What 6% GST means to Malaysians

Malaysians like many of their counterparts in the developed world will have to pay the Goods and Services Tax (GST) when they purchase products or seek services.

However, most Malaysians are still at a loss on how the GST is going to affect their lives with many fearing they may have to pay more or by at least 6 percent of the GST rate that has been set by the government.

The confusion is further compounded by misleading information given by those antagonistic towards GST and the wrong information has spread through the grapevine.

How GST works

GST, a broad based consumption tax, is meant to streamline taxation at every stage of the supply chain right from the manufacturer or service provider to the end-user.

Though admittedly it is not a popular move, it is implemented to enhance the efficiency of the taxation system and deter tax evasion. GST also allows a more transparent tax collection system and at 6 percent the government is expected to collect at least an additional RM30 billion in taxes annually.

GST is an innate feature of the developed nations including Malaysia’s neighbor Singapore. Malaysia and Brunei are the last two nations that have yet to implement GST within ASEAN.

Singapore’s experience

Malaysian Association of Tax Accountants (MATA) president Abd Aziz Abu Bakar was reported saying recently that when Singapore introduced GST at 3 percent, it was imposed on everything, even the essential items were not exempted.

Yet Malaysia is taking a cautious step in imposing GST so that consumers will not be burdened by higher costs. Therefore Malaysians won’t be paying GST for certain essential goods like unprocessed meat, cooking oil, sugar and essential services like electricity, education, healthcare, toll, financial transactions and life insurance.

Singapore in fact took a different route to cushion the impact of GST through an offset package – reducing corporate tax rate by 3 percent to 27 percent while the personal income tax rate was cut by 3 percent to 30 percent.

The initial GST rate of 3 percent when introduced in 1994 was among the lowest in the world as the focus was not to generate substantial revenue but to allow people to get adjusted to the tax.

Later it was revised to 4 percent (1 Jan, 2003), 5 percent (1 Jan, 2004) and 7 percent (1 July, 2007).

Singapore’s government argued that any exemptions would actually help the high-income group more than low income group, because well-off households usually spend much more on essentials (whether food or healthcare or other basic necessities) than lower-income households.Therefore it is not surprising to see that many of those who abhor GST are actually from the high income households.

What Malaysians will be paying

So how much more Malaysians will be paying, and will they be paying 6 percent more for goods and services?

In a recent article published on a local daily on Oct 21, Price-WaterhouseCoopers Malaysia’s Executive Director Raja Kumaran and consultant Tim Simpson provided some insight into GST mechanism in layman’s terms.

A closer look into the country’s taxation regime will reveal that Malaysians at present already paying the sales and service tax (SST) that has been subtly incorporated in the cost of products and services.

Malaysians already familiar with the 6 percent service tax for selected services, for example at hotels and posh restaurants. There is another consumption tax, namely the sales tax, that Malaysians have been paying but may not be aware of it.

“For example a carbonated drink sold is subject to a sales tax of 10 percent, but the tax is not generally itemized to the end user by the manufacturer. If the drink costs RM11, the drink actually costs RM10 and the tax amount is RM1.

However, as far as the consumer is aware he/she is buying a drink for RM11, not RM10 plus the RM1 tax,” they explained in the article.

GST prevents double taxation

They also pointed out the SST could lead to double taxation, that can prove to be a demerit to consumers.

“Going back to the carbonated drink example. When buying the carbonated drink at a hotel, not only does the consumer pays an additional RM1.08 in tax under the current system, the hotel¡zs profit carries a 6 percent service tax on the sales tax already charged by the drink manufacturer,” both of them explained further in their article.

However, they pointed out the problem of double taxation is addressed in GST as the tax paid by the hotelier is recoverable as input tax credit and does not form part of the cost to the hotel.

Therefore under the current system, the drink costs the consumer RM14.58. Under GST, the drink will cost the consumer RM13.25, that is 9 percent (or RM1.33) less.

So did the carbonated drink become 6 percent more expensive? Definitely not. Therefore, consumers should not forget that they still stand to benefit under GST.