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understanding effects of gst

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)

Goods

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
  • Sale where goods are delivered from overseas to another place overseas
  • Private transactions

Services

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.

Example:

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.

1. Manufacturer
  • Pays GST to Customs for importsImport value = $100
    Import GST paid = 7% X $100=$7 (input tax to claim from IRAS)
  • Charges and collects GST for sale of toys to retailerSelling price to retailer = $200
    GST charged to retailer = 7% X $200 = $14 (output tax to pay IRAS)
2. Retailer
  • Pays GST to ManufacturerPurchase value = $200
    GST paid = 7% X $200=$14 (input tax to claim from IRAS)
  • Charges and collects GST for sale of toys to end consumerSelling price to end consumer = $300
    GST charged to end consumer = 7% X $300 = $21 (output tax to pay IRAS)
3. End-consumer
  • Pays GST to RetailerPurchase value = $300
    GST paid = 7% X $300=$21

End consumer is not GST-registered. Therefore, he cannot claim GST paid on his purchase from IRAS.

GST which is also known as VAT or the value added tax in many countries is a multi-stage consumption tax on goods and services.

GST is levied on the supply of goods and services at each stage of the supply chain from the supplier up to the retail stage of the distribution. Even though GST is imposed at each level of the supply chain, the tax element does not become part of the cost of the product because GST paid on the business inputs is claimable. Hence, it does not matter how many stages where a particular good and service goes through the supply chain because the input tax incurred at the previous stage is always deducted by the businesses at the next step in the supply chain.

GST is a broad based consumption tax covering all sectors of the economy i.e all goods and services made in Malaysia including imports except specific goods and services which are categorized under zero rated supply and exempt supply orders as determined by the Minister of Finance and published in the Gazette.

The basic fundamental of GST is its self-policing features which allow the businesses to claim their Input tax credit by way of automatic deduction in their accounting system. This eases the administrative procedures on the part of businesses and the Government. Thus, the Government’s delivery system will be further enhanced.

We need to pay taxes so that the government can finance socio-economic development; which includes providing infrastructure, education, welfare, healthcare, national security etc.

“Over the past few decades, the worldwide trend has been for the introduction of a multi-stage GST system. Today, almost 90% of the world’s populations live in countries with GST, including China, Indonesia, Thailand, Singapore and India.”

 

All you need to know about Malaysia Goods and Services Tax (GST).

Link to the official website of the

        Royal Malaysian Customs department:   http://gst.customs.gov.my/en/gst/Pages/gst_wi.aspx

 

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