Goods and Services Tax: What Malaysian should know...

Goods and Services Tax: How it Affects Malaysia’s Middle-Income Earners

Prime Minister Datuk Seri Najib Razak announced during the unveiling of the 2014 Budget that the Malaysian government will introduce a 6% goods and services tax (GST) come April 1, 2015. With the introduction of the GST, personal income taxes will be cut by 1 to 3 percentage points while corporate income taxes will be cut by 1 to 2 points.

The GST is set to replace the sales tax and service tax (SST). As the new consumption tax system, the GST is more comprehensive than the previous system because it includes the manufacturing and distribution stages whereas the SST is only charged during the manufacturing stage or when goods are imported.

Malaysia’s Ministry of Finance calls the GST “a more effective, transparent, and business-friendly tax system,” and that it overcomes the weaknesses in the SST system. The ministry expects the introduction of the GST to increase tax compliance as businesses will need to submit simplified tax returns.

Deputy Prime Minister Tan Sri Muhyiddin Yassin said the GST will have a positive long-term impact on Malaysia’s economic growth. The New Straits Times quoted the Deputy Prime Minister on the issue, saying that the DPM believed replacing the SST with GST will not bring “too huge of an impact, especially to low-and-middle-income groups.” 

In terms of its impact to government revenues, Free Malaysia Today said the GST will contribute up to RM 22 billion to the government annually. Royal Malaysian Customs (RMC) senior assistant director Mohammad Sabri Saad said they expect an additional RM 5 billion to RM 6 billion on top of the RM 16 billion that comes from the existing sales and services tax.

Which Income Groups will the New Tax System Affect the Most?

Chartered accountant Ooi Kok Seng was quoted by the Malaysian Insider as saying that those earning RM 400,000 a year will not be too affected by the new GST and that this group will still have RM 7,200 in tax savings with the GST in place. 

He adds that those earning RM 3,000 a month “who may not have to pay income tax at present depending on their deductions, will have to start paying tax.” This group will have to pay tax for expenses like clothes and bus fare. He also says that the GST can be used by small businesses as an excuse to raise prices.

The same article says that low-and middle-income earners will have to face rising property prices as the price of low-and-mid-end properties will grow more expensive. 

While the middle-income earners may have to pay more for the goods and services they pay for with the GST in place, in terms of a tax burden, the RMC has a table that shows that the lower-and-middle-income earners will have less tax burdens under the GST than compared to the SST system. Lower-income groups have a tax burden of 2.94% under the SST while this goes down to 2.57% under the GST system. These figures are at 2.94% and 2.57%, respectively, for middle-income earners or those who earn RM 2,000 to RM 3,999 per month.

The GST is equivalent to the Value Added Tax implemented in other countries. Malaysia’s 6% GST is lower than the tax implemented in other nations in the Asean region. In Singapore and Thailand, the equivalent tax is at 7% while the equivalent tax in Indonesia, Laos, Vietnam, and Cambodia is at 12%. In the Philippines, the VAT is set at 12%.

The Malaysian government has identified several items as exempt from GST and these include food items such as rice, flour, sugar, fish, flour, and chicken. 

To give the public guidance on price differences before and after the GST is implemented, the Treasury and RMC are working on a “shopping guide” that lists the prices of 325 essential goods with their prices before and after the GST is implemented next year. The two agencies will release the list 3 months before the GST is finally expected to take effect.

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