Baker & McKenzie
From as far back as 2005, the idea of introducing a Goods and Services Tax (GST) regime in Malaysia has been bandied around, its merits and drawbacks mentioned, discussed, and heatedly debated. First introduced in the 2005 Budget speech, the government has since deferred the implementation of the GST several times with the stated intention to engage in further public consultation and to accord businesses more time to prepare for its introduction. Since the GST Bill was tabled in the Malaysian Parliament for its first reading in 2009, there has been no further progress in Parliament to date, with the second and third reading of the bill having been repeatedly postponed.
When the prime minister alluded to the implementation of a new tax structure which will ensure that the federal government's finances remain sustainable for the future in the 2013 Budget speech, there was a flurry of anticipation that the government will finally proceed with the implementation of a GST regime. Given that the 13th general election had recently just been completed, it is anticipated that the GST will be implemented very soon. This was exacerbated by recent comments by a minister in the Prime Minister's Department who commented that if the GST was implemented at the same rate of 7 percent as that of neighbouring country Singapore, this can guarantee additional revenue of MYR20 – 27 billion.
Nevertheless, as recent as May 2013, Finance Minister II Datuk Seri Ahmad Husni Hanadzlah made it a point to stress that no time frame has been set for the GST's implementation and that the government would be re-examining earlier studies before effecting the regime. This was in response to the outcry by the public that the 7 percent rate is too high. Whilst he affirmed that the rate for the GST has not been determined, he further added that a GST rate of 4 percent would be a normal starting position.
Malaysia remains one of only three countries in Southeast Asia that does not yet operate under a GST regime, the other two being Brunei and Myanmar. Currently, sales tax of 5 percent – 20 percent and service tax of 6 percent are imposed on the domestic consumption of certain prescribed goods and services, respectively, on an ad valorem basis. When implemented, the GST will replace the existing sales and service taxes. In contrast to both single-stage taxes above, the GST will be a multi-stage value-added consumption tax payable by all intermediaries in the production and distribution chain, though the tax burden will still be ultimately borne by the consumer. In contrast to the current sales and service tax regimes, the proposed GST regime allows input tax credits to be claimed, similar to the GST regime in Singapore and Australia.
Critics of the GST regime voice concerns on the exorbitant cost of implementing and regulating a GST system, as well as on the resulting burden on consumers whose incomes have arguably remained stagnant. Their argument centres around the contention that the GST is only viable if the income gap is first addressed and if the country's per capita income is higher than it currently is.
Nevertheless, the government has recognised the issue and the proposed GST model contains similar concepts adopted by other regimes, such as standard-rated, zero-rated and exempt supplies. It has been proposed that certain basic goods and services which are deemed necessities will be zero-rated or exempted from the GST, including basic foodstuff, residential accommodation, education, health services, public transportation, and domestic water and electricity supply to a certain limit. Fears that businesses will increase the prices of goods in light of the GST should be allayed by the Price Control and Anti-Profiteering Act 2010 which came into effect on 1 April 2011. In addition, all exports of goods and services will be zero-rated to ensure that Malaysian products and services remain internationally competitive.
While the GST regime's implementation in Malaysia remains uncertain in terms of a concrete timeline, it is likely to be an inevitable outcome. Even detractors concede that the introduction of a GST regime would result in a more efficient taxation system overall as it would reduce the opportunity for tax evasion while simultaneously generating additional revenue for the country. It has further been acknowledged by all parties that personal income and corporate tax rates should be reduced accordingly in tandem with the adoption of a GST system.
It would appear that the move to introduce GST is in line with Malaysia's vision of being a high-income nation by 2020. Although the introduction of a GST regime would initially impact businesses and individuals across the board, a focused and well-driven implementation should prove to be beneficial for the country as a whole in the long run.
Tien Sim Lim, Yvonne Beh
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