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Malaysia's GST Effect: Catalyst or Deterrent?
Revenue from GST More Short Term Benefit than Long Term Strategy
Malaysia’s new Goods and Service Tax (GST) regime (replacing the SST system) is
the government’s attempt to create an additional revenue stream (around MYR
30 billion estimated revenue in 2015 and MYR 39 billion in 2016) for the country,
in order to reduce the fiscal deficit and debt levels. However, the drastic drop in
oil revenue since early 2014 has resulted in a MYR 30 billion loss in revenue for
2015. The additional GST revenue, therefore, simply makes up for the loss in
revenue and does not help reduce the fiscal deficit in the short term at least.
To encourage the adoption of and compliance with the GST system, the
government is providing a number of incentives in the form of financial
assistance, grants, reduced corporate tax rates and tax allowances for the
purchase of GST software, training of employees and SMEs. However, despite its
advantages, GST also demands government time and money in processing claims
and monitoring of the system. There are also concerns that this is just a short
term strategy to maintain government revenue and therefore not a long-term
benefit to the country.
0
Amani Iqbal
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Property, Healthcare, Telecommunications and Tourism were Main Sectors Affected by GST
The manufacturing sector has been the main beneficiary of GST, with
manufacturers being able to claim GST for tax paid on inputs and therefore not
having to increase the prices of goods offered to customers. However, within the
property sector, developers are affected as they cannot charge GST on sales of
residential properties despite having to pay GST at each stage of the
construction phase. This has caused residential prices to rise and sales numbers
to decline since 2Q 2015.
From among the service sectors, healthcare has had the biggest impact as a
result of the government exempting only public healthcare from GST. Further,
only 25% of the medication on the National Drugs List had initially been exempt
rated, excluding many drugs used for long-term illnesses. This increased the cost
of private healthcare, drugs for lifelong illness such as diabetes, heart disease
and cancer and medical insurance as well.
The domestic tourism sector was also negatively impacted, as domestic flights
were charged with GST. This put an undue burden on many residents in east
Eastern states such as Sabah, for whom air transport is the only mode of
transportation to Kuala Lumpur. Although tourists can re-claim GST charged on
goods and services they spend on while in Malaysia, many are still unaware of
the process to do this and therefore are choosing other travel destinations
instead.
In 4Q the government addressed these concerns by increasing the number of
exempt drugs, providing rebates within the telecom sector and making local
travel GST exempt. These initiatives provide citizens with the reassurance that
the government is willing to accommodate their concerns and adjust policies
accordingly to benefit the public as well.
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Price Increases and Failure to Comply with GST are Main Concerns for Government
Since the implementation of GST in April 2015, the prices of nearly 70% of goods
and services in the consumer price index basket have risen by as much as 30%.
With household debt levels already at 88% (the highest in the ASEAN region),
domestic consumption could fall as high value goods become more expensive.
This could reduce the projected GST revenue numbers and even force smaller
SMEs to close down as raw materials and costs increase. Further, reduced
demand could decrease total revenue and profitability generated by SMEs,
resulting in lower corporate and income tax paid to the government. This could
negatively impact the government’s expected outcome from GST
implementation.
The main concern is the failure of companies to register and comply with GST. As
of May 2015, only 75% of all businesses had registered for GST. Contractors and
e-commerce merchants made up the largest proportion of companies failing to
comply with GST requirements. The government has enforced fines on non-
compliant companies and is also planning to provide awareness programs and
training for businesses regarding GST to boost the number of registered
companies to a least 400,000 by early 2016.
Taking the above arguments into consideration, only time will tell whether the
GST regime will have a positive or negative effect on Malaysia in the long-term.
At present, it seems to be just a short term solution to the government’s deficit
and loss of revenue in key industries. As the full impact of GST sets in only during
2016, it will be a critical year for the government to prove to citizens the benefits
of the new regime in improving productivity and boosting the economy in the
long run.
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GST Regime Vs Previous SST System
Since the 1970s, Malaysia has had the Sales (5%-10%) and Service Tax (6%)
systems in place on goods sold and services offered. However, over time, this
system experienced a number of problems such as being non-transparent
(where different rates were being applied to different goods and services), red
tape and multiple taxation. In an attempt to overcome these issues, the GST
system was announced in the Budget 2005 to be implemented in 2007.
However, public resistance, conflicting opinions and concerns raised caused the
government to delay the implementation of GST. From then until 2011, the
government conducted in-depth studies on the implementation of GST, to
identify the social and economic impact on the country and in particular, on the
Rakyat.
Finally, after continuous discussion and evaluation, the proposed
implementation of GST was announced in the Budget 2014. However, since its
implementation in April 2015, a number of concerns and drawbacks have arisen,
thereby affecting the local economy. As is the case with new tax regimes, it is
likely to take a year or two for the dust to settle. In the meantime, there have
already been some effects of GST on the economy this year, with other short-
term implications and benefits on the Malaysian economy.
GST Timeline in Malaysia
Source: Uzabase research
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Sales and Service Tax (SST) – until April 2015 Goods and Services Tax (GST) – April 2015 onwards
Sales Tax of 5-10% imposed only at one stage – when goods are taken out of the factory to be sold. Tax rate depends on good or service.
GST is a standard consumerism tax of 6% based on a value added concept. It is imposed at every stage of the supply chain from production to consumer, including exported goods and services.
Service Tax of 6% imposed on certain services when offered to the consumer.
Tax paid at each level of production (input tax) can be claimed back by businesses. Therefore, multiple taxation is avoided. Claims are processed within 14-28 days.
Source: Uzabase Research
GST is implemented under three categories: Standard-Rated GST, Zero-Rated
GST and Exempt-Rated GST. This eases the burden on lower income households
as basic items (eg. rice, flour, sugar etc.) and essential goods and services (eg.
education and healthcare) are either zero rated or exempt from GST.
TYPE OF GST RATE OF GST HOW IT WORKS CATEGORIES OF GOODS
Standard-Rated GST 6% GST on final price
Goods and services charged at 6% at every stage of the supply chain. All parties can claim back credits on GST paid (input tax), EXCEPT the final consumer
Household items, utensils, clothing and accessories.
Zero-rated GST 0% GST on final price
Goods and services in this category charged at 0%. However, businesses can claim back credits for taxes paid on inputs
Basic food items, unprocessed food items, most education materials.Eg. Imported and local fruits, bread, coffee powder, cocoa powder, eggs, sugar, flour, cooking oil, tea dust, fish, meat, poultry, noodles, public transportation and National Essential Medicine covering 2,900 brands.
Exempt-rated GST No GST cost to consumer
Goods and services non-taxable. Final party in the supply chain CANNOT claim back credits for taxes paid on inputs
Residential property and Healthcare. Eg. Agricultural land, newspapers, electricity bills with usage under 300 units, Ron 95 fuel, diesel, LPG and private education
Source: Uzabase research
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Despite being slightly complex to understand at first and requiring a one-off
investment to set up, the GST system overall is a more transparent, smooth and
effective system than SST, which had higher taxation levels and different
thresholds.
Under the GST tax system, businesses with a minimum annual revenue of MYR
500,000 are legally required to register. For businesses with revenue below this
threshold, registration is voluntary.
Pros and Cons of GST System
Although the main drawback of GST relates to the increase in the price of goods
and services, there is a greater awareness regarding the system and its benefits
among taxpayers and businesses alike. In the long run, the additional revenue
should boost the Malaysian economy by enabling the government to spend this
extra revenue to overcome the fiscal deficit and improve the productivity of the
manufacturing and service industries.
ADVANTAGES OF GST DRAWBACKS OF GSTGST rate lower than the previous SST Increase in the cost of goods and services as
producers try to pass on GST to the final consumerCost of production for businesses does not increase as input tax incurred at one part of the supply chain can be deducted at the next stage
If GST causes a continuous rise in prices, it could lead to inflation
More transparent than SST as GST is a single standard rate of tax applied at each stage of the production value chain and with clear guidelines laid out regarding GST claims and processing
Decrease in domestic consumption as prices of higher value add products rise
GST creates additional revenue for government to help reduce fiscal deficit
Monitoring and handling companies who fail to submit GST statements and/or pay GST can be time consuming and expensive for the government
Additional revenue can help the government spend to improve the standard of living of the country, leading to economic growth
Government has to incur cost of training, implementation, monitoring and processing claims
Overcomes the current problems of multiple taxation, non-declaration of SST through transfer pricing and the current tax exemption on export goods.
The list of zero-rated and exempt-rated GSTs have to be revised on the basis of feedback and challenges faced by taxpayers. Eg. Additional medicines made exempt from GST, domestic air flights exempt, and more basic items added to zero-rated list in 2H 2015.Investment in accounting software and automation of existing systems required
Source: Uzabase Research
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To help businesses and consumers ease into the GST system, the government is
reducing some taxes and providing a number of incentives such as:
1. Reduction in corporate tax rate to 24% from 25% and decrease in income
tax rates for small and medium enterprises to 19% from 20%. These will
take effect in tax assessment year 2016.
2. Co-operative income tax rate to be reduced to 2% from 3% in the tax
assessment year 2015.
3. From assessment year 2015, secretarial and tax filing fees will be tax
deductible
4. Accelerated capital allowances on the cost of ICT equipment and software
extended to assessment year 2016.
5. Expenditure on accounting and ICT training relating to GST will be given
further tax deductions for assessment years 2014 and 2015.
6. Grants for training employees regarding GST have been provided for 2013
and 2014.
7. Financial assistance provided to Small and Medium Enterprises (SMEs) for
the purchase of accounting software in 2014 and 2015.
GST to Increase Total Tax Revenue Base and Even Out Income Distribution
Since 2005, the government’s earnings from direct taxes has steadily increased.
Direct taxes accounted for 78% of total tax revenue in 2014, up from 74% in
2009. During 2009-2014, total revenue from direct tax grew at a CAGR of 11.2%.
Revenue contribution from indirect taxes (which included SST under the
previous regime), on the other hand, declined to 22% of total government
revenue in 2014, from 26% in 2009. However, total indirect tax revenue actually
grew by a CAGR of 6.5% over the same period.
From 2009-2014, total tax revenue grew at CAGR of 10.0%, reaching MYR 171.8
billion in 2014. With the introduction of GST, the government’s total tax base is
expected to increase by 6.8% yoy to MYR 183.4 billion in 2015, with indirect
taxes driving growth, thereby enhancing fiscal resilience.
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As commodity prices decline, the government has been trying to boost its
income from indirect tax revenue since 2011. Revenue from the SST in 2011
totalled MYR 13.6 billion amounting to 7.3% of total revenue. However, GST
revenue in 2015 is expected to exceed MYR 30 billion and for 2016, GST revenue
is estimated to contribute almost MYR 39 billion, accounting for around 17.5% of
total government revenue.
Most developed nations that have already implemented GST, did so to shift the
tax burden from high income earners to the middle class in order to balance tax
distribution, but not with the aim of increasing total tax revenue. GST does this
by increasing the proportion of indirect taxes to total tax revenue. The
corresponding reductions in corporate and income tax rates also spread the tax
burden more evenly among the population.
The Malaysian government, however, intended to create an additional revenue
stream with GST to help reduce the fiscal deficit and national debt. This raises
the question of whether GST will actually help improve the economy or if it is a
long term strategy to cover government spending.
Source: Department of Statistics Malaysia
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Revenue from GST Could Help Reduce Fiscal Deficit
Over the last ten years, Malaysia’s fiscal deficit has been constantly mounting.
However, since 2013 the country has been in the “safe zone” by maintaining
debt to GDP ratios below 75% and a deficit below 4% of GDP. Compared to other
neighboring ASEAN nations, this makes the Malaysian economy relatively robust.
The fiscal deficit is expected to decline to 3.2% of GDP in 2015 and 3.1% in 2016,
through the additional estimated revenue generated via GST. However, despite
the implementation of GST and abolishment of fuel subsidies in Malaysia,
Standard & Poor’s (S&P) believes that additional subsidy reforms would be
crucial in order for the government to achieve its 0% deficit to GDP target by
2020.
Source: Trading Economics, Ministry of Finance
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There is a concern, however, that the general public are increasingly taking on
the burden of the shortfall in government revenue through this indirect tax, in
order to support budget spending. Ideally, the additional revenue generated
through GST should be spent by the government in improving the productivity of
the economy, which would lead to economic growth. While the Budget 2016
includes generous allocations for education (MYR 41.3 billion) and
developmental projects (MYR 30.1 billion), financial aid provisions have been
increased to MYR 5.9 billion for low income households, raising questions about
the effectiveness this would have in boosting productivity. Therefore, it appears
that the actual positive impacts GST could have on the economy can only be
gauged in a year or two from now.
Additional Revenue from GST Helps Offset Shortfall in Oil Revenues
The introduction of GST was also intended as a proactive measure to help the
government cover the decrease in revenue from the oil sector, especially after
oil prices fell drastically since the fracking boom and price war with the US shale
industry affected the global sector in late 2014.
The share of oil related revenue to total revenue is expected to fall to 20% in
2015, from around 33% in 2014, mainly due to the decrease in global oil prices
(which fell from around USD 78 in November 2014 to USD 41 in November
2015). If oil prices hadn’t fallen so drastically this year, the government would
have earned an additional MYR 30 billion from oil revenue in 2015. While the
MYR 30 billion expected to be received from GST this year could replace this
loss, this would hinder the country's efforts in reducing the fiscal deficit. It makes
more sense for the government to look at ways of increasing productivity and
strengthening either the oil or other industries to replace this loss in revenue so
that the additional GST revenue can be used more productively.
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Impact of GST and Developments in Key Sectors
Rise in Property Prices as a Result of GST Has Negatively Impacted Property Sales
Within the property sector, the new tax regime applies GST on the sales of
commercial properties but not on residential properties. For sales of commercial
properties, 6% GST is charged in addition to the selling price. Even if a
commercial property is leased, an extra 6% GST will have to be paid by the
tenant.
However, when it comes to the cost of building materials, under the SST system
materials such as bricks, cement and tiles were tax exempt. The GST system
applies the 6% tax rate to all building materials and input services provided by
contractors and engineers.
In the residential property segment, developers are affected by the GST charged
on the building materials used during the construction phase as they cannot get
refunds on taxes paid on inputs. The weakening ringgit also increased the prices
of imported building materials such as steel, elevators, escalators and air-
conditioning. As total construction costs have risen by up to 11%, the
profitability of many developers has been affected as they have had to absorb
the cost of GST instead of passing it onto consumers.
According to the Real Estate and Housing Developers’ Association Malaysia
(REHDA), new property prices increased by nearly 4% since April 2015 due to
higher material costs incurred by developers as a result of the additional GST
during the construction phase. During the 2H 2015, property sales fell by 30%
yoy, primarily due to GST and tighter loan requirements.
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REHDA is proposing that the government exempt the real estate sector from GST
for another year to boost property sales. The government, however, appears to
be supporting property price increases as in 2H 2015 it introduced a new rule
enabling developers to claim a 6% rebate for GST charged on the final output,
even if they are able to pass on this charge to buyers in the form of higher
prices.
Prepaid Mobile Users to Receive GST Rebates from January 2016
In the telecom sector, since GST was implemented, prepaid reloads became
subject to the 6% tax rate. Under the previous SST system, prepaid users were
relieved of tax as the 6% sales tax was absorbed by the telecom service
providers themselves.
Subsequently, in May 2015, the government slightly altered this ruling to the
GST being deducted only when the reload is actually used for calls and text
messages and not when it was purchased. Telecom operators were given until
the end of October to switch to this charging system. However, many companies
have been unable to meet this deadline, claiming that their existing ICT
equipment and software are not equipped to handle the change.
This has led to a rise in customer dissatisfaction as consumers are unable to
understand why telecom operators cannot absorb the 6% GST cost as they had
done under the previous SST system. To resolve this issue, the Malaysian
Communications and Multimedia Commission (MCMC) is currently developing a
system whereby Malaysian users will receive a rebate in the form of additional
airtime for the value of the GST paid on reloads. The system is expected to be
ready by January 2016 and implemented throughout next year.
The main operators – Celcom, Digi and Maxis – are in full support of this
initiative and believe that this move would help retain customers and enable
players to maintain competitive pricing as well as not worry about absorbing GST
costs hitting profits or passing them onto users.
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Cost of Private Healthcare and Medication Increased as a Result of GST
When GST was implemented in April, healthcare was stated to be exempt of
GST. However, this was only applicable to the public healthcare system.
Consultation fees at private hospitals are still subject to 6% GST by classifying
medical specialists as outsourced service providers.
Many medical supplies required for hospitals are also subject to GST, which will
further increase operating costs for hospitals while they are unable to claim
credit for GST paid on inputs.
When it comes to medication, only 2,900 brands of medicine (about 25% of the
12,000 registered brands of medication in Malaysia) were exempt from GST in
April 2015. Many expensive medicines used for critical and life-long illnesses are
not exempt. Ironically, the patients needing such medication are usually unable
to take up full time employment or earn full time salaries. It is estimated that
post-GST, patients will be paying an additional MYR 180 million per year for
medication, which would be a 0.4% increase from 2014 annual spending of MYR
42.6 billion (USD 13.0 billion). Although this figure is still lower than Singapore
(USD 14.4 billion) and Thailand (USD 17.9 billion), it is higher than the Philippines
(USD 12.7 billion) and Vietnam (USD 11.1 billion), which could negatively impact
the medical tourism industry
Taking this issue into consideration, in the announcement of the Budget 2016 in
October 2015, the government zero-rated all types of medicine for non-
communicable diseases, all controlled medicines and 95 over-the-counter drugs.
This increased the number of exempt medicines to 8,630 brands. The list now
includes medication for 30 types of long term illnesses such as cancer, diabetes,
hypertension and heart disease. This will help in reducing the expected increase
in healthcare expenditure as a result of GST to much less than the previously
forecasted MYR 180 million per annum.
Medical insurance is also subject to GST and could deter the public from
obtaining insurance, particularly the elderly who need it the most and depend
on fixed pensions for their livelihood.
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Domestic Tourism Industry Protected by GST Exemption on Local Travel
In 2Q 2015, Malaysia’s local tourism industry saw a 30-40% drop in revenue,
according to the Malaysian Association of Tour and Travel Agents (MATTA).
Although the prices of goods and services had become cheaper as a result of the
weakening ringgit, this was offset by the additional GST imposed, thereby
making Malaysia dearer for tourists. The Tourist Refund Scheme allows foreign
tourists to reclaim GST paid after spending MYR 300 on a single receipt.
However, many tourists are still unaware as to how this process works and the
red tape involved is likely to make neighbouring nations more attractive to
tourists.
With the advent of GST, all domestic air travel also became subject to tax in
Malaysia. This raised serious concerns in East Malaysian states such as Sabah,
which do not have any other mode of travel to connect residents in the area to
Kuala Lumpur. Whether it is work or leisure, air travel is the only transport
facility available for people living in the state of Sabah. The state therefore called
on the government to consider this an essential service and thereby exempt it
from GST in order to make it fair for Malaysian citizens. This would help avoid
other social and work related issues that could have arisen as a result of the GST
on local travel and thereby have an overall positive effect on industry revenue.
Taking the above issues into consideration, the government announced in the
Budget 2016 in October that all domestic economy flights will be exempt from
GST. Additionally, the 100% tax exemption on statutory income for tour
operators has been extended from 2016-2018. The government expects these
moves to boost tourist arrivals to 30.5 million (up 3.7% yoy) and tourist receipts
to MYR 103 billion (up 15.7% yoy) in 2016.
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2009 2010 2011 2012 2013 2014 2015e 2016e0
5
10
15
20
25
30
35
0
20
40
60
80
100
120
23.65 24.58 24.71 25.03 25.7227.44
29.4 30.5
53.4 56.5 58.3 60.6 65.4472
89103
Tourist Arrivals and Receipts in Malaysia
Tourist Arrivals Tourist Receipts (RHS)
Mill
ion
MYR Billion
Source: Tourism Malaysia
Negative Impacts of GST
Corporate and Income Tax Revenue Likely to Decrease post GST
Corporate tax revenue has grown at a CAGR of 17.5% from 2009-2014 and made
up around 54% of the government’s total revenue from direct taxes in 2014.
During the first year of GST implementation, many businesses are choosing or
being forced to absorb the cost of GST in order to remain competitive and
maintain/increase revenue. In doing so, they incur higher cost of sales and
thereby lower profit margins. Thus, they would end up paying less corporate tax
to the government. Many smaller businesses may also be forced to shut down,
leading to further reductions in corporate tax received and unemployment. This
could actually worsen the government’s fiscal deficit over the next two years.
Even where sellers have passed on the GST to the final consumer in the form of
increased prices, this has caused a decrease in demand/consumption. The
reduction in unit sales lowered overall revenue and thereby profits. As a result,
businesses once again ended up paying lower corporate and income tax.
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e -
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
26,381 26,477 32,149
37,741
30,199 36,266
46,888 51,288
58,175
67,679
8,649 10,196 11,661 14,966 15,590
17,805 20,203 22,977 23,055
26,746
Direct Tax Trend in Malaysia
Corporate Tax Income Tax
MYR
Mill
ion
Source: Department of Statistics, Malaysia
Rising Prices and Household Debt Could Negatively Impact Domestic Consumption
Since April 2015, GST has become increasingly unpopular due to the number of
basic/essential food items used by the bulk of the population, which were not on
the zero rated or GST exempt list. In October 2015, the Malaysian Prime Minister
addressed some of these issues by expanding the zero-rated list to include soy-
based and organic milk for babies and toddlers, dhal, brown sugar, various nuts,
lotus fruit water chestnuts and dried kolok noodles, among others.
Prior to the implementation of GST, the government had projected a 4.1% yoy
drop in the prices of 532 items out of the 944 goods and services that make up
the consumer price index basket. However, since April 2015, the prices of over
70% of the goods and services in the basket have gone up by as much as 30%,
leaving many people confused as to the benefits of GST implementation.
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Over the last ten years, Malaysia has become increasingly dependent on
domestic consumption, especially since the growth rate of exports decreased
after the global financial crisis in 2008. However, as most domestic consumption
is fuelled by debt, it has its constraints.
Malaysia also has one of ASEAN’S highest household debt levels, which is
continually rising. In 2014, the household debt to GDP ratio stood at 88%, up
from 62% in 2004. This has affected domestic consumption as households have
less money available for discretionary spending.
Since the introduction of GST, domestic consumption and private spending has
eased due to the subsequent rise in the price of goods and services. In 3Q 2015,
the Malaysian economy grew by 4.7% yoy, its slowest pace in two years. The
increasing levels of debt combined with rising prices could result in the
government not meeting its GST revenue target, which would worsen the
country’s national deficit.
GST - a Game Changer for SMEs
In Malaysia, SMEs represent 97.3% of all businesses and are expected to
contribute 35% of GDP in 2015 (from 33.1% in 2014). Within the manufacturing
sector, SMEs are categorized as companies with a turnover under MYR 50
million or an employee strength of less than 200. In the service sector, SMEs are
defined as companies having a turnover of less than MYR 20 million or an
employee headcount not exceeding 75.
In most of these businesses, accounting and invoicing is usually done in-house
and manually. However since April 2015, SMEs now have to change existing
procedures and systems and invest in accounting software and training for
employees to automate business processes in order to be compliant with GST.
They need to send tax reports on a regular basis to the Customs Department and
ensure that all data is archived for inspection as well. The SME Association is
emphasizing the need for the government to provide training and further
educate the businessmen running SMES regarding GST, its implementation, costs
and benefits to encourage maximum adoption.
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With many GST software programs being cloud-based or web-based, there is
also the increased risk of internet hackers gaining access to valuable data and
holding companies to ransom for it (i.e ransomware). This is a primary concern
for SMEs, particularly those run by older people who are hardly tech savvy. As
they are unaware of the consequences of cyber threats, many feel it is
unnecessary to invest in data protection or security measures. Moreover, most
SMEs do not have the financial resources or the manpower to make such an
investment, which is between MYR 2,000 – MYR 10,000.
SMEs have also been facing rising production costs and falling profits as a result
of the weakening ringgit, as the bulk of raw materials are generally imported.
Margins are further compressed as most SMEs sell only to the local market. The
majority of SMEs don’t have access to banking facilities such as loans and
thereby rely on credit terms from overseas supplies to meet their financing
needs. The new GST system has resulted in SMEs facing severe cash flow
constraints as they have had to wait up to three months to receive GST claims.
Many companies reduced stock purchases or have written off unpaid refunds as
losses, which further reduced profits. This delay occurred due to the government
having to verify all GST claims to ensure they were genuine and error free.
The Federation of Sabah Industries (FSI) believes the current turnover threshold
and rate of GST are too oppressive on SMEs. It suggests increasing the annual
turnover threshold to MYR 3 million (from the current MYR 500,000) and
lowering the GST rate to 3% as the first phase of the new system. This would
help ease the burden on SMEs to register and give them time to get used to GST.
However, SMEs who are not registered under GST cannot claim input tax paid on
production materials either, which could lower margins. Therefore, despite the
obstacles present, SMEs (i.e those which are not required to register for GST)
need to weigh the cost-benefit and see how best they would be able to
maximize profitability, either through the GST system or without it.
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Failure to Comply with GST Remains Primary Concern for Government
As of May 2015, 377,452 companies had registered for GST, out of a total of
500,000 companies in Malaysia. Of those registered, only 55% were mandatory,
while the remainder were voluntary, indicating the growing awareness of GST
and its benefits among businesses.
However, from April to November 2015, the Finance Ministry had also issued
26,963 notices to companies registered for GST but which have failed to submit
their GST statements and pay the required amounts. Contractors and e-
commerce merchants make up the largest proportion of businesses that have
not yet registered for GST although they meet the requirement. This number
includes an association of 10,000 contractors – all of whom are unregistered.
Based on the number of complaints received by the Finance Ministry in 3Q
compared to 2Q of this year, it appears that people have begun to accept the
implementation of GST and its implications. Only 572 complaints were recorded
in 3Q, as opposed to 5,873 complaints in 2Q. In addition to the MYR 15,000 fine
for businesses which fail to comply with GST, the Customs Department plans to
introduce a GST guide specifically for the housing sector to educate developers
regarding the tax regime. The aim is to increase the number of GST registered
businesses to 400,000 by early 2016.
Malaysia’s GST Regime in Comparison to Regional Countries
China (17% GST) and ASEAN countries such as Singapore (7% GST), Thailand (7%
GST) and Indonesia (10% GST) have already implemented GST systems from as
far back as 1984 with rates as high as 17%. However, since implementation, all
these countries have made amendments and reductions to their GST policies
and rates to accommodate the consequences of GST, in order to boost their
economies. Compared to these countries, Malaysia’s GST rate of 6% is currently
the lowest.
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The main benefit of GST should be the spending of the additional revenue by the
government in improving productivity, standards of living and boosting the
overall economic growth in the country. Singapore has clearly detailed the offset
package it has implemented to compensate for the charging of GST.
In Malaysia’s case, Budget 2016 has already made amendments to GST in certain
sectors and industries, taking into consideration the requests and concerns of
various government authorities and businesses. At present, the government’s
main focus appears to be reducing the fiscal deficit. Therefore, it will be
interesting to observe if GST revenue will be continuously used to consolidate
Malaysia’s fiscal position, or if the country will use this new tax regime to
increase its competitiveness and shift from an income based tax system to a
consumption based one.
COMPARISON OF GST IN CHINA AND OTHER ASEAN COUNTRIES
COUNTRY YEAR OF IMPLEMENTATION
PHASES Developments
China 1984 17%Reduction in VAT:13% that applies to products such as books and types of oils
Singapore 1993
3% (1994)4% (2003)5% (2004) 7% (2007)
SGD4 billion (USD3.1 billion) spent over five years to offset GST, consisting of:
1. Direct transfer benefits in the form of cash payouts (GST credits, growth dividends, senior citizens’ bonuses)
2. CPF top-ups (post-secondary education account top-ups for students, Medisave top-ups for older Singaporeans).
3. Rebates (on utilities and public housing services and conservancy charges.)
Thailand 1992
10% (1992) 7% (2010) – revised at the request of business operators
In 2014, the Fiscal Economics Office in Thailand suggested that the old 10% GST rate be reintroduced as every one percent increase would generate THB 70-80 billion (USD2.14 billion - USD2.45 billion) in annual revenue.
Indonesia 1985 10%
- VAT and GST are applied to most goods and services in Indonesia, including imports
- Exports are GST free- Reduction in VAT:
a. 4% reduced VAT on most goods and services in Indonesia, including imports
b. 4% reduced VAT rate on in-house construction
Source: Astro Awani