Article 2

An Overview of GST Malaysia

BRIEF HISTORY OF GOODS & SERVICES TAX (GST) MALAYSIA
In recent months there has been increasing talk in the market that the long
proposed Goods and Services Tax (GST) is likely be announced in the coming
Budget 2014. Most economists believe that GST in Malaysia will commence in
2015, giving a lead time of 14 months for businesses in Malaysia to get ready.
GST was first announced in the 2005 Budget for implementation in 2007.
However, in February 2006 the Malaysian Government announced that GST
would be deferred as more time was needed to get feedback from the public.
Subsequently, GST was tabled for first reading in 2009 for proposed
implementation in 2011. The bill was supposed to be presented for second
reading in 2010 but was withdrawn.
Finally, on the 25th of October 2013, Malaysian Prime Minister Datuk Seri Najib
Razak announced the introduction of the Goods and Services Tax (GST) in Budget
2014 to replace the current sales and services tax; GST will be effective on April,
2015.
Upon implementation of GST in Malaysia, we will join the 146 countries around
the world which has GST or VAT. We will also be joining the 7 out of 10 ASEAN
countries which have either GST or VAT.

WHAT IS GST MALAYSIA?

Goods and Services Tax (GST) is a multi-stage consumption tax on goods and
services whereby each point of supply in a production chain is potentially taxable
up to the retail stage of distribution. At the same time suppliers are entitled to
refunds of GST incurred on business inputs. The basic fundamental of GST
Malaysia is its self-policing features which allow the businesses to claim their
Input tax credit by way of automatic deduction in their accounting system.
GST in Malaysia is proposed to replace the current consumption tax i.e. the sales
tax and service tax (SST). The introduction of GST is part of the Government's
tax reform program.
Source: (extracted from An Overview of GST Malaysia http://www.yycadvisors.com/overview-of-gst-malaysia.html)
a) What do you understand about GST?
b) Which are the 7 ASEAN countries which have GST or VAT? What are their tax
rates?
c) What are the reasons for Malaysian government to opt for GST?
d) In your opinion, do you think that GST will contribute to our efforts towards
becoming fully developed country by the year 2020?

Answers:
a)

Goods and Services Tax (GST) is one of the types of indirect taxes. Tax

payers can be taxed in two forms either through direct taxes such as income tax
and road tax or through indirect taxes. For example, the indirect tax is the Sales
tax and Service tax (SST). Indirect taxes use a different approach to calculate the
amount of tax. It is counted and embedded within the selling price. Therefore, it
usually cause the taxpayers do not realize that they are being taxed.
GST is also known as Value Added Tax (VAT) in many countries. It is a
multi consumption tax on goods and services. Developing and emerging
economies have been transforming their tax revenue based by moving from
direct taxes to consumption taxes such as GST in recent years. GST is a multistage consumption tax on goods and services. GST is charged on sales at all
stages of the supply, production and distribution chain unlike the existing sales
tax and services tax that levied at only one stage of the supply chain.
GST covers all types of goods and services sold to the public (Malaysia
residents and non-Malaysia residents) except for a common commodity.
Examples of common commodity are paddy rice, fruits, vegetables, and livestock
such as meat, chicken and fish. Other than that, certain services such as
healthcare, education, saving and current accounts, ATM cards and life insurance
will be exempted.
The person or organisations that are liable to tax for the tax are sole
proprietors, unincorporated body of persons, company, associations not for gain,
welfare organisation, local authority and certain public authorities. However,
small businesses will most probably be exempted from GST. There are up to 40
basic goods and services that will be exempted or zero-rated. Exempted or zerorated products will have a 0% on GST rate. However, the exempted products
producer can claim the GST paid on inputs in the production of that product like
overheads and raw material costs. The supplies and services excluded from GST
include agricultural products, basic foodstuff, livestock and poultry, private
education services, private healthcare services, public transportation and private

transportation services, highway tolls, residential property, land for agricultural

purposes and general use land.
In conclusion, GST is a totally different concept of taxation system
compare with the existing sales tax and services tax. It is implemented as part
of the governments tax reform program to strengthen the effectiveness of the
current taxation system. GST in Malaysia is proposed to replace the current
consumption, the sales tax and service tax (SST). Under the new taxation
system, it will promote economic growth and increase the competitiveness in
global market.
b)

There are seven ASEAN countries that implemented GST (Goods and

Services Tax) or VAT (Value Added Tax). The seven ASEAN countries are
Singapore, Thailand, Indonesia, Cambodia, Vietnam, Laos, and Philippines.
Different countries will have different tax rates.
GST in Singapore is a broad-based value added tax levied on import of
goods as well as nearly all the supplies of goods and services. The only
exemptions are the sales and leases of residential properties and most of the
financial services. Export of goods and international services are zero-rated in
Singapore. GST was introduced on in Singapore on 1 st April 1994, at the tax rate
of 3% with an assurance that the tax rate would not be raised in 5 years time.
The initial GST rate of 3% was among the lowest in the world. The GST was then
increased to 4% on 1st January 2003. The tax rate continues to rise till 5% on 1 st
January 2004. Finally, the tax rate was increased to its current rate of 7% on 1 st
July 2007. The tax rate has not been increased since then.
As for Thailand, VAT has been implemented since 1992 replacing the
Business Tax (BT). It is an indirect tax imposed on the value added of each stage
of production and distribution. Certain activities are liable to VAT at the rate tax
of 0%. Those activities include export of goods, services rendered in and utilised
outside Thailand, aircraft or sea-vessels engaging in international transportation,
and supply of goods and services to government agencies, United Nation and
between bonded warehouses.
In Indonesia, GST or VAT is known as Pertambahan Pajak Nilai (PPN). It is
implemented in Indonesia in the year of 1984. The initial and the current rate of
GST still remain the same as 10%. PPN is a 10% point-of-sale tax that extends to
services supplied by foreign taxpayers outside Indonesia if these services benefit

Indonesia. Other than that, provisions allow for certain products to be taxed in
the range of 20%-35%. PPnBM is the Sales Tax on luxury goods. It is levied in
addition to PPN. It is imposed on luxury goods in which both manufactured in and
imported into the country. Rates range from 10%50% with a few items taxes as
high as 75%.
Cambodia implemented GST in the year 1999. The initial tax rate is 10%
and remains the same for 15 years till today. The tax rates are divided into two,
10% on taxable supplies and 0% on taxable supplies exported out of Cambodia.
Other than those that are exempted, taxable supplies are made up of all
supplies. Businesses may elect to register for VAT. However, certain registered
entities are required to register for VAT by law, not matter what is their level of
turnover such as companies and export-import businesses. Businesses like sole
proprietors and foreign entities doing business in Cambodia do not have to
register for VAT. However, if the exceed the VAT registration thresholds, they will
have to register under VAT.
Vietnam is a country that implemented VAT in the year 1999. The initial
and the current rate is the same which is, 10%. Good and services that are used
for the purposes of production, business and consumption in Vietnam will be
subjected to VAT, except as provided for the law on VAT. In Vietnam, goods and
services that are subject to VAT are charged at three different rates, 0%, 5% and
10% depending on their categories given. However, some goods and services
shall not be subject to value added tax.
In Laos, VAT is implemented in the year 2009 to replace the business
turnover tax. Just like most of the ASEAN countries, its initial rate and current
rate remains the same at 10%. VAT is imposed on the final consumers of goods
and services. The goods and services used in production, trading and
consumption, goods imported and services rendered by foreigners are subject to
VAT. However, certain products will receive exemption from the government of
Laos. Exempted products include unprocessed agricultural products, seeds,
fertilisers, textbooks, and services such as education, medical healthcare,
banking and insurance. Exported goods and services are subject to VAT at 0%
except for the exported natural resources like timbers and minerals.
On the other hand, in Philippines, implementation of GST happened in the
year of 1998. VAT in Philippines is a tax that each and every entrepreneur must

be aware of. It affects all the consumers. It also greatly affects the business
transactions. For example, pricing of goods and services bought or sold contains
VAT, maximising VAT when input VAT is at minimum and cash flow issues. The
initial rate of the tax is 10% and the current has been increased to 12%.
In short, different countries have different GST/VAT tax rates. Malaysia is
one of the countries in ASEAN that will be implementing GST on April 2015. It is
also one of the countries in ASEAN with the lowest tax rate of 6%.

c)

There are many reasons why Malaysia government opt for Goods and

Services Tax (GST). GST is proposed to replace the current consumption tax,
Sales Tax and Service Tax (SST). Malaysia government has decided to do so
because the introduction of GST is part of the governments tax reform
programmed

to

enhance

the

efficiency,

effectiveness,

capability

and

transparency of the tax administration and management.

GST can eliminate the various inherent weaknesses under the SST. The
examples of inherent weaknesses are such as the cascading tax, double tax and
pyramiding tax, tax erosion and leakages through transfer pricing. GST is proven
to be a better tax system as it is better in a way and could even spur the
economic growth as well as to increase the competitiveness in the world or
global market. For example, the price of Malaysian exports will become more
competitive on the global stage as no GST is imposed on exported goods and
services, while GST will incur on the inputs that can be recovered along the
supplies chain. GST is capable of generating a stable source of income to the
nation because it is less susceptible to economic fluctuations.

Besides that, GST leads to enhanced delivery system. GST will be

administrated in fully computerized environment which can speeds up the
delivery system especially in refunding claims. This system definitely makes it
faster, reliable and more efficient than before.

Not only that, GST helps in

enhancing compliance too. The current SST system has many weaknesses that
cause the administration difficult. However, GST system has in-built mechanism
to make the tax administration self-policing and systematic and thus will
enhance compliance.
Under the current system, multiples taxes and higher levels of tax-on-tax
or it is known as the cascading tax is charged on certain businesses that reduces
their profits. With the GST system introduced, businesses can benefit from
recovering input tax, and there for reducing and minimizing the cost of doing
business in Malaysia. Other than that, GST system reduces red tape. Red tape
refers to excessive regulations or rigid conformity to rules that is considered
redundant and prevents action or decision-making. Under SST system, to get taxfree materials and special exemption for capital goods, businesses must apply
for approval. In contrast, GST abolished this system as businesses can offset the
GST on inputs in their returns.
GST system benefits people in terms of fair pricing to consumers. The
double taxation under SST will be eliminated in GST system. Consumers will only
pay for fairer prices for most goods and services. Unlike the present sales tax,
consumers would benefit under GST as they will know exactly whether the goods
or services they consume are subject to tax and the amount they for what they
consumed. Furthermore, with the GST, taxes are levied fairly among all the
businesses involved including in manufacturing, wholesaling, retailing or service
sectors.
In conclusion, with all the benefits of GST system stated, it is proven that it
will improve the standard of living in Malaysia. The income earned from GST
could be used for development for social infrastructure such as health
institutions, educational institutions and public facilities to further improve the
standard of living. GST is a better and more efficient way of profit collection for
the government. Funds that are raised can be channelled into nation-building
projects towards achieving a high income nation by the year 2020.

d)

In Malaysia, there is a chance of growing that if the country wants to

achieve as a developed-nation status, the government needs to reform the

current tax system. Tax reform can definitely drive business and the economy.
GST is proven to be a better tax system as it is more effective, efficient,
transparent, business friendly, spur the economic growth and even increase
competitiveness in the global market. There are several benefits that GST can
contribute to our efforts towards becoming a fully developed and high income
nation.
One of the main aspects that can drive the economic growth is the
government spending. The government spending income is largely based on the
income collection of taxes gained from taxation. Taxes play a big significant role

to any governments revenue. With sufficient of revenue collected from taxation

in hand, government is able to put action on the plans that planned to spur
economic growth and business as a whole. This includes governments scheme
such as providing subsidies to small industries to help them grow, provide health
facilities, upgrading public transports and educational institutions.
In contrast to popular belief, tax reform is not just about raising more
revenue or income. It is also about making the tax system fairer, reliable,
simpler, more transparent and more efficient to fully develop a country. Under
GST system, consumers benefits from the fair pricing. Consumers will know
whether the goods or services they consume are being tax or vice versa.
Consumers will not have to pay for double taxation since it will be eliminated
from the GST system. Furthermore, with the GST system, the taxes are levied
fairly.
There are huge benefits in such a tax reform. Compared with income tax
that has high compliance and administration costs for businesses and
governments, GST is a much simpler and efficient tax system. Besides, it is also
more effective in monitoring and limiting the cash in economy compared to the
income taxes. GST can raise more tax revenue or income at low rates. The
increased tax revenue from a GST implementation will allow the government to
collect transfer payments for the needy. It is more efficient in a way to fast track
the economic development. It is also an opportunity for the government to lower
the individual income tax rates and company tax rates. This way would provide
incentives

for

employees

and

make

the

businesses

more

competitive

internationally and even attract foreign investors to invest in our country.

Tax reform, such as introducing a GST may not be a well received
decision. However, for economically speaking, it is a right decision for our nation
as to achieve a fully developed and high income nation by the year 2020.

REFERENCE
http://www.gstmalaysia.co/ron95-diesel-and-lpg-to-be-exempted-from-gstbudget-2015-gst-update/147/
http://www.gst.com.my/what-is-gst-goods-and-services-tax.html

https://www.pwc.com/my/en/assets/press/110919-Embracing-GST-to-boostrevenue.pdf
gst.customs.gov.my
malaysia-gst.my