Review of GST vs SST implementation in Malaysia: benefits and challenges

Benefits of Goods and Services Tax (GST)

The introduction of the GST is proven to be better tax system as to enhance the
effectiveness and efficiency of the existing taxation system in order to eliminate the
existing Sales and Services tax (SST) inherent weaknesses such as compounding effects,
transfer pricing and value shifting. This is because the GST will be administrated in a
fully computerized environment, therefore speeding up the information delivery such as
refund claims.

In addition, GST could provide fairness and equality as the taxed are levied fairly
on the businesses involved such as wholesaling, manufacturing, service sectors or
retailing and provide better transparency to consumers as they will know exactly
whether the goods or services they consume are subject to tax and the amount they
pay for, unlike the present sales tax. Everyone is paying tax with the implementation of
GST and the tax burden is spread over, instead of just relying on the income tax derived
from the working population, thus GST could provide fairness and equality to everyone.
All these benefits provided by the implementation of GST could stimulate the economic
growth and increase the competitiveness in the global market.

Moreover, the standard of living to Malaysian consumers and businesses can be

improved as the government can have more fund to use for the country development
purposes in social infrastructure such as health facilities and institutions, educations
and public facilities due to the increment of revenue from the collection of GST.
Government can provide for the needs of the public, better health care system and provide
welfare services for the underprivileged and vulnerable communities with the increment
of revenue from the collections of GST. Therefore, the introduced of GST can improve
the Malaysian standard of living by the larger funding available to invest for existing
improvement and better future development.

Benefit people as prices will come down which in turn will help companies as
consumption will increase.
There is no doubt that in production and distribution of goods, services are
increasingly used or consumed and vice versa.

Because of its multi-stage, cumulative nature, GST ensures a higher tax revenue,
which is good for the country as it increases the amount of money available to
work on projects and developments that benefit the people. The system also allows
for transparency of cash flow, allowing less opportunity for misappropriation of funds.
It is also a favoured structure for conducting international businesses.

Benefits of SST

The general consensus is that with SST back in the system, some prices have seen
a decrease, but it remains to be seen whether prices will stay that way as there is
still room for price adjustments. The single-stage taxation also means that businesses
incur lower costs and that fewer businesses are impacted. The threshold for F&B
providers is set at an annual turnover of RM1 million, meaning that those who operate
with less than RM1 million turnover would not need to charge the 6% service tax. This
also means that consumers potentially save a lot more on their discretionary
expenditures.

Challenges GST

There are many complaints and unsatisfied voices and opinions from the businesses
and consumers about the implementation of GST in Malaysia. Definitely,
the consumers are hurt by the price increases of goods and services due to the
implementation of GST together with other factors and the possibility of hardship
occurrence due to the increment of cost burden and financial burden on cost of living
that might causes other issues such as mentally issue due to the overload of pressure on
the cost of living.

There is always challenge for a country to implement a new system or policy as it

has to consider the widespread effect on individual citizen, businesses,
government and the whole economy. The regulators have to balance the interest
between the benefits and disadvantages of the new policy along with the long term goal.
One of the challenges in the implementation of GST might be the level of
technological knowledge of the citizen especially those senior citizen. This is not a
discrimination issue but in fact, many senior citizens in Malaysia are not familiar
with the technology equipments such as the uses of computer and GST software.
For an example, a case from Teluk Intan where a hardware store owner, Chen, 65 tried
to commit suicide due to the pressure from trying to implement the Goods and Services
Tax (GST).

Hence, the regulators should aware of the challenges of GST in order to protect
the interest of the public and to avoid any unintended consequences by providing
adequate of information to the public, sufficient of time and more training
programs should be take place in order to help people who are still struggling on
the implementation of the GST.

Challenge relates to education of staff in compliance with GST rules and

regulations. Retailer 1 expressed concern that some of his staff were not receptive to
change despite relentless effort made to educate them on GST matters. Other
participants were concerned that they may be potentially exposed to the risks of
unintentional errors or negligence in terms of actions committed by their staff.

Challenges of SST

On challenges in implementing the SST 2.0, Paddy said he expected no major problems
except for new businesses which may not have the experience of using the tax while
some may still be clueless whether their goods are taxable or not.

Due to this, he said the Customs Department, after having organised hundreds of
hand-holding programmes for companies nationwide, would continue its effort until
the second week of September.

“Because we have simplified the (exemption) process, there could be issues whereby
businesses abuse the system, but if there is, it should be minor. We don’t expect
everyone to abuse the system and we placed trust in the businesses,” he said.

The department announced that the number of consumer goods to be exempted from
the sales tax was 10 times the number of goods exempted under the GST.

A total of 5,443 consumer items have been exempted from the sales tax, set at 5.0 per
cent or 10 per cent.
Among the items that will not be taxed include live animals and daily food items like
rice, cooking oil and bread.

He explained that this poses a formidable challenge to businesses as tariff codes for
products are not easily available, particularly for businesses that are not involved in
import/export.

As for service providers, Bromley said that their challenge is to determine whether their
services are “taxable” as prescribed.

“Only once these matters are addressed can a business determine whether it should be
registered for SST, what goods and/or services (purchases and sales) are affected and
therefore, the impact on pricing.”

Challenges in changing prices

Bromley further noted that communicating price changes will also be challenging as
confirmation of exempted and taxable goods, the Sales Tax rates applicable, as well as
the services subject to Service Tax, have only been confirmed recently, or clarification
is still required.

He opined that businesses may well be able to enhance their IT and point-of-sale
systems in time, but for those with a large number of outlets making sales to
end-consumers, they will be pressed for time to update all pricing.

As such, he remarked that it is hoped that the Royal Malaysian Customs Department
(RMCD) will be flexible in allowing time for these changes to happen, as was the case
when the GST was reduced from six per cent to zero per cent.

“Overall, businesses will find their costs increasing for purchases subject to SST.
Unlike GST, SST incurred on inputs is not able to be offset against SST charged and
collected.”

Bromley also pointed out that while managing the introduction of SST, businesses will
also have to manage the final reporting for GST.

“Under the GST (Repeal) Bill 2018, GST registrants are given a period of 120 days for
the filing of the final GST return.”

“GST registrants are required to report all supplies made up to August 31, 2018, as well
as claim any GST input tax credits incurred on their purchases (if they have not done so
previously) in this final GST return.
“In order to do so, GST registrants are to ascertain the actual value of supplies made up
to August 31, 2018, as well as quantify the GST input tax to be claimed in the final GST
return.”

In view of this, he thus advised businesses to begin communicating with external

parties such as customers and suppliers, for billings to be issued and obtaining tax
invoices for GST input tax claiming purposes, as well as with internal parties to ensure
all tax invoices received from suppliers are processed in time.

Lau believed that the real test of whether businesses have got SST right or not may only
be evident after they have filed the first SST return, and the authorities have conducted
checks thereon.

“Any wrong compliance could have adverse impacts on end consumers vis-à-vis
pricing. Ultimately, the level of good and correct compliance by businesses will
determine the impact on end consumers – strong enforcement by the authorities will
help to keep these in check.”

Challenge for businesses,though will be that the old SST did not have input and
output tax mechanism.
 Benefits of Goods and Services Tax (GST)

A goods and services tax (GST) is a value-added tax. It is applied at each point
in the supply chain, and levied equally on goods and services supplied. GST
paid on products or services a company uses to operate its business are offset
through tax credits. Adopting GST has four primary benefits: it can increase
exports, simplify the issue of taxation as a whole, reduce costs of administration
and compliance, and lower taxes overall.(Themalaymailonline.com)

Increase Exports

 One of the biggest benefits of GST is that businesses pay less when
purchasing goods to resell; in other words, the supplier avoids paying a
manufacturer's sales tax, so it is cheaper for businesses who buy the goods to
resell. This lowers the cost of exports and, as such, can stimulate exports for
the country adopting GST, bringing more money into the country.
(Themalaymailonline.com)
 Simplification

 GST is extremely easy to calculate, unlike tax structures that use

different tax rates for different products or services and have different rates
depending on the price of the product or service. This makes it easier to
calculate and plan accordingly, but it also makes it easier for businesses to
remain in compliance and for the government to adopt procedures to ensure
compliance. (Themalaymailonline.com)

Reduced Costs

 With regard to businesses, having a single broad tax makes compliance

easier, and it reduces the cost of compliance and, in the case of a business with
multiple divisions, it can prevent inefficiency stemming from the duplication of
efforts to remain in compliance. A company can pass those savings on to its
customers or retain the profits and use them to fund expansion, new hires, or
employee raises, for instance.

Lower Income Taxes

 When taxes are levied equally across the board, the government can
reduce its operating costs in the same way; duplication goes out the window
and ensuring compliance becomes easier. The costs associated with
determining tax classifications and managing disputes with regard to tax
classification are similarly saved. In turn, the government can lower income
taxes at its discretion, a mechanism that can be employed to increase domestic
spending or fuel productivity.

Advantages and Disadvantages of GST in Malaysia

Like any other reform in the country, even GST has had its pros and cons in
Malaysia. Let us see what benefits and drawbacks GST brought to the
economy.
Advantages

 Easy and Simple Registration Process

Compared to any other tax registration process, GST registration in Malaysia
can be done with ease. GST registration has been made online which makes it
simpler for people who are doing company registration in Malaysia for the very
first time. Even for the companies that are present in the market, registering
their company for GST is a very simple process.

 Elimination of the Cascading Effect

GST in Malaysia has discarded the cascading effect of all the indirect taxes
which were earlier there in the country. GST is a combination of all the indirect
taxes which was levied on the common public, so it serves as bucket which
contains all the indirect taxes in it.
The ‘cascading effect’ means a tax on tax. Let us illustrate this through an
example:
Let’s say that a consumer has taken a service for company formation in
Malaysia for MYR 60,000, paying 15% service tax (i.e. 60,000*15% = 9,000).
He then purchases furniture and other assets for his office for MYR 30,000,
paying 5% sales tax (i.e. 30,000*5% = 1,500). His total outflow of tax would be
9,000+1,500 = 10,500. He paid MYR 9,000 as service tax without getting any
deduction of MYR 1,500 paid as sales tax.

 Increasing the Threshold Limit for Registration

In the previous tax structure, the companies that had a turnover over 5 lakhs
were liable to pay tax. But under GST regime, this limit was extended to 20
lakhs, which served as a relief to many small businessmen and also for the
foreign people who are planning to set up a company in Malaysia.

 No Hidden Taxes

GST consists of 2 taxes: Central Goods and Services Tax (CGST), and State
Goods and Services Tax (SGST) – imposed on all the manufacturing goods
and services which are offered in the country. There will be no hidden taxes
other than CGST and SGST which can be charged for the goods and services.