A.What is a GST and explain how it works?

We all know that the upcoming Goods and Services tax (GST)

is going to be implemented on the 1st of April 2015. Under

GST, most of the goods and services (besides the basic

needs) will be charged a tax rate of 6%. Right now, under

our current tax pays, 10% sales tax will be charged mainly

on manufactured goods and 6% service tax will be charged on

food and beverages. GST works in a way that a company have

to pay tax its supplier which is also known as input tax.

Right after the company sells the end product to the

customers or consumers, it will have an impose tax which is

known as output tax. To calculate how much tax to pay to the

authorities, it is the total amount of output tax minus the

total input tax. An equation should be shown as: GST payable

by company = Total Output Tax – Total Input Tax.

The study showed middle income households will suffer

cash outflows of up to RM 1000+ per year, because of GST

payments exceeding income tax savings. But the worst hit

households are those earning about RM2,500 a month,

including technicians, clerks, services workers, farmers and

fishermen. They are expected to pay 2.67% of their income in

GST. And when the tax comes into effect on April 1st 2015,

those residing in West Malaysia as well as single-person

households are expected to bear a bigger brunt of the tax at

6%! On low income households, the study showed that 2.35% of

their income will be toward the GST, while high income

households those with an average monthly income of RM 30,815

will bear only 1.32%.

Example:

A person called Idris, who is also Chief Executive

Officer of The Performance Management and Delivery Unit

(Pemandu), said last month that the tax would affect mostly

the rich as they are heavy consumers. For the poor, they

would suffer less since they receive the Bantuan Rakyat

1Malaysia (BR1M) aid, and most necessities would be either

zero-rated or exempted from the GST. These include basic

food items, public transportation and education.

GST mostly benefits the manufacturers, primary industry

producers and as well as retailers. These registered

businesses are able to claim these input tax credit from the

government. Whereas, people who not yet acquired a job will

have a disadvantage and in the end, we have to pay more than

the others who have already acquired a job.

B.Demand and supply diagram to show the impact of GST

The economy will be at equilibrium when the supply function

(S1S1) intersects with the demand function (D1D1).The amount

of goods being supplied and demanded will be the same when

it is at the equilibrium point (e1).So, the distribution of

goods is at its most efficient. By implement GST, the supply

function will be left shifted to (S2S2) and intersect with

the original demand function so the new equilibrium point

will be (e2).The output of goods and services will decrease

as the cost of goods increase.

C.Identify and explain area of consumer surplus producer

surplus and government tax revenue.

1.Consumer Surplus : The market price that consumer pay(P2)

is actually the amount of consumer spend,and the quantity

they buy(P1E1Q1B). Where means the net gain of consumer, as

area AEQB is greater that area PEQB. This net gain is

called consumer surplus, which is the total benefit, area

AEQB, less the amount spent, area PEQB. Hence AEQB - PEQB =

area AEP.

2.Producer Surplus Producer Surplus : The private benefits

that gain by producer is called Producer surplus .In terms

of profit, the minimum price that receive in the market is

greater than the minimum price to supply.In other words they

received a reward that more than covers their costs of

production.The producer surplus derived by all firms in the

market is the area from the supply curve to the price line,

area PEB

3.Government tax revenue : A unit tax will cause a parallel

shift in the supply curve. The vertical distance between the

supply curves shows the amount of tax per unit. An 

percentage tax will cause the supply curve to tilt or

pivot to the left. This is because the size of the tax

increases with price. The actual tax levied by the

Government on the basis of equilibrium point only.

D.deadweight loss to predict the overall effect on welfare

as a result of the GST on haircuts.

The diagram before carry out GST,show that the consumer

surplus and producer surplus has the highest efficient

The diagram after carry out GST show that the consumer

surplus and producer surplus has been decrease therefore

becoming deadweight.

The tax of a product will less than the benefit of the

consumer and buyers.By the way, the decrease of consumer

surplus and the producer surplus often exceed the income of

the government.The deadweight loss refer to the tax distort

of market and decrease the total surplus.The tax will

reduces consumer and producer surplus after tax. Because the

reduce amount of producer surplus and consumer surplus is

greater than tax revenues. So , the tax causes a deadweight

loss.

Market usually efficient allocation of scarce resources.That

means,the supply and demand equilibrium maximizes the total

surplus in the market of buyers and sellers . However, when

tax increases the buyer 's price and reduce the seller 's

price , the buyer of its motivation is less than when there

is no consumption tax , and incentives for sellers is to

produce less revenue than without . When buyers and sellers

respond to these incentives , the market size be reduced to

below its optimal level . Therefore , the tax distorts

incentives, and market allocation of resources caused by

inefficient , resulting in unnecessary losses. Deadweight

welfare loss due to reduction in the barber shop , because

the price rise , reducing customer demand for a haircut .

E.Explain why broader based GST tax system may be preferable

to the current system of progressive income tax

As we know income tax is a government tax imposed on

individuals or taxpayers that varies with the income or

profits of the taxpayer. The new tax package will cause

consumers to buy more items because they have extra money to

buy their own things. But in the other hand , the GST are

means that the product or item that never been for a tax was

being taxed and that might cause the price of product

rising.As a GST begin in April, the demand for some product

being reduced.and producers have to pay a tax therefore the

price of product wont be decrease and the weight loss is

being grow. As producer they may have to decrease their

supply levels because they may not able to pay for the tax

or buy the increased materials that price have gone up