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STORY BY
quanmin@kinibiz.com
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FEATURED & ISSUES | OCTOBER 1, 2013 9:00 PM
Clear, concise and thoroughly researched answers to the most pressing and basic questions on the
goods and services tax or GST. Despite the bad press, economists could not heap more praise
on this efficient, self-policing form of consumption tax.
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Prime Minister Najib Abdul Razak will make his 2014 Budget speech on Oct 25 and the long overdue GST is highly likely to be a major part of a package of reforms to address the growing fiscal deficit.
In 2009 a Goods and Services Tax Bill made it as far as Parliament only to be withdrawn for reassessment. The same is not likely to happen this time owing to fewer obstacles to the introduction of GST.
Once an announcement on the GST is made, actual implementation of the tax will be subject to a 14-month long implementation period for businesses to familiarise themselves with the new accounting standards.
Here are nine basic GST questions and answers courtesy of KiniBiz:
1. What is GST?
A goods and services tax (GST) is a tax on consumption or in other words, spending. To be more specific, GST taxes only the value-added portion of a good or service and is collected at every stage of the supply chain.
This means GST is enforced on primary industry producers, manufacturers and retailers alike, with the end consumer footing the final tax bill at the point of purchase. The accompanying table provides a simulated supply chain example.
A system of input tax credits ensures GST is only levied on the difference between the sale price and production cost. This is called the value-added portion.
All businesses are authorised to claim input tax credits once they are registered. Individuals on the other hand are not privileged to claim input tax credits. As a result, they bear the full GST burden.
Unless exempted by law, all goods and services (technical term: supply) in the course of furtherance of business in Malaysia are taxable. In international trade, imports are taxable whereas exports are exempt.
The pervasive nature of this consumption tax often leads economists to label it as a broad-based consumption tax
2. How will I be affected?
So long as a person participates in the economy as a consumer – practically everyone does – they will be nett GST payers once the tax is implemented.
Unlike income taxes, individuals will not need to fill in any forms or file returns; GST is collected on their behalf by businesses. As such, GST is considered an indirect tax.
Businesses may face additional paperwork. They will be obliged to maintain payment records in order to qualify for input tax credits as well as file returns on a regular basis. As a result, they may face compliance costs related to GST implementation.
The scope and reach of the GST, according to 2009 draft documents, means almost all goods and services – unless specifically excluded – will be taxed.
In a seminar, Tan Eng Yew, Country GST leader of Deloitte Malaysia shared an interesting analogy to illustrate the pervasiveness of the GST system:
“In Singapore, where the GST was introduced in 1994, taxi drivers often joke that the GST acronym stands for Government Semua Tax.”
If implemented as originally designed the tax would have very few exemptions. Draft documents for the Malaysian system, however, indicate several classes of basic goods and services as exempt from the system.
3. Is the GST a new tax?
The GST unit of the Royal Malaysian Customs maintains the original purpose of the GST as a replacement to the sales tax and service tax. Therefore it is not a new tax, strictly speaking.
Sales tax is currently levied at a rate of 10% and has been in force since the 1970s. Service tax, meanwhile, is levied at a 6% rate.
The government’s intention has always been to replace the sales and service tax regime with GST and to do so at a GST rate that is revenue-neutral.
Sales and service tax will be abolished once the GST is eventually implemented.
Compared to the sales and service taxes, GST is considerably more efficient. Critically, GST has a broader tax base and does not have a cascading or compounding tax problem.
Many countries worldwide have embraced the GST as a replacement to a single-stage sales tax regime.
4. Why do we need the GST?
The GST unit of the Royal Malaysian Customs Department considers GST as a ‘method of collecting taxes which works better than others’ to explain the need for GST.
Economists, meanwhile, believe the government has very rightly approached the GST as a new source of income with a broad tax base as a means to begin to diversify tax revenue sources.
The government is spending more than it earns leading to a 2012 fiscal deficit, which in 2012 was 4.5% of GDP. Introducing a GST could help the government raise additional revenue, as consumption increases, to narrow the fiscal deficit.
News reports suggest the government is aiming to reduce the country’s debt position to below 55% of GDP and cut the fiscal deficit to 3% by 2015; an ambitious target.
5. Will the GST cause inflation?
Yes and no. Studies allowing for a GST rate of 4% predict some goods and services will increase in price while others may see a decrease. The overall impact is expected to be neutral.
Economic modelling studies by a tax review panel of the Ministry of Finance circa 2009 found that at a tax rate of 4% the GST would have little overall impact on the Consumer Price Index (CPI).
Because the GST is a replacement for the current sales and services tax (SST), goods that now carry a heavy SST tax burden will likely fall in price.
Conversely, goods and services not currently taxed under the sales and service tax regime will increase in price.
According to the GST unit of the Royal Malaysian Customs Department, any inflation will be one off, because the increase in prices would occur as single event. Following the spike inflation will return to the normal cycle.
Until an official announcement is made, inflation is difficult to predict, mainly because the government is yet to finalise the tax rate.
6. Will the GST be levied on basic necessities?
Similar to other countries worldwide that have implemented a GST, there will be a list of goods and services that are either exempted or zero-rated.
Draft documents list several classes of goods and services, mostly fresh food as zero-rated.
Tax officers at the Royal Malaysian Customs Department say traders could use the GST as an excuse to unscrupulously increase prices despite the fact that the introduction of the GST will not introduce inflationary pressure to exempt or zero-rated items.
Deloitte’s Tan says the government has powers to prosecute errant traders under the Anti-Profiteering Act, 2011 and may enforce the law during the early stages of GST implementation.
7. Will there be a corresponding fall in income tax to compensate?
News reports suggest that the government will introduce measures to alleviate the effects of the GST on prices for the lower income group.
Ministry of Finance secretary-general Mohd Irwan Serigar has come on record to say the GST will be introduced as a package. However, there are no concrete details pending an official announcement.
Cash handouts in the form of BRIM (the 1Malaysia People’s Assistance Programme) next year have been promised to help soften the blow of subsidy rationalisation and the GST.
But considering the fact that the GST is designed as a revenue-neutral replacement tax, additional measures such as an adjustment to income or corporate taxes are considered unnecessary at this stage.
In the event a decision is made to implement a GST rate higher than the revenue-neutral rate of 4%, then the government may consider lowering income tax rates said Inland Revenue Board (IRB) director-general Mohd Shukor Mahfar in a press conference last month.
8. Will the GST increase the cost of doing business?
First, the short answer. According to Deloitte’s Tan “GST is not a cost of doing business if you are not providing exempt supply.”
Although the tax is collected at every stage of the supply chain, the eventual burden falls upon the end consumer.
Therefore economists do not consider GST to have an effect on business-to-business transactions.
The only cost to businesses will be compliance costs related to GST implementation.
This is of course assuming that the business in question is on the straight and narrow. GST returns will require companies to report on their cost of doing business which will indicate to authorities the scale of their businesses.
9. Will the GST take more from the poor than the rich?
Economists call GST a regressive tax. That is, as a percentage of income, the GST will impact lower income individuals much more than high-income individuals.
The current draft of the Goods and Services Tax Bill has provisions to attempt to avoid this imbalance. Basic goods and services are either exempt from supply or zero-rated. That means they do not attract GST.
To protect small businesses there is a threshold of RM500,000 in annual turnover. Businesses below that threshold do not need to register nor collect GST.
Another question worth asking is if GST equates to double taxation of income. Technically this is true according to tax experts. Disposable income spent on goods and services that attract GST is income that has already been subject to income tax.
Those were the answers to some basic questions on GST. Tomorrows issue will explore in detail the business implications of the controversial tax.
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