Is GST coming back for real?

ONCE abolished in 2018, the Goods and Services Tax (GST) that was initially introduced in 2015 seemed to be coming back. There have been numerous calls and proposals in recent years, from our Prime Minister to Finance Minister and various business groups in the private sector. They have been coming up with multiple suggestions for re-implementing the GST. All these indicate that the government will soon bring back the GST regime.

Many may ask, why are businesses that used to oppose the GST now calling for its revival? How has a tax system implemented in more than 170 countries and regions worldwide caused so many controversies back then and even indirectly led to the historic change of government since Malaysia's independence? Ever since suggestions for the GST revival emerged, anyone who weighed in has drawn much flak from the public regardless of media platform. The public's comments have been mostly one-sided. Are these experts and learned personalities ignorant of the people's suffering and only see the GST's benefits while ignoring the disadvantages?

Why do we need the GST? Let us first look at Malaysia's financial situation over the past few years:

[Figure 1]

From Figure 1, we can see that from 2017 to 2022, the government's total expenditure increased by 27.4%. Still, the total revenue, mainly from various taxes, had only increased by 6%. If this goes on, not only we will not break even, but our deficits will go up, and the outcomes are going to be unbearable for us all.

In Budget 2022's total expenditure of RM332.1bil, 5.2% (RM17.26bil) has been allocated for various subsidies and social assistance. Let's take a look at our fuel subsidy. According to data from the Finance Ministry, in January this year alone, fuel subsidy increased to RM2bil following a surge in the world oil prices - which was ten times that of the same period last year! As of March this year, fuel subsidy has exceeded RM4bil. The people will have to pay for these expenses. Compounded by issues such as an ageing population and burdening healthcare and social welfare needs, a tax regime reform is imminent.

There have been many expert explanations of how the GST works. So let us focus on some comparisons between the GST and the sales and service tax (SST).

The general public has opposed the GST because many do not understand how it works. In reality, the SST is included in the cost of a product but not stated on the invoice. Many people are not aware that they have been paying the SST. It is a different case for the GST, which, in contrast, is much more transparent, as businesses are required to state clearly the taxes levied on each invoice. However, this has led to the public misconception that blamed the increasing prices on the GST.

The GST regime uses the input tax mechanism to knock off its output tax, hence hedging against the volatility in the cost of product and not increasing the production costs. When purchasing raw materials, businesses pay the input tax, which can be reclaimed later. So the GST does not overlap, lowering supply costs and service costs. This is provided that the business operator is GST registered; otherwise, no reclaim of the input tax can be made. When the GST was first implemented, prices of various goods and services rose due to a lack of understanding about the tax regime and felt that the costs would increase. In reality, it was more of "emotional inflation."

On the other hand, the SST is another type of indirect tax. A manufacturer or importer must account for the SST when selling its goods. Businesses usually pass on the tax to a third party. Therefore, the SST tends to cascade in the supply chain. When a downstream merchant purchases an item, the acquisition price it pays already includes the SST. When selling the product, the merchant often regards the paid SST as purchase cost and would increase the item's price again. Merchants collect the payable tax from the customers while ensuring their profit margin. Eventually, consumers at the end of the entire supply chain have to bear the SST and pay a higher price because merchants superimpose the cost layer by layer.

Looking back at Figure 1, the GST brought in RM44.3bil in revenue to the country. Then in 2022, the SST was expected to bring in only RM27.6bil. Why such a big gap? This is because, first of all, the mechanism of the SST where only certain businesses with annual sales of a certain threshold are required to register and make collections. The GST applies to all goods and services (of course, some necessities are exempted or zero-rated). The scope of taxation covers almost all businesses; as long as consumers spend or consume GST products, they pay the GST; the more they buy, the more they have to pay.

Besides, due to the GST's input tax reclaim mechanism, even businesses that do not meet the registered operators’ threshold may choose to register voluntarily to reclaim their input tax, thus narrowing the loophole of tax evasion.

The SST, in comparison, owing to the defects in the tax system, the government is unable to effectively review the accuracy of tax sources, hence unable to collect the actual taxes. This is why most countries implement the GST, also known as VAT (Value-Added Tax). Further, the Finance Minister also said in January that tax evasion was rampant under the SST and had cost the government RM20bil in revenue.

From Figure 1, we can see that in 2017 when the GST was still in force, it accounted for 20% of the country's total income, while pressure on the corporate and personal tax was not that heavy. This allowed the government to reduce the corporate tax, making our tax rate more competitive in the region. The GST is a more transparent and fairer tax system for companies and individuals. At the same time, it can reduce tax evasion more effectively. The business community has been calling on the government to restore the GST over the past few years because they realised that it makes them more competitive after comparing the two different tax regimes.

Undeniably, there had been shortcomings when our country first implemented the GST years ago. The government has to resolve these flaws if we are re-implementing the GST. There are several main concerns here from the private sector to the government to focus on.
1) GST rate and implementation timetable
2) Mechanism, especially on input tax reclaim
3) Government assistance
4) Effectively control prices of goods, prevent malicious price hikes among businesses

In recent years, the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) and other business organisations have been urging the government to revive the GST by reducing the tax rate to 3% or 4%. A lower rate would take away the burden on consumers while reviewing the turnover threshold for the SMEs to avoid aggravating their business costs. The onus is on the government to set a clear timeframe to allow businesses enough time to prepare, acquire or adjust their accounting software. Similarly, a clear timeframe is necessary for any adjustments to tax rates so that all sectors can prepare themselves.

The government needs to learn from the past about the proper GST implementation mechanism. Firstly, they need to avoid having too many different tax rates and exempted products, so that the government and businesses would have less confusion and difficulties in the calculation. The relevant Customs Department personnel must be well-trained to anticipate, understand and resolve the various possible problems that may arise from different industries, without giving incomplete or wrong information. The refund of the input tax must also strictly follow the relevant guidelines and timetables without delay. When discrepancies arise, refunds should still occur first and be followed by an audit, so businesses' cash flow is not affected. Another suggestion is to emulate the Inland Revenue Board's self-assessment method, where the input tax is refunded as claimed by the business, followed by an audit of suspicious reports or a random audit to deter fraud.

Businesses are hopeful that the government will assist the SMEs when reintroducing the GST, especially in purchasing accounting software and staff training to reduce their burden. During the initial implementation phase, a grace period of at least six months can be given to absolve businesses from fines when they make mistakes in their filing. Also, the government needs to control the prices of goods and services, and deter companies from raising their prices viciously in the name of the GST.

In conclusion, a tax system that has been in place in more than 170 countries must have its advantages. We need to ensure no deviation in its re-implementation, where the common interest of consumers, businesses and the government are protected to increase the country's coffers without burdening companies and consumers.

- this article is published on The Star "Insights" on 21st June 2022

Written by:
Koong Lin Loong
• Managing Partner, Reanda LLKG International
• Treasurer General cum Chairman of SMEs Committee, The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM)