A SUSTAINABLE GST
by Mr. Tuam Kwok Choon (CSDCSR)
The Goods and Services Tax (GST), a broad based consumption tax, will be implemented in Malaysia effective 1 April 2015 at a uniform rate of 6% on all taxable goods and services. It is part of the government’s tax reform programme to improve revenue by restructuring the existing tax system. Currently, the main sources of revenue are income taxes (direct tax) and indirect taxes (e.g. sales and services tax or SST). SST has its weaknesses because it is imposed only on selected goods and services, usually on non-essentials. With GST, the tax net will be widened to cover more categories of goods and services.
With GST, the tax system should be more effective, efficient, business-friendly, transparent, and generates a more stable revenue. It is efficient because businesses will have to practice self-compliance and self-regulation and a cut-down on government policing, hence saving on time and human resources. GST, which replaces SST, will address the inherent weaknesses of the current SST.
With GST there will be less bureaucracy and application will be simplified with online system. In addition the government is also providing various schemes to assist businesses in their GST compliance, such as grants for training and purchase of GST software.
To ensure sustainability, some important and essential goods and services will be exempted from GST, such as land and properties (for housing, agriculture and general purpose), financial services, education services, childcare services, healthcare services, business licences, transport services, highway tolls, burial and crematorial services, and other goods and services supplied to members of an organization. Many categories of foodstuff will also be zero-rated.
GST will also eliminate the cascading effect in the same tax regime. There will be no double taxation effect. Under SST, a double taxation effect takes place due to multiple tax system. The same product may be taxed twice, (sales tax plus service tax). Under GST, however, the registrant only pays GST rate once. Here is a simple illustration on GST:
A professional service provider incurs the following costs:
Telecommunication services – > RM1,000, GST 6% = RM60. Total paid: RM1,060
Legal service -- > RM6,000, GST 6% = RM360. Total paid: RM6,360
Total GST paid -- > 60 + 360 = RM420
The professional service provider then charges his customer RM30,000. GST 6% =RM1,800.
The customer has to pay him RM31,800 (includes GST).
Since the professional service provider has paid RM420, the balance he needs to remit for GST will be 1,800 – 420 = RM1,380.
His total tax paid will be RM1,800 and NOT RM1,800 + RM420 = 2,220.
The RM420 is called input tax. The RM1,800 is called output tax. The net amount he has to remit to the government tax agency should be RM1,800 – RM420 = RM1,380.
Currently there are more than 160 GST (also called Value Added Tax, or VAT) countries in the world, and in ASEAN, Brunei, Malaysia and Myanmar are the only ones that have not implemented GST.
IMPACT OF GST
How will GST impact the people’s livelihood and the economy? For a start, basic items such as price control items such as foodstuff will be zero-rated, and therefore will have no GST. However small businesses such as mini-markets and grocery shops which have a sales turnover exceeding RM500,000 will charge GST at 6% on taxable items only. However this does not prevent businesses which are categorized as GST exempt from increasing the price of their services for the purpose of recovering GST which they paid for but which cannot be recovered from their customers, which may be inflationary. This is similar to the current SST system where prices are marked up several times in the supply chain until it reaches the end-user or consumer.
To ease the impact of GST on the cost of doing business, the government has provided the following incentives:
Secretarial fee of up to RM5,000 and tax filing fee of up to RM10,000 are allowed as tax deductions from year of assessment 2015 onwards (prior to this, these were non-deductible expenses)
Accelerated capital allowance on expenses for the purchase of ICT equipment and software are extended for another three years of assessments (2014 until 2016)
Costs incurred for GST training of employees in accounting and ICT will be given further deduction in years of assessment 2014 and 2015
Training grant of RM100mil will be provided to businesses that send their employees for GST training in 2013 and 2014
Financial assistance of RM150mil will be provided to small and medium enterprises (SMEs) for the purchase of accounting software in 2014 and 2015.
The current SST rates are 6% for service tax and 10% for sales tax. This will be replaced by GST. With this replacement, goods and services will either be less taxed or remains status quo. There will of course be some items that will be more costly as a result of GST, especially items that did not fall under the SST but now comes under GST.
To prevent unscrupulous traders who do not understand the GST system from taking advantage of this tax rule by increasing prices of items to make a quick gain from consumers, the Price Control and Anti Profiteering Act 2011 has been in place to make profiteering an illegal business practice. In addition the government will monitor GST compliance during the initial implementation period. It will also publish consumer guide so that the consumers will be well informed and can compare prices.
With the implementation of GST, corporate tax rate is expected to be reduced by 1% to 24% for year of assessment 2016. For companies with paid up capital of not more than RM2.5 million, the company tax rate will be reduced by 1% to 19% on chargeable income up to RM500,000, and 24% on the balance of chargeable income.
Similarly individual tax rate will also be reduced by 1% to 3% and the chargeable income bands will included two additional bands for chargeable income exceeding RM100,000.
According to tax expert, Dr Veerinderjeet Singh, GST may have minimal immediate impact on the Federal budget deficit because of the outflow of cash aid initiative, BR1M, which the government is currently practicing. BR1M was initiated because of the surge in cost of living that is affecting the rakyat from the lower income group, including the new generation in the work force. Any further negative impact on the cost of living is not a welcome and will affect social behaviours.
Our neighbour Singapore has a 7% GST (1% higher than our own) but the personal income tax and company tax rate are 20% and 17% respectively, compared to 25% in Malaysia. Singapore started off GST with 3% nine years ago and increased progressively to 7% in 2007, and each GST rate increase is accompanied by a reduction in income tax rate.
Also in Singapore, the threshold was GST registration is set at S$1 million which constitutes about 15% of registered businesses. However many small businesses in Malaysia easily reached the RM500,000 threshold and are eligible for GST.
It is also noted that the cost of collecting GST in Singapore is probably the lowest among all the taxes, even lower than personal income tax and property tax.
The government’s main objective is not to burden the rakyat, at a time when the cost of living surges to an all-time high. GST must ensure that revenue is gained progressively, not immediately.
The Singapore government designed GST to be revenue negative at the beginning, according to the Deputy Commissioner of International, Investigation and Indirect Taxes group of the Inland Revenue of Singapore. For the first two years of implementation, the collection was less than the offsets claimed.
Also during the first year of implementation, based on the Singapore experience, inflation rate shot up from 2.3% to 3.1% bur one year later the inflation rate was back to 2.3% and has since never been higher, with one exception, in 2008. Also deserving attention is the fact that over 80% of GST contributors are from the higher income groups and foreigners.
For convincing persuasion for GST is the government’s credibility in managing the country’s financial resources with probity.
The challenges to implementation of GST in Malaysia are:
Lowering the cost of living
lowering cost of doing business and staying competitive
check on profiteering
improving income distribution
Job creation, economic growth and the proper functioning of the internal market
The government must engage small and medium size businesses and trade associations because they are the major components of the business sector, and the engine of growth. GST structure must be kept simple and easy to understand, especially for small businesses.
The tax structure should be carefully designed and improved to ensure equitable and just income distribution to reduce disparity between the income groups. The government must constantly disseminate relevant and useful information to consumers to help them to be smart purchasers.
The use of internet-based technology and cloud computing are important in reducing processing time and improving efficiency and effectiveness in revenue collection.