Consumption tax is tax charged on consumers for goods and services purchased by them. Since the early 1970s, Malaysia has imposed the single-stage consumption tax, called sales and service tax (SST). Sales tax is imposed on goods manufactured in or imported into Malaysia and service tax on services rendered in Malaysia. The cost of the SST is embedded in the selling price of the goods to recover the additional cost.
In 2005 the government announced that VAT (value-added tax), also called GST (goods and services tax) was to be adopted to replace SST effective January 2007.
VAT or GST is considered theoretically sound as it avoids tax cascading, multiple taxation and transfer pricing bias. Consequently, it has been adopted by over 130 countries.
GST is also said to help enhance tax compliance and reduce tax avoidance and tax evasion. GST, as a consumption tax, is finally borne by the consumers. Businesses will not have to bear GST but they have to help collect the tax, account for and remit the tax to the government during the supply chain.
GST is broad-based and is imposed on the value-add of almost all goods and services, said to cover everything under the sun. The collection of the GST is practically carried out by all the businesses. Businesses pay GST (called input tax) on all their purchases (i.e. input goods and services) needed to conduct their business. They will then charge and collect GST of, say 4%, on the selling price of their outputs (called output tax) on sales of such goods to their buyers, which can be another business or final consumers.
If the output tax collected is more than the input tax paid, the difference will be remitted to the government. Conversely, if the input tax paid is more than the output tax collected, the businesses will get refund of the difference from the government.
The implementation of the multi-stage GST is complex. There are three types of supplies — standard-rated, zero-rated and exempted supplies — each with different applicable rules. The businesses will need to register with the authority to be able to secure refund for input tax paid on their purchases. Exempted businesses are not to be registered, not entitled to claim input tax refund and are not allowed to charge output tax on their sales (so they will have to increase their selling price to recover the input tax paid on their purchases). Zero-rates supplies mainly refer to export sales on which no GST will be charged (and so all related input tax will be refunded by the government).
There are many other provisions, reliefs, refund schemes, remissions, special treatment for certain businesses (e.g. construction and property businesses), etc. Most businessmen, large or small ones, will need to pay the GST tax consultants to help them comply with the laws and rules. This is so even in the advanced country like New Zealand.
There are so many concerns and considerations expressed that the government has not implemented GST since announcing it in 2005. Hong Kong also announced its plan to adopt GST in 2007 and has since kept quiet on its implementation.
The various concerns included:
1. Indirect tax like GST is regressive in that the poor and the rich pay similar rate of tax on similar items, even basic necessities;
2. Based on the past experience of other countries, GST will usually lead to higher inflation;
3. Income disparity among Malaysians is still very great — less than 20% working Malaysians earn more than the threshold to have to pay income tax. When income tax rates are reduced subsequent to the imposition of GST, only those rich ones can benefit from such tax rate reduction.
4. High cost of compliance by the businesses will affect their competitiveness. They will invariably pass the cost to consumers, causing higher inflation;
5. High cost of administration and enforcement of GST by the government may not help reduce its budget deficit;
6. Malaysians are concerned about the tendency of GST rates increase. Singapore started with 3% and has since increased to 7%, an increase of 130%. Certain European countries kept increasing the GST rate to the current rate of 25%.
7. The fraud and refund mechanism has led to substantial loss and leakage even among the advanced nations. The UK suffered a loss of about £11.9 billion (RM59.2 billion) in one year. The US government did two studies on the possibility of introducing GST in 2004 and 2008 and had so far not decided on adopting GST.
8. The refund mechanism is a fertile source of fraud, as the source document is only the invoice of a company. As more frauds are detected, increased levels of checking will make it impossible for Customs to adhere to the 14 day refund timeline, thereby affecting competitiveness
9. Both the export and SME sectors will likely be affected due to high cost of compliance and loss of competitiveness
The government will certainly do an in-depth study, perhaps at a special lab to devise measures to deal with the aforesaid concerns.
Datuk OK Lee is the northern branch chairman of the Federation of Malaysian Manufacturers.