A little over a year after the implementation of the new Sales Tax and Service Tax (SST), Prime Minister Tun Dr Mahathir Mohamad has indicated that if the rakyat believe that the abolished Goods and Services Tax (GST) may benefit the country, the government will conduct a study on the possibility of reviving it.
The SST regime was reintroduced to replace GST on Sept 1,2018. Each tax regime has its strengths and weaknesses. One of the challenges with SST is preventing a cascading “tax-on-tax” effect which will increase the cost of goods and services.
The government has worked hard to put in place various measures to address this, such as introducing a business-to-business exemption and of course, not imposing SST on essential goods and services. Nonetheless, certain stakeholders are keen for the country to explore the potential reintroduction of GST, in the hope that it will address some of the concerns with the SST regime.
What are the potential benefits of re-introducing GST?
A lot of time and effort was spent in the development of the GST regime. Some argue that the reintroduction of GST would be simpler than ongoing finetuning of the SST legislation, which would be time-consuming and would likely result in an inefficient use of manpower by the authorities and taxpayers.
Unlike the existing SST regime, GST would help mitigate the tax cascading effect as it provides an input tax mechanism where businesses could recover any GST incurred as an input tax credit, subject to conditions being met. This helps to alleviate the tax cascading effect mentioned above, as any GST incurred by the business would be claimed back as input tax credit, where the same would not form part of the cost of doing business.
Theoretically, it is expected that there will be a reduction in the selling price of certain goods and services, whilst essential goods and services will be subject to GST at 0%. Of course, some businesses, such as financial institutions and residential property developers, would not be able to claim back input GST in full or at all – hence certain goods or services may be more expensive.
With the input tax mechanism in place, businesses would be more willing to register for GST (i.e. voluntary registration) to reduce the cost of business, where possible. This would lead to a more effective and efficient tax collection system for the government, where the same may help to reduce potential tax leakages in the long run. In particular, GST could reduce the size of the country’s “hidden” economy. GST has been known to disincentivise companies from operating in the shadows, as companies would need to register in order to avail the input tax mechanism, Further, in more developed countries, larger businesses may be less willing to transact with a supplier who is not registered for GST purposes.
GST, value-added tax (VAT) or other similar consumption tax has proven to be a more effective, efficient and transparent tax model that has been implemented in over 160 countries around the world to date. The relevant tax authorities in the respective countries where GST has been implemented, find it easier to administer and manage GST as a whole, due to the efficiency and transparency of the tax model. In addition, consumers would be comforted that the tax cascading and compounding effects have been eliminated, and they are aware of the amount of taxes that they would be paying for the products and services.
The GST system is arguably more business-friendly as it is less ambiguous and easier to understand, by both local and foreign businesses. A more standardised tax regime such as GST may spur economic growth as well as increase the level of competitiveness for busineses in the global market.
The implementation of GST will also reduce the government’s level of dependency on income tax and oil revenue, where the government may opt to reduce income tax rates or consider incentives which can spur the economy.
Further, petroleum is a limited resource and would eventually deplete in the years to come, so the government would have to eventually seek an alternative source of revenue. Based on statistics provided by the MoF (Federal Government revenue), the GST collection for 2017 was RM44bil, while tax collection under the SST regime is expected to be RM22bil for 2019.
We believe that it would not be difficult for businesses in Malaysia to switch from the existing SST system to the GST system when required, as the relevant accounting and compliance systems would already be in place.
How could GST be reintroduced?
With the possibility of reintroducing GST, certain key aspects must be considered for the transition from SST to GST. One key factor would be to provide an appropriate period for businesses to prepare for the transition. The change from SST to GST may require additional effort on the part of businesses as they will need to reassess the impact of GST on business transactions, wherein product pricing and effective communication to stakeholders will be important.
Nevertheless, as the GST regime was recently abolished, taxpayers would still be familiar with the GST mechanism and most businesses would still have the GST functions within their accounting systems.
The government may also opt to reimplement GST at various rates instead of two flat rates (i.e. standard rate at 6%, and zero rate at 0%), for instance, 0% for essential goods and necessities; 3% for general goods and services; and 6% for luxury goods and services. The government may also consider setting a higher GST registration threshold, as the previous GST registration threshold of RM500,000 may be relatively low.
There was a concern that a low GST registration threshold would place undue compliance burden on smaller businesses, hence making it difficult for the middle-income earners to do business.
The main concern of the public is the price impact of any change in tax regime. In order to ensure that businesses will not use the transition to another tax system as a way to impose higher prices, the Domestic Trade and Consumer Affairs Ministry should be vigilant in their enforcement activities.
Proper enforcement and administration are key to a successful tax system. The GST system should be refined, taking into consideration and addressing any gaps from the previous GST system.
This could include addressing the delay in providing refunds to taxpayers which resulted in cash flow issues previously.
Further, clear guidance on policies should be disseminated to aid taxpayers in their compliance matters, which will effectively enable the government to create a tax system that is collaborative and not burdensome to the taxpayers.
Overall, to ensure that the country benefits and the rakyat do not feel unduly burdened, all the relevant stakeholders’ points of view and opinions should be considered before a decision is made on the reintroduction of GST. Pain points from the previous GST regime should be addressed, and if these points are addressed, we can hope for a better tax system and positive feedback from the people in the long run.
Jalbir Singh Riar is a Tax Partner in Ernst & Young Tax Consultants Sdn Bhd. The views reflected above are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms. The views expressed are solely that of the writer.