Malaysia Goods and Sales Service Tax (GST)

EVERY year, Tien Ming Lee (not his real name) pays about RM3,000 in income tax. While he is not fond of paying taxes, like most people Tien believes it is every Malaysian's obligation and duty to contribute to the Government's coffers.

For that reason, he is not happy that many are not paying their income tax.

It has been reported that there are 6.4 million registered taxpayers in Malaysia, but only 2.4 million pay taxes. The country has 28 million people.

“I think it is unfair,” grouses the 33-year-old engineer.

The Government recognises this problem and has been mulling the implementation of the Goods and Sales Service Tax (GST) to broaden its tax base for a while now.

On Tuesday, Minister in the Prime Minister's Department Datuk Seri Idris Jala said the Government would be implementing the GST but not just yet as it wanted to make sure the public fully understood and was supportive of it.

Implementation of the GST will not be an easy task as it involves a bread and butter issue, and there are already fears that prices of goods and services will rise once it is done.

Nevertheless, some economists, like Dr Yeah Kim Leng of the Ratings Agency of Malaysia (RAM), feel the GST must be implemented quickly.

Dr Yeah, who is chief economist of RAM, says it is not a question of “if” but “when” Malaysia needs to implement the system.

“Its adoption is fairly universal,” he points out. “The sooner (GST is implemented here), the better because it will broaden the Government's revenue base.”

The GST or VAT (value-added-tax) is tax on consumption rather than earnings. It is a multi-stage consumption tax levied on the supply of goods and services at each stage of the supply chain from the supplier up to the retail stage of the distribution.

Even though GST is imposed at each level of the supply chain, the tax element does not become part of the cost of the product because GST paid on the business input is claimable.

So far, 143 countries have implemented the GST, or VAT as it is known in other countries. Canada imposes the lowest VAT rate of 5% while the highest, at 25.5%, is imposed by Iceland.

Idris has said that the GST, if implemented in Malaysia, would range from 4% to 7%.

The Performance Management and Delivery Unit (Pemandu) estimates show that a GST rate of 5% would create an additional RM9.7bil in revenue for the Government.

For the tax-paying population, there is a purported silver lining in the form of lower personal and corporate taxes. This is what those who pay high taxes under both categories are hoping for, as Prime Minister Datuk Seri Najib Tun Razak has hinted that both these taxes could be lowered when the GST is in place.

Malaysian Association of Tax Accountants (Mata) president Abd Aziz Abu Bakar says the implementation of the GST would reform an ineffective and inefficient taxation system.

Describing the GST as effective, he says that if it wasn't, “143 countries would not have implemented it. It is considered to be a more stable source of revenue for governments.”

Abd Aziz adds that almost 70% of the Government's revenue is derived from taxes direct and indirect.

Malaysians are already paying taxes for goods in the form of SST sales tax (1972) and service tax (1975), he explains. These taxes are already embedded in the price of products we pay a sales tax of 10% and service tax of 5%.

“When we purchase goods, we don't know how much SST we are paying,” says Abd Aziz.

He explains that there is a cascading effect and double taxation on things we consume.

“It's essentially a replacement tax and more of a rebranding than anything else,” says Abd Aziz about the GST.

The main challenge, however, would be convincing the public of its advantages, especially the lower and middle-income groups.

“The lower income group is worried about the implementation of the GST, not realising they have already been paying the SST,” Abd Aziz points out.

He says that if the GST is implemented, people can expect to pay less tax for their consumables and prices of some goods are expected to decrease.

According to the Malaysian GST website (gst.customs.gov.my), eight categories of items will see a price reduction; clothing and footwear among them.

Datuk Paul Selvaraj, CEO of the Federation of Malaysian Consumers Association (Fomca), says the GST is a form of an indirect tax that is not new.

“We are getting excited over a common mode of tax collection,” he adds.

Selvaraj believes that at the most, there might be a one-off increase in prices, especially for goods that are not taxed.

“It should stabilise after that,” he says.

Abd Aziz, who has been in consultation with the Government on the GST, says the system here would be modelled after the systems implemented by Singapore, New Zealand and Australia, among others. Malaysia's system would, however, be unique and suited to our needs, he adds.

Studies on spending patterns have shown that the lower-income group spends more on basic necessities, which will be classified as zero-rated items under the GST.

To protect this group, GST will not be imposed on basic items such as bread, rice and vegetables. Services such as transportation, toll rates, education and healthcare will similarly be zero-rated, among other things.

Abd Aziz adds that only businesses with a turnover of at least RM500,000 will have to pay GST. This means the roadside coffee stalls will not charge their customers GST.

In any case, Abd Aziz says, the Anti-Profiteering Bill has been introduced to prevent indiscriminate price hikes following the implementation of the GST.

“The only problem would be enforcement,” he admits.

He says government revenue will increase because taxation involves the whole supply chain, unlike the SST (sales and service tax) system, which is imposed only at one stage.

“It is not squeezing the people but getting money that is supposed to be paid. Those affected are those who have been evading taxes,” says Abd Aziz, referring to a portion of the business community also known as the hidden or shadow economy.

With GST in place, businesses will be forced to have proper accounting records to claim the input tax on consumables for their business, says Abd Aziz, adding that problems such as transfer pricing would be less prevalent. (Transfer pricing refers to the price that is assumed to have been charged by one part of a company for products and services it provides to another part of the same company, in order to calculate each division's profit and loss separately.)

Another challenge is the readiness of the business community to update their software and accounting systems.

Dr Leong Kai Hin, chairman of the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) commerce committee, says the business community would need an estimated 18 months to prepare their accounting systems.

Dr Leong is all for the GST, saying that it would give the Government a more stable revenue and corporate taxes, which at 25% are among the highest in the region, can be reduced.

“Lower corporate tax will attract more FDI into the country. If we don't implement the GST, we won't be so competitive,” he says.

Yeah agrees, and adds that such measures will attract more investment in private businesses and spur the people to work harder.

“The harder you work, the higher your disposable income,” he points out.

With more revenue generated from the GST, the Government will have more funds for social projects such as education and healthcare.

Like many Malaysians, Selvaraj hopes the additional money will be put to good use.

“It should benefit the rakyat,” he says.