Is GST coming back? The Pros and Cons of GST
In March 2020, Datuk Dr. Dominic Lau, the president of PARTI Gerakan Rakyat Malaysia has suggested to the government to consider re-implementing the Goods and Services Tax (GST).
He suggested that GST can be re-implement at a lower rate of 3% while the Sales and Services Tax (SST) can be temporarily suspended.
He believed the move would stimulate economic growth in Malaysia.
However, this topic was put on hold for a while until November 2020 due to the pandemic. Recently, Prime Minister Tan Sri Muhyiddin Yassin said that the government will pay attention and study the suggestions and proposals from the public.
So, is GST coming back? Is it good news or bad news? Let’s look at it from different aspects.
More Income for the Government
According to the MoF’s statistics of the Federal Government revenue, the GST collection for 2017 was RM44 bil, while the SST collection is expected to be RM22 bil for 2019.
This is because SST only charges on the taxable services listed in the Service Tax Regulations 2018. While the GST charges on everything except for the exempt supply.
That means the GST re-implementation will yield more income for the government. This is vital especially after the government gave out a lot of subsidies to support the economy during the pandemic.
Furthermore, it could help to recover from the impact on the financial position from the MCO and the volatility of oil price.
If our government is truthful and honest as they claimed to be, the GST tax collection will be used for country development and benefit the people.
Potential Reduction in Individual Tax
With the additional tax yield from GST, there could be a potential reduction in individual tax for those low & middle-income earners. This could better reduce economic inequality.
Besides, many people believe that GST is more fair compared to personal tax. They believe with GST, everyone has to pay tax. The more you spend, the more tax you pay.
GST is Simpler?
Some argue that the reintroduction of GST would be simpler because we have spent a lot of time and effort in the development of the GST regime before.
Hence, instead of the ongoing finetuning of the SST tax legislation, the GST re-implementation will allow efficient use of manpower by the authorities and taxpayers.
However, the frequent change in legislation would affect the business operation and put an unnecessary burden on the small business who can’t afford the extra compliance costs.
In fact, some of our clients complained that the frequent changes in law like GST, SST have consumed a lot of their time. As they have to learn the new tax law by attending seminars or asking the professionals.
It’s regrettable to know that one business owner results in RM600k underpaid GST and penalty as he was totally unaware of the GST law. Luckily, he found us and we helped him to do proper GST filing and submission. With that, we managed to appeal for him and reduced the liability to RM230k.
Things Become More Expensive Again?
Pakatan Harapan during the election claimed that SST can reduce the price of goods and services. Does that mean the re-implementation of GST will increase the price again?
Theoretically speaking, GST would mitigate the tax cascading effect because businesses could claim back paid GST with the input tax credit.
In other words, GST will not increase the cost of doing business.
However, there were some unethical businesses that marked up the price with an excuse for paying GST.
If the manufacturer, wholesaler, and retailer marked up for the GST, the price of goods and services will become very expensive. Ie. 6% + 6% + 6%. Though this is based on a very extreme situation. Not every business is unethical.
On the other hand, although the SST cannot be refunded and will become part of the cost of doing business, the SST only charges on the manufacturer and some specific services.
Hence, there will only be one mark up. Ie. 10%.
Besides, if a manufacturer buys from another manufacturer who pays SST, the SST is waived to avoid double taxation.
Theoretically, this has mitigated the potential unethical markup we said above.
However, in practical terms, we have seen a lot of times that some manufacturers are reluctant to waive the SST in the small trade. They think it’s not convenient and not cost-effective. In that case, there would be two markups. Ie. 10% + 10%.
This is called the tax cascading effect. And some people believe that GST can mitigate this issue.
However, we believe that it very much depends on the seller.
The reintroduction of GST might also cause an unethical increase in pricing with an excuse for a new tax system.
Hence, the government has to come up with a plan to tackle this issue.
A Nightmare for Low & Middle-Income Earners to Do Business
One of the biggest failures in the previous implementation of GST is cash flow issues.
You’re right that the GST input tax can be claimed back later. But very “later”.
Many small and medium businesses struggle to pay the GST first.
For example, one of our clients is doing a renovation business. According to him, his customers often delay payment and sometimes result in bad debt. But he had to pay GST first which gave him a big burden. Not to mention he still needs to pay the suppliers and workers for the renovation works to continue.
However, with proper planning by a professional accountant, these cash flow issues can be mitigated.
The problem is that some small business owners normally can’t afford a professional accountant. Therefore, a complicated tax system would place an undue compliance burden on them which results in higher overhead costs.
This is difficult for low and middle-income earners to do business.
Therefore, the government needs to take this into consideration to mitigate the downside of the GST re-implementation.
Alternatively, these small businesses may consider our outsourced accounting services which start from RM297 only. Which represents 10% only of a full-time fresh graduate salary.
I believe that GST is a good tax system. Most countries are using this kind of tax system. So, the problem is not on the tax system. It’s on the implementer.
Just like a credit card is a good thing. It’s convenient. But not for those who misuse it and end up in bankruptcy.
Hence, the government needs to study and come up with an improved tax system that keeps the advantage of both GST and SST while avoiding the disadvantage of them.
When the GST is re-implemented, we will study the new tax system as soon as possible. If you need someone to do GST submission and filing, please feel free to contact us.