaysia is ready for GST implementation. There're many more issues to iron out, including ensuring all involved are aware of the terms under which GST is collected etc..

In Australia, certain exemptions on GST apply, eg raw foodstuff such as meat is GST exempt. Not too sure whether Malaysia has announced anything re exemptions?

Discussion on sin tax (eg on cigarettes) and those on luxury cars shouldn't be lumped together with GST..One thing we can be sure - complaints by the rakyat will increase as cost of living goes up even more..

Peter said...


This should be differentiating, not comparing.

It just that government want to replace or put more emphasis on GST.

Just like government give you apple previously. But will give you orange in future. so what is the difference. In term of colour and it nutrition.

There is some way of measurement. Like you buy apple previously on daily basis. In future, your family want to eat orange. With the same budget that you buy apple previously. How many orange will you get.

I think that is what we should do.


Thanks for your shares on Australia experience.

Jean said...

Yeah Di.. lots of issues.. though whatever the outcome, it would be good if they would incorporate the 5% govt taxes into the final prices like they do here in Aus. its really irritating to look at one price and end up paying another.

Peter, what do u mean replace GST? I'm not sure what you are getting at as have not been following issues about this in Malaysia.. but just based on what you wrote, either you have mis-worded it or something, but it seems to me that you are comparing 2 very different things. And what kind of measurements are you talking about? in terms of ? if its the cost of living and quality of life, then yeah, what you said is right.

Peter said...

Hi Jean,

In country that implemted GST like UK and Australia. Govenment income from Indirect Tax portion have over income derived from income tax.

Thus the trend is all other country in the world including Singapore start to implement it own indirect tax system. Hopefully one day such system might replace income tax system.

However, non of the government in any part of the world has fully replace it. I might have mis-worded it as most of the country in the world are running both system simultaneously together.

As I expain earlier. People used to say if you comparing two sets of accounts in different industries. Like manufacturing company accounts and a plantation company accounts. It is like comparing apple with orange.

However, in stock market. You still have to make a choice between the two company as you have limited capital.

Investment Analyst still able to go throught both sets of accounts and then make a recommendation.

I think this call analysis. Not comparing

lqis_louis said...

so if in this case, since my income is more thn RM300k permonth and im always oversea, i rather choose GST tax thn income tax? im a Permenant residen in mexico so i can have my money rolling here without paying tax and spend it at mexico since im living there now. so i can choose GST in this case.

lqis_louis said...

so if in this case, since my income is more thn RM300k permonth and im always oversea, i rather choose GST tax thn income tax? im a Permenant residen in mexico so i can have my money rolling here without paying tax and spend it at mexico since im living there now. so i can choose GST in this case.

lqis_louis said...

so if in this case, since my income is more thn RM300k permonth and im always oversea, i rather choose GST tax thn income tax? im a Permenant residen in mexico so i can have my money rolling here without paying tax and spend it at mexico since im living there now. so i can choose GST in this case.

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point0 said...

We can't compare with countries that has a higher buying power... for them it only makes sense to implement a consumption tax, because they CAN afford to buy...

And also because they live off imported goods.


As far as I understand, income taxes in Malaysia only hits you if you earn above RM 2,500. Do you know 75% registered workers in Malaysia earn below RM 2,000?

This means, they do not pay income taxes.

BUT to say they totally do not pay tax is a myth.


Under the current indirect tax system, the Sales and Service Tax... tax is levied at the beginning of the value chain. This tax is usually 10%. This 10% is then passed down to the end consumer.

But why is SST a more progressive tax than GST? This is because SST is levied on all imported goods, BUT exempts 4,700 locally produced goods. GST only exempts 40 goods... the poor who usually don't buy imported goods are now taxed more under the SST.

Secondly, the Service Tax befalls more luxurious items; as the post says... for outlets earning above RM 300k OR if they serve alcohol. Also, corporate services are taxed, and private clubs too.

What does this mean? Only the rich gets taxed more under the SST system. But under the GST system, everyone gets taxed.


SOOOOOOOO the REAL poor who don't pay income tax will pay MORE tax $$ with GST....

BECAUSE the "Savings" from drop of 10% to 4% only applies to those who pay the SST, which is the richer individuals in Malaysia

kristy said...

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md razu Ahmed said...

I talked about taxes on Dividends in one of my blogs of last year. Bottom line you have to earn more
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Health Premium.

Another consideration is that if you are building a portfolio of dividend stocks like I did,
my dividend income was always increasing. I had no year when my dividends did not increase.
They also increased more than the rate of inflation. However, the increases did vary from year
to year ranging between 5% and 23%.

double income
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