When the Tsunami of May 9 gave birth to a new government led by Tun Dr Mahathir Mohamad, one of its first tasks was to announce that the 6% Goods and Services Tax (GST) would be rated 0% effective June 1, 2018.
Pakatan Harapan (PH) stuck to its promise to remove GST and have it replaced with SST (Sales and Service Tax). By 2020, it hopes to be able to completely remove GST.
A major move like this will certainly have an impact not only on the country’s financial standing, but on the people too. The income group that stands to benefit the most from the removal of GST is the middle-income group as they are the ones who have to spend the most on household goods and services that do not fall under the zero-rated or GST-exempt categories.
When GST was first implemented in 2013, high prices were not expected, according to then secretary-general of the Ministry of Finance Tan Sri Mohd Irwan Serigar Abdullah, “Prices of some goods may rise, but this should go down later on. Hopefully, this is a one-time spike, after that it will moderate downwards.” That certainly didn’t happen and since GST was implemented, prices were on a rise while salary growth remained stagnant.
GST A brief history
Introduced on April 1, 2015, the GST was to supplant the then existing Sales and Services Tax (SST) in Malaysia. The former government proclaimed that the GST was meant as an additional income for the government, seeing that they were solely dependent on the revenue mustered from PETRONAS (Petroliam National Berhad), Malaysia’s state-owned oil company.
While it might seem to be the best choice to salvage the economy, considering the apparent drop in petroleum revenue, it was to say the least very unpopular amongst Malaysian. Hence, its current abolition is seen by many as a positive impact for the people.
However, Moody’s Investors Service had announced since that Malaysia’s plan of abolishing the GST will be “credit negative”, seeing that the government will be again heavily relying on oil-related revenue.
Unless the government introduces other offsetting measures over the next two years, the removal of GST will have a net negative effect on government revenue, even accounting for some budgetary cushion from higher oil prices, the credit rating agency said.
Impact on the economy
Ease Inflation
The removal of GST will bring positive changes to the economy as it is supposed to ease rising inflation. When GST was introduced in April 2015, it caused the inflation rate to hike to 4.2%. This was in part due to profiteers taking advantage of the new system to indiscriminately increase the prices of goods and services.
Increase consumer spending
The removal is predicted to create an increase in consumer spending, therefore boosting the economy overall. Bank Negara Malaysia (BNM) has forecast that the economy will grow 6% in 2018.
Oil revenue to offset
Malaysia being one of the largest oil and natural energy producers in the Asia-Pacific region is set to benefit from crude oil prices trading up to a new high of roughly RM314 per barrel, this will partly offset any loss in revenue. Tan Sri Dato’ Sri Dr. Ungku Zeti Akhtar Aziz, who is part of the Team of Eminent Persons to advice the new government, said that Malaysia can reduce fiscal deficit by controlling expenditure.
Review, defer or renegotiate
The Finance Ministry is confident there will not be any problem even with the GST removed as the government plans to review, defer or renegotiate at least RM10 billion worth of projects.
Additional income
The federal government will be getting an estimated RM14.4 billion in additional income this year, including from higher corporate and petroleum income taxes from oil firms on the back of higher oil prices (RM5.4 billion) and higher dividends from government-linked companies like Khazanah Nasional and Petronas (RM5 billion).
Out of the RM14.4 billion estimated, SST is expected to contribute RM4 billion this year after its implementation in September.
Despite the GST removal, the extra income, review of projects and the stabilization of fuel prices the government expects to only see its budget deficit increase from the original projected RM39.8 billion to RM40.1 billion.
Was GST evil?
160 countries have adopted the GST/VAT, and GST has been instrumental in providing the government with more revenue than SST did. It was estimated that RM43.8bil was to be collected in 2018 from GST as compared to the RM17.2bil collected in 2014 through SST.
The current government’s main strategy appears to be to depend on crude oil prices remaining high for an extended period of time, this reliance on petroleum-related revenue means that the country’s budget will be vulnerable to fluctuations in oil prices. Since the implementation of GST in 2015, revenue has proven to be much more balanced.
On June 1 with the implementation of zero rated GST the Customs department already received 20 complaints on profiteering on the first day and expects to receive more in the next few days. The government therefore has to implement new laws to strictly enforce and curb unlawful profiteers.
Pros and cons
As is with every amendment, the GST has its share of pros and cons. Amongst its advantages are that it has no hidden charges. GST mainly consists of 2 taxes, Central Goods and Services Tax (CGST), and State Goods and Services Tax (SGST). These taxes have been levied on all the manufacturing goods and services which are offered in the country, resulting in no hidden taxes other than CGST and SGST which can be charged for the goods and services.
GST has also been amicable towards business. As the cost of goods reduces, consumption rate increases, which in turn benefits companies and business individuals greatly.
The most favourable factor gained from the implementation of GST was the permanent removal of all the unnecessary tax rates which were dominant in the economy. This includes value added tax (VAT), octroi, central sales tax, state sales tax, entry tax, and others.
However, given all its leverage, one of the most apparent disadvantages of this tax reform is its impact on the country’s real estate industry. GST added 8% to the price of new houses which had simultaneously led to deterioration in the demand for new homes in Malaysia.
What’s more, the payment of the GST had to be made online. This proved to be inconvenient for the small businesses to comply, particularly when compared to the old days, where the process of tax filing was conducted offline. GST also required quarterly or monthly submissions which affected the cash flow of companies as it was calculated on billings rather than collections.
In 2017, the revenue collected from GST was RM44.3 billion, which was 3.3% of gross domestic products (GDP).
Money back to the people
Malaysians will enjoy three months tax free on goods and services. The MOF has indicated that Malaysians will have approximately RM17 billion in savings for the rest of the year that would otherwise have been collected as tax and are expected to save RM3 billion from the fixed pricing of RON95 petrol and diesel prices , while a special assistance of RM700 million will be given to civil servants ranking Grade 41 and below and pensioners for Hari Raya. Therefore they will have RM20.7 billion this year in savings, which the ministry believes will boost consumer spending and business profits.
GST vs SST: the differences
Implemented on April 1, 2015, the Goods and Services Tax (GST) is a tax on most products and services for domestic consumption at every level in the production process. As a replacement for the Sales and Services Tax (SST), GST can be claimed as input tax for companies with revenue above RM500k.
Also known as Value Added Tax (VAT) in some other countries, GST is the most commonly used form of taxation used by 160 out of 190 countries globally.
Implemented in the 1970’s, the SST is covered by two separate tax laws on a wide variety of goods and services at a single level. The Sales Tax Act in 1972 is a single-stage tax charged at the manufacturer’s level.
Meanwhile, the Service Tax Act of 1975 is a single-stage tax charged at the consumer’s level with the exception of tax free zones. Prior to being replaced by the GST, the sales tax was at 10% and service tax was at 6% respectively.
The Sales Tax is levied only to the manufacturer or consumer level while the Service Tax is imposed to consumers who are using tax services. As it varies from five to ten percent to specific rates, the SST rates are deemed to be not as transparent as the six percent rate of GST. Paid input tax is not claimable by businesses.
With the GST, tax is being levied to every level of distribution. These include manufacturers, wholesalers, retailers and consumers. Paid input tax is claimable by businesses.
Hence, the GST is claimed to be able to curb transparency, tax-payment issues and misappropriations as the tax system is at a one standard rate of six percent and is not an added tax.
On the other hand, the SST rates vary from five to ten percent or a specific rate, not forgetting another six percent from service tax. As such, certain importers, manufacturers, wholesalers or retailers fail to declare their taxes through transfer pricing.
Even so, GST was unpopular amongst the people as it has caused hardships with the cost of goods going up since implementation.
While it is true that some goods were exempted from GST, with a zero percent rate, these goods are often items that are only purchasable by those comprising of the high-income group, such as lobsters.
Although input tax is claimable by businesses, the GST claim back on tax is difficult, and oftentimes can be declined. What’s more, businesses require RM500k in sales before being able to claim tax input.
However, the SST too is not without its own shortcomings, with the biggest concern being that the SST will cause government tax revenue to drop when compared to the GST, with the revenue collected being RM44.3 billion last year.
SST is also seen as a less progressive form of tax, seeing that most countries have moved on to GST. Switching back from GST to SST will also cost businesses ambiguity and ultimately, more loss on money.
