Government Tax Implementation: Goods and Services Tax (GST)

GOVERNMENT TAX IMPLEMENTATION: GOODS AND SERVICES TAX (GST)

INTRODUCTION

The GST was announced by Prime Minister Dato Seri Najib Tun Razak on 25^th October 2013 and the implementation is set to be effective on 1^st April 2015 at 6% rate. The GST was believed will swell government coffer for another 30% extra. Second Finance Minister, Ahmad Husni Hanadzlah told during Dewan Rakyat session (2013) that the benefit of GST are clear, it would swell tax coffers by further RM 6 billion and by another RM 7 billion in the following year. GST, which is also known as Value Added Tax (VAT) in many countries is a multi-stage consumption tax on goods and services. About 160 out of 196 countries in the United Nation have adopted this tax. Among the ASEAN country only Brunei and Myanmar does not implemented it. The last three countries to join are Laos, Cambodia and Vietnam and all of them started at the rate of 10% and have kept it at that.

GST was introduced in Thailand in 1992 at a rate of 10%, however it been cut down to 7% at the request of business operators who felt the rate was too high. Singapore had introduced in gradual approach by starting at 3% in 1994 and increased to 7% in 2007. Singapore plan to shift reliance from direct taxes to indirect taxes. This means lower income tax rate to encourage earning, saving and investment as GST is a tax on consumption and not income (Vanitha, 2014). Malaysian had did just like that and before we go deep into GST detail implementation let take a look on how Singapore and others country manage to successfully implemented it.

Literature Review

A number of studies have been performed to examine the regresses of the implementation of GST. It’s even problematic. Most of these studies were on understanding the policy, social, cultural, economic and political impact (Anushuya, 2014). These studies explain that the GST will impact all, especially the firms and the public. In Ireland, a study show that even though the government given abolishment of GST to house hold basic consumables, it’s still noticed that highest proportion of disposal income in GST. GST system disproportionately hits the poorest household (Leahy & Tol, 2011). A study on the GST post effect on economic growth in ASEAN country was done and the result suggests that house hold final consumption expenditure is positively significant related to GDP. The countries that implementing the GST always encountered economic growth but it’s depending on the governance, compliance cost and economic distortion (Saravanan, 2014). A positive impact of GST depends on a neutral and rational design of the GST such a way it is simple, transparent and significantly enhances involuntary compliance (Khan & Shadab). It must be actual, not presumptive, prices and compliance control would be exercised through an auditing system (Chossen, 2013). Locally, a study on estimating the compliance cost of companies in Malaysia, found that the implementation of the GST will increase the firm compliance cost on the tax computation and tax planning (Palil et al, 2013). On consumer perspective in Malaysia, although most of the people well aware of GST implementation, however overall they are not prepared to accept the implementation (Hussin et al, 2013). Responsible agencies and parties should play a greater role in delivering information about country’s need to implementing the GST.

GST in Singapore

Singapore first implemented GST in 1994 despite vocal protests from consumer groups. Initial rate was 3% on 1^st April 1994 then 4% on 1^st Jan 2003 followed by 5% on 1 Jan 2004 and lastly 7% on 1^st July 2007. How is it impact on the Singapore Stock Market, taken from forecast-chart.com it shows that only minimal effect on the stock market.

Some views that the implementation of this tax did not have much impact on stock due to Singaporean in high growth on economic. The following chart, which plots Singapore’s GDP per capita, appears to support this view.

Singapore also attempted to reduce the effects of GST on low income groups by cutting the income taxes and offset payments such as increasing subsidies for public housing and medical expenses. Singapore spent S$4 billion (US$3.1 billion) over five years to offset GST and this offset package consisted of:

1. Direct transfer benefits, in the form of cash pay-outs (GST credits, growth dividends, senior citizens’ bonuses);
2. CPF top-ups (post-secondary education account top-ups for students, Medisave top-ups for older Singaporeans); and
3. Rebates (on utilities and public housing services and conservancy charges) those who lived or owned smaller homes received more benefits.

Despite protestations from NGOs and social activist groups, it appears that Singapore’s GST implementation was a success.

GST IMPLEMENTATION

Malaysia had start implemented the GST on 1^st April 2015. To date 188,596 companies out of estimate 300,000 eligible for GST registration, have registered with the department, surpassing the government target of 140,000 companies by end of December 2015 (Kisho, 2015). It has come to a point where the government has no option to address two major challenges, the high fiscal deficit and government debt to gross domestic product (GDP) or National Income level and to ensure the sovereign rating are not at risk. To handle the challenges the Goods and Services Tax Act 2014 was passed in Jan 2014 to enable the implementation of GST. Another option is that the government has to scrap the subsidies for fuel, electricity, sugar and such.

In October 2014, fuel subsidies been reduced by 20 cent, put Malaysian a couple of steps away from abolishing fuel subsidies altogether, which is something seem to be impossible a few year ago. The government also looking forward to trim its fiscal deficit in stages as it has been doing since 2013, from 3.9% of the GDP to 3.5% in 2014 and subsequently to 3.0% in 2015. Hope that by 2020 the country will have a balance budget by then. Another concern is the country national debt, currently at 54.6% of GDP, lingers just below a critical legal ceiling and is jointly with Pakistan as having second highest debt to GDP ratio, among 13 emerging Asian market after Sri Langka (Malaymail, 2014)

How Is It Implemented

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. It will levy on the supply of goods and services at each stages 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 in the supply chain. GST is self-policing features which allow the businesses to claim their input tax credit by way of automatic deduction in their accounting system[1]. This eases the administrative procedures on the part of businesses and the Government. Thus, the Government’s delivery system will be further enhanced.

GST is to be levied and charged at the proposed rate of 6% on the value of the supply. GST can be levied and charged only of the business is registered under GST. A business is not liable to be registered of its annual turnover of taxable supplies does not reach the prescribed threshold. Therefore, such businesses cannot charge and collect GST on the supply of goods and services made to their customers. Nevertheless, businesses can apply to be registered voluntarily.

Types of Supply[2]

Standard-rated supplies – Standard-rated supplies are taxable supplies of goods and services which are subject to a proposed rate of 6%. A taxable person who is registered under GST has to collect GST on the supply and is eligible to claim input tax credit on his business inputs in making taxable supplies.

1.Zero-rated supplies – Zero-rated supplies are taxable supplies of goods and services which are subject to GST at zero % rates. In this respect, businesses do not collect any GST on their supplies but are entitled to claim credit on inputs used in the course of furtherance of the business..

2.Exempt supplies – Exempt supplies are supplies of goods or services which are not subject to GST. In this context, businesses do not collect any GST on their supplies and are not entitled to claim credit on his business inputs.

3.Supplies not within the scope of GST – Supplies which do not fall within the charging provision of the GST Act include non-business transactions, sale of goods from a place outside Malaysia to another place outside Malaysia as well as services provided by the Government sector.

Benefit Gains by GST from Other Tax[3]

GST is a better and fairer tax system compared to SST (Sales & Service Tax) as GST will:

1.Lower business cost – Under the current system, some business pay multiple taxes and higher levels of tax-on-tax (cascading tax). With GST, businesses can benefit from recovering input tax on raw materials and incurred expenses, thus reducing costs.

2.Increase global competitiveness – Prices of Malaysia exports will become more competitive on the global stage as no GST is imposed on exported goods and services, while GST incurred on inputs can be recovered along the supplies chain. This will strengthen our export industry, helping the country progress even further.

3.Enhance compliance – The current SST has many inherent weaknesses making administration difficult. GST system has in-built mechanism to make the tax administration self-policy and therefore will enhance compliance.

4.Reduces red tape – Under the present SST, businesses must apply for approval to get tax-free materials and also for special exemption for capital goods. Under GST, this system is abolished as businesses can offset automatically the GST on inputs in their returns.

5.Equity – With GST, taxes are levelled fairly among all the businesses involved, whether they are in the manufacturing, wholesaling, retailing or service sectors.

6.Fair pricing to consumers – GST eliminates double taxation under SST. Consumers will pay fairer prices for most goods and services compared to SST.

7.Greater transparency – Unlike the present sales tax, consumers would benefit under GST as they will know exactly whether the goods they consume are subject to tax and the amount they pay for.

Goods and services that are not subject to GST are not eligible to pay the tax such as:

1.Zero Rated Supplies – These are taxable supplies that are subject to a zero rate. Businesses are eligible to claim input tax credit in producing these supplies, but cannot charge output tax to the consumer.

2.Exempt Supplies – These are non-taxable supplies that are not subject to GST. Businesses are not eligible to claim input tax credit in producing these supplies, and cannot charge output tax to the consumer.

Benefit That Consumers Gain

Suppliers, manufacturers, wholesalers and retailers are able to recover GST incurred on inputs. This reduces the cost of doing business, thus enabling fairer prices for consumers. Certain basic goods and services are not subject to GST for socio-economic objectives. These include basic foods, residential accommodation, education, health services, public transportation, and domestic consumption of water supply and electricity up to a certain limit.

Impact GST on Economy[4]

Consumption stimulates the economy but people may not want to consume/spend as much if they are taxed for it. Due to that, there will be a positive impact on the economy on the following:

1.Reduction in business costs:

a.Special schemes to relieve cash flow problems

b.Credit offset mechanism

c.Can claim the input tax due based on the invoice produced

2.Lead to more competitive pricing

3.Makes our export more competitive as exports are to be zero-rated

4.Increase in Gross Domestic Product when government expenditure increase and firms start to invest more will give good impact on GDP. Raise in export also can increase the GDP.

5.Reduce shadow economy activities

6.It is a tool to manage the economy eg tourist refund scheme is proposed as a means to boost the tourism industry and tourism spending in the country, exports are zero-rated to make our goods more competitive globally.

There might not be a reduction in consumption due to:

1.Prices of certain goods and services might be lower

2.Change in consumption pattern. GST works on the affordability concept. Consumers have to decide on which goods or services to buy and GST is only incurred when the goods or services are consumed. They may divert more of their expenses towards essential goods and services rather than on luxury goods

3.A lot of basic necessities are not subject to GST

4.GST is a replacement tax

5.Input tax credit mechanism should reduce business cost.

Initiatives by the Government

The Royal Malaysian Customs and theFinance Ministry have done research on the impact of GST.They estimate that the tax burden as percentage to expenditure for a household income of RM2,000 is only 2.59% (or RM 52/month) whereas for a household income of RM12,000 is 4.14%. The percentage of Malaysians who pay income tax is extremely low, is about 1 million according toDeputy Finance Minister, about 3% of the total Malaysian population (Bernama, 2013).

1. RM300 one-off cash to BR1M recipients as household assistance.Token sum only as GST is forever.

2. Individual income tax rates reduced by 1% to 3% to increase their disposable income – 300,000 tax payers will no longer pay tax.This will relief medium level people but not relevant to the poor as they don’t pay taxes.

3. Families of RM4,000 household income will no longer pay tax.This will relief medium level people but not relevant to the poor as they don’t pay taxes.

4. Cash assistance under the BRIM is increased from RM500 to RM650 in 2014 and to increase it further in 2015.This suggests that for low income groups, the cash assistance will fully offset any GST for 2014-2015.

5. Chargeable income subject to the maximum rate of exceeding RM100,000 will be increasing to exceeding RM400,000. Current maximum tax rate of 26% will be reduced to 24%, 24.5% and 25%.Not relevant as the poor don’t pay taxes.

RECOMMENDATIONS

Enough said the benefit of GST to economic growth however in some people and consumer in appear as intangible profits that cannot be seen in real life. Especially those from lower income household and the effect of rising in goods and services price are already taking place. Although in theory it was really stated that the benefit of reducing price instead of increase but the firms always take an advantages to act differently. Therefore the government should continue the effort to monitor and control the price rising and take action accordance to Price Control and Anti-Profiteering Act 2011.

The information regard to the GST been manipulate by some others parties for political reason, thus gave negative sentiment to the implementation of GST. People are been provoke to disagreed on the implementation although it’s just a month on operation. The educational and learning on the tax system need to be continued and pursued to enable all consumers in any level understood well and can benefit on the system.

The government must deliberately return back the tax collected to the people in term of providing good infrastructure, transportation services, education, medical and welfare. These are the proof that the money is not going elsewhere.

CONCLUSION

GST will swift government focus on depending direct tax (income) to indirect tax. Definitely due to small income in tax collection base, GST will be a strong boost to government revenues. Hopefully with these amount of revenue challenges that the government face in term of deficit budget and debt can be clear by 2020.

As it is a consumption tax, it appears that Malaysian GST will also act as an effective dragnet for tax evaders and illegal immigrants who pay no income tax. The payment made to BRIM recipient will offset most of the GST’s impact on the poor.

GST will give some impact on consumer expenditure due to rise in goods and services price, however with increase of revenue government spending aspect to be more and firm will continue to invest as export goods will exempted from tax. GDP will increase when government spending and investment increase. Hopefully the implementation of GST can provide good platform for the country to become develop country with high income.

REFERENCES

Anushuya, & Pal, N. K., Indian Indirect Tax Systems ’ Reforms and Goods and Services Tax. Advances In Management, 7(7), 9–15, 2014.

Bernama (2013, June 21). Only One Million Malaysian Eligible to Pay Tax. Borneo Post. Rerieved from http://www.theborneopost.com/2013/06/21/only-one-million-malaysians-eligible-to-pay-tax-ahmad/

Cnossen, S., Preparing the way for a modern GST in India. International Tax and Public Finance, 20(4), 715–723, 2013. http://dx.doi.org/10.1007/s10797-013-9281-0

Hussin, Aeefi & Normalaa (2013). Kefahaman dan Kesediaan Pengguna terhadap Perlaksanaan Cukai Barang dan Perkhidmatan (GST): Satu Tinjauan Awal. Prosiding PERKEM VIII,JILID 2.688-702.

Kisho (2015, may 6). Countdown Begins for Implementation of GST. Bernama.com. Retrieved from http://web10.bernama.com/gst/news.php?id=1094319

Khan, M., & Shadab, N., Goods and Services Tax (GST) in India: prospect for states. Budgetary Research Review, 4(1), 38–64.n.d

Leahy, E., & Tol, R. S. J., The Distributional Effects of Value Added Tax in Ireland. The Economic and Social Review, 42(2), 213–235, 2011.

Palil, M. R., Ramli, R., Mustapha, A. F., & Abu Hassan, N. S., Elements of Compliance Costs : Lesson from Malaysian Companies towards Goods and Services Tax ( GST ). Asian Social Science, 9(11), 135, 2013. http://dx.doi.org/10.5539/ass.v9n11P135

http://www.freemalaysiatoday.com/category/business/ retrieved 5 may 2015 .

http://juristech.net/juristech/impact-malaysias-gst-implementation-comparing-singapore/ Posted by KJ retrieved 5 may 2015

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[1] Retrieved from http://www.gst.com.my/what-is-gst-goods-and-services-tax.html dated 5 May 2015.

[2] Retrieved from http://www.gst.com.my/what-is-gst-goods-and-services-tax.html#gstcontent-box5 dated 5 May 2015.

[3] Retrieved from http://www.gst.com.my/what-is-gst-goods-and-services-tax.html#gstcontent-box8 dated 5 May 2015.

[4] Retrieved from http://www.treasury.gov.my/index.php?option=com_content&view=article&id=2848 dated 5 May 2015.