How does GST affect you?
By Hann Liew
As the Budget 2014 (tabled on the 25th of October 2013) announcement draws near, Malaysians await with bated breath on whether the government of the day will or won’t finally introduce a Goods and Services Tax (GST) in Malaysia.
How does GST work in Malaysia?
In the current tax regime, the 10% Sales Tax (on manufacturing and imports) and 6% Service Tax (on the F&B and professional services industry) is collected by one party (usually the seller) and passed on to the tax authorities.
For example, in the previous 6% Service Tax regime, when you buy a cup of coffee from Starbucks that says RM15 on the menu, you pay RM15.90 (including the current Service Tax of 6%). Starbucks will keep RM15 and pass on RM0.90 to the tax authorities.
In a GST regime (assume 4% GST in this calculation), the following happens:
1. Starbucks buys the coffee beans from the wholesaler to make your cup of coffee for RM10 (RM10+ 4% GST). The Wholesaler keeps RM10 and passes on RM0.40 from Starbucks to the tax authorities.
2. You buy that cup of coffee from Starbucks which the beans were used to make, and pay RM15.60 (RM15 + 4% GST). Starbucks now keeps RM15 and passes on RM0.20 to the tax authorities (RM0.60 – RM0.40). The reason why Starbucks only passes RM0.20 to the tax authorities is because they have effectively already ‘paid’ RM0.40 in tax earlier on the first RM10, and only RM0.20 tax is left to be paid on the RM5 “value-add”.
We have graphically shown this example below.
How will the implementation of GST affect me?
As mentioned, the replacement of Sales and Service Tax with GST is intended to be revenue-neutral to the government’s coffers, so in theory, to consumers this may represent a minimal effect to the aggregate prices of everyday goods and services. Lets look at 3 scenarios to see what it means for prices, (1) for items charged with Service Tax, (2) for items charged with Sales Tax, and (3) for items with no Service or Sales Taxes:
6% Service Tax Abolished, 4% GST introduced – Pay less
While most consumers don’t directly see the current 10% Sales Tax (its mostly a business to business tax), many of us experience the 6% Service Tax (when we eat at food outlets and restaurants like McDonald’s and Starbucks, and when we engage a lawyer for services etc.). As per our earlier graphic, if the rate of GST is below 6% (say at 4%), we may end up paying less than we did before.
10% Sales Tax Abolished, 4% GST introduced – Pay less
Similar to the earlier example, you may end up paying less if a product manufactured or imported now is subject to 4% GST rather than 10% Sales Tax.
SST Exempt Items, 4% GST introduced – Pay more
With that in mind, sectors of the economy which were not covered under the Sales and Service Taxes may now be under the coverage of GST, as it is a broad based tax measure. Unless these things are zero-rated (ie GST is applicable, but at a 0% rate), prices of goods not previously covered under those 2 tax systems will now be affected by the broad based GST and cost more.
So there you have it! Some scenarios that may occur if the SST is replaced with a 4% GST. However, the obvious concern here is to make sure that businesses do not take advantage of just the fact that GST has been introduced as a reason to raise prices of goods and services indiscriminately. To this end, the Anti-Profiteering Act has been tabled to enable enforcement against such practices.
How does GST work
GST is a broad-based consumption tax levied on the import of goods (collected by Customs), as well as nearly all supplies of goods and services . The only exemptions are for the sale and lease of residential properties, the importation and local supply of investment precious metals and the provision of most financial services. Export of goods and international services are zero-rated. In some countries, GST is known as the Value Added Tax (VAT).
|Taxable Supplies||Non-Taxable Supplies|
|Standard-Rated Supplies(7% GST)||Zero-Rated Supplies(0% GST)||Exempt Supplies(GST is not applicable)||Out-Of-Scope Supplies(GST is not applicable)|
|Most local sales would fall under this category.E.g. sale of TV set in a retail shop||Export of goodsE.g. sale of laptop to overseas customer. The laptop is shipped to an overseas address by the supplier||Sale and rental of unfurnished residential propertyImportation and local supply of investment precious metals||
|Most local provision of services would fall under this category.E.g. provision of spa services to customers.||Services that are classified as international servicesE.g. air ticket to Thailand (international transportation service)||Financial servicesE.g. issue of a debt security|
In countries like Singapore, It is compulsory for businesses to come forward to register for GST when their taxable turnover exceeds $1mil per year. Businesses that do not exceed $1mil in taxable turnover may register for GST voluntarily.
After registration, businesses must charge GST at the prevailing rate. This GST that they charge and collect is known as output tax, which has to be paid to IRAS. GST incurred on business purchases and expenses (including import of goods) are known as input tax. Businesses can claim input tax if conditions for claiming are satisfied. This credit mechanism ensures that only the value added is taxed at each stage of a supply chain.
A GST-registered manufacturer imports leather from overseas and uses them to manufacture a bag. The manufacturer sells the bag to a GST-registered retailer. Thereafter, the retailer sells the bag to an end-consumer.
End consumer is not GST-registered. Therefore, he cannot claim GST paid on his purchase from IRAS.