GST in Malaysia (2015)

Sorry for the long, long holiday from updating this blog. It has been a while because I was on vacation and also CNY is just around the corner, so there's ALOT of cleaning to do. If any of you who is familiar with Toastmasters, I am scheduled to speak my 7th project speech which requires me to research on my topic. Thus, I chose this topic as it is highly debated of its implementation impact in Malaysia, from the parliament to the roadside mamak shop.

What is GST?
Basically, the new Goods and Services Tax (GST) will replace our existing Sales and Services Tax (SST) in April 2015. Both of these taxes are consumption taxes, which means consumers opt to pay more in tax as they consume more. The main difference between this two taxes is how they work. Our current system, the SST, taxes are collected at the end of the supply chain. For the GST, however, taxes are collected at every stage of the supply chain. Currently, the disclosed rate at the beginning of the implementation of GST is at 6% to replace both 10% Sales Tax and 6% Service Tax. The government did clarify that the proposed rate of 6% will not be raised for at least 2 to 3 years, citing that it will take time for its impact to stabilize [ to which extent this statement is true, the consumers should be prepared for an 'alternative' event ]

How does the GST work?
To explain this, I've found some very good diagrams from savemoney.my.

diagram 1

source : savemoney.my

If we study the diagram closely, we can note that the GST is a value-added tax, unlike the SST which is levied on the final goods. Under GST, the tax will be levied at every stage of the supply chain. That may sound as if the tax burden will increase proportionately depending on the number of stages, but fortunately it does not work that way. A value-added tax means that for tax only applies for every increase in sales value along the supply chain, leaving the amount which have been taxed at previous stages unchanged.

To be more detailed, let us refer back to the above diagram. The manufacturer, under 4% GST, will first charge tax of RM0.40 [RM10 x 4% ] to its bill, therefore total paid by the coffee shop to the manufacturer will be RM10.40 for its supplies of coffee. The government will then collect RM0.40 from the manufacturer. In the second stage, the coffee shop ( must be registered under the GST program, only those registered can claim and charge GST ) charges its customers RM15 for the cup of coffee. The tax levied will only be of 4% from any addition to RM10 previously taxed, which is RM5. Coffee shops registered under this GST will first claim the RM0.40 from the taxation office when they prepares annual taxation. Then they will pay 4% out of their sales, RM0.60 ( RM15x4% ). The effective tax paid by the coffee shop will only be RM0.20 (RM0.60 - RM0.40), therefore eliminating double taxation on the same goods. 

Why do we need GST?

According to various sources, including the official Government Transformation Programme (GTP) website, implementing the new GST system will be able to solve the multiple weakness of our current sales and service tax system, other than being a more business-friendly tax system. A few examples of it would be double taxation, double transactions, as well as being rather opaque. Most people did not realise that the goods they bought from retailers or hypermarkets have indeed been taxed at the manufacturer's level. Another main reason for this move is that GST is a broader base taxation. Unlike the SST, GST will cover significantly more areas and products or services. Even services such as giving tuition can be taxed under the GST. This will provide higher revenue for our government. For decades, Malaysia relied highly on revenue from our oil reserves and also income taxes. Income sources from natural resources are highly unsustainable. To make matters worse, official reports showed that an average of only 2 million paid income taxes out of the rough estimate of 8 million working population (I might research this topic in the next few posts). So, the new taxation system will try to reduce the problem of lack in revenue, and this will also help in curbing tax evasions. 

Inflation?

When the news of GST broke out in tabling of the 2014 budget, the first question to ask would obviously be the impact of such move. Will inflation kicks in hard? Senior officials from one of the subunits of GTP in charge of GST who was interviewed on bfm radio said that according to data and research, the likely inflation rate of implementing GST would be 1.8% ( I am not sure if this is a direct or indirect impact of it ). That seems rather mild and reasonable. There is one particular interesting question asked to the official ( he did not have enough time to answer it ); 

"Why even at 6% proposed rate, which is lower than the original 10% sales and 6% service tax it will cause prices to go up? Shouldn't the price drop instead? "

Bare in mind that GST is after all a broader tax system, which means more goods and services will be levied a tax. Some goods will be cheaper while some will be more expensive. [refer diagram 1 above] Goods that were previously taxed under 10% sales will definitely see a reduction in tax, but there are also many goods not taxed by the 10% sales tax but are now under the GST [refer diagram 2 below]. Reports from media claimed that the current system exempted goods runs down to almost 250 pages, while zero-rated items under the GST (essential items) is only about 21 pages [we assume the pages are rather same in length and also the zero-rated items will not increase significantly in the near future ].

diagram 2

source : savemoney.my

With many goods that will fall into being taxable, we shall see a rise in prices of certain goods we normally consume. However, we do not know if the prices of those goods which are taxed at a lower rate will see a decline. There is a general tendency of prices to stay rather than falling even if the cost of production goes down. The statistic given by official might not have taken into consideration of expected inflations and also the ripple effect of such move ( or a contagion if it gets serious ). Business may expect prices to jump, thus increases its price proportionately not only due to fear of losing profit margin, but also the fear of rising cost of living as well as herd mentality allows business to increase prices together. Some even claimed that even if the cost does not rise, business can and normally do take this as an excuse to raise prices. The government thus assured that the Anti-profiteering Act will be revised to prevent business from raising prices as one pleases to. Though, we do not know how effective and efficient of this Act, especially in preventing such business practices amongst Small and Medium Enterprise (SME).

Conclusion

We should expect a higher rate of inflation! Besides, it would make no sense to implement if the government gets less revenue in return. Even at a neutral rate of 4%, they are expecting to collect at least the same amount as our current tax system. We cannot be sure of how much higher it will get as it depends on our government's move to curtail the rising expectation of inflation. Thank you very much for reading this long long post :) feel free to comment if I've made any mistakes or errors.