SEPTEMBER 20, 2013
LATEST UPDATE: SEPTEMBER 20, 2013 04:12 PM
The Government has done extensive ground work towards the introduction of a Goods and Services Tax (GST) with the Customs Department having invested time and money in getting itself GST-ready.
The Department has undergone intensive training and has engaged in dialogues with trade and business associations, professional bodies and various industry groups. The Department has also issued several draft GST guidelines.
The need for GST is predicated on the fact that the country has been running at a budget deficit for more than 15 years, and that it is important that a clear and sustainable alternative tax base be introduced as the corporate and personal income tax base is very narrow with a few paying taxes to fuel the nations' expenditure.
A GST is a consumption tax which is broad-based and thus spreads the tax burden across a wider segment of the working population. While GST will replace the existing sales tax (typically imposed at 10%) and service tax (6%), the initial indication from the Government some years ago was that GST would be introduced at the rate of 4%.
There have since been rumblings that the introductory rate will be higher, and many are sceptical as to whether the introduction of GST at 4% will create an effective alternative tax base needed to ease the budget deficit. As has been the case in several countries which operate a GST (or value added tax (VAT)) system, the rate of GST will likely increase over time, particularly where the introductory rate has been low.
For instance, Singapore introduced GST in 1994 at the rate of 3% and the rate is currently 7%. This rate is still low as compared with many other GST/VAT regimes. The United Kingdom's VAT rate has gradually risen from 10% in the 1970's to the current rate of 20%.
Should GST be introduced at the proposed 4% in Malaysia, it is fairly safe to assume that this rate will increase over time, probably within 5-10 years or so after its introduction. However, if that is the case, then there should be a lowering of the income tax rates as well. An effective tax revenue contributor such as GST will enable corporate and personal income tax rates to be reduced over time.
Issues
It is obvious that various matters need to be considered carefully before a comprehensive GST system can be introduced in Malaysia. These are summarised below:
Computerisation
The administration and enforcement of the GST system would require efficient and effective computerisation of the relevant department which will be administering the tax. It is important to ensure compliance with registration requirements, as well as to carry out internal checking and auditing of GST returns.
Accounting records
A comprehensive GST necessitates good business accounting records. At present, most small businessmen do not have good accounting systems. This would have to be considered in determining the exemption threshold for small businesses and in handling tax audits in the initial years of implementation.
Trained personnel
Effective administration and enforcement requires well-trained GST officers. Under the GST system, there is a need to have regular inspection of accounting records to counter tax evasion.
Treatment of exports
Exports should be zero-rated, i.e. the exports are covered by GST but the rate is zero. An exporter can, therefore, claim tax credit in respect of its inputs on which GST has been imposed. This has been confirmed to be the case by the Malaysian authorities in the various business consultations carried out over the years.
Exemptions
Small firms are normally exempted from GST, i.e. no GST is levied on their products but they are not allowed to claim any credit or refund for the tax imposed on their inputs. Otherwise, small firms may have difficulty in complying with GST legislation and their administrative costs would be increased. In addition, various necessities would also be exempted from GST. GST is a broad-based tax and exemptions and zero ratings must be scrutinised very carefully. Too many exemptions would result in the erosion of the tax base.
Rate of tax
This would depend on various considerations. GST could be levied at a single rate except for exports which are zero-rated. This simplifies administration while the provision for a zero rate is intended to encourage exports. It is possible that luxury goods may be subjected to a higher GST rate.
Impact on the general price level
It should be noted that the impact of GST on the general price level is part and parcel of its transitional phase. The general consensus in the literature is that while the introduction of GST may bring about a one-time increase in the cost of living, the probability of it leading to inflation is not high.
Government policies to inform the public and traders about the expected effect of the GST on prices, the use of price controls, offsetting adjustment in other taxes (if possible), the correct timing of the tax changeover, and generous provisions to ensure full credit for previously paid taxes on business assets and inventories should help to contain any potential inflationary effect.
Education
It is essential that the general public, in particular businesses and traders, are adequately informed about the features of the GST and the procedural requirements before the GST legislation comes into force. This is necessary to avoid unwarranted increases in prices of goods and services.
Transitional provisions
This refers to the changeover from sales tax/service tax to GST and the effect on stocks and capital equipment bought just before the implementation of GST. A decision would have to be made on whether the sales/service tax paid would be available as a credit, or be refunded to businesses.
Readiness
Is Malaysia ready for GST and more importantly are Malaysians ready for GST? Businesses are at various levels of 'GST-readiness' but on the whole it would be fair to say that most businesses have not committed the time and resources to getting themselves GST-ready in view of the frequent changes with regard to the introduction of this tax.
It is hoped that the introduction of GST in Malaysia will see more smaller businesses voluntarily registering themselves for GST and gradually coming within the tax net, largely as GST operates a self- assessment mechanism whereby registering for GST will ensure that businesses will be able to claim input tax credits in respect of GST suffered on purchases of goods and services.
Although many of these businesses may be sceptical as to the implementation and administration of GST, the Customs Department has indicated a clear level of confidence in its ability to administer the GST system effectively.
The Customs Department will be closely watched in this regard, particularly by organisations such as the Federation of Malaysian Manufacturers, with Malaysia being a net exporting nation. For exporters, cash flow will be significantly impacted by the speed and efficiency at which GST refunds in respect of exports are processed, and it is essential that the Customs Department be well equipped to ensure that exporters' needs in this regard are met.
The general consensus is that GST is likely to be introduced, but it has been a waiting game. Will this end in the 2014 Budget? Indications are that when the Government eventually commits to GST, there will be a 12 month period before the implementation of the tax.
Businesses should have some plans in place as to how they intend to prepare themselves in the event that GST is introduced as a 12 month implementation period is not long. For large entities with complex transactions, this time-frame will be a real challenge, if initial steps have not already been taken to prepare for GST.
However, as GST implementation will potentially be a costly exercise, and given the uncertainty on the introduction of the tax, many are not willing to invest in a GST implementation exercise until there is certainty.
Is the average Malaysian ready for GST? GST as a consumption tax will ultimately affect the man on the street, and this is where the Government has felt the need to tread carefully.
It is estimated by the tax authorities that a GST at 4% would have a minimum impact on the Consumer Price Index (CPI). However, there is the possibility of traders not passing on their savings and some unscrupulous traders taking advantage of the introduction of GST. In reality, there could be a slight one-off increase for most products and services except for zero-rated items.
However we should note that any price movements in response to the introduction of GST would ultimately be decided by the market forces, levels of competition, and the pricing and positioning strategy of various market players.
As such, there would be a need for steps to be taken to mitigate the possibility of unscrupulous traders taking advantage. These can involve the following:
Heavier fines and penalties should be imposed to make sure businesses comply with the provisions of the law i.e. the Price Control and Anti-Profiteering Act. Shoppers' Guides have to be issued to make consumers aware of what the price increase or decrease is likely to be so that they will be paying a fair price. Assistance of hypermarkets and their suppliers' should be sought to act as price setters so that others will not unreasonably mark up their prices. Consumer Associations should be educated to act as the eyes and ears of the Government agencies to report excessive prices and consumers should be encouraged to exercise their rights.
GST has clear advantages and features in order to replace outdated consumption taxes; it can be applied to a broader spectrum of the economy; it will eliminate the tax-on-tax issue, etc due to it being a tax on final consumption.
Carefully designed, the GST would be more effective and equitable, and with a single low rate, minimum exemptions and zero rating will help simplify the tax administration in addition to enhancing tax compliance.
There is a need to broaden our tax base to secure a steady and predictable source of revenue to meet our future expenditure needs and to ensure a competitive tax environment for investment purposes.
Thus an overall tax reform with a GST being an important focus would be the most viable option to achieve our goals. This should not mean, of course, that the expenditure on Government projects can be incurred unabated - there must be a strict regime of cost-benefit analysis, cutting out the middlemen, instituting an open tender system for all public projects and a strict accounting on how taxpayer's funds are being spent. - September 20, 2013.
* Dr Veerinderjeet Singh is Chairman of Taxand Malaysia Sdn Bhd (a member of the TAXAND global organisation of independent tax advisers around the world) as well as a member of the Taxand Global Board and the Commission on Taxation of the International Chamber of Commerce based in Paris.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.
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