During our firm’s annual budget talk, attended by over 1,000 participants, we delved into Malaysia's Budget 2024 and the hotly debated issue of reinstating the Goods and Services Tax (GST).
The call to bring back the GST has grown stronger, particularly after the pandemic depleted the national treasury. Both the business community and the government consider it a viable solution to increase revenue.
Looking back, the initial implementation of the GST in 2015 faced fierce opposition, becoming the last straw that led to the downfall of the ruling party after 60 years of reign. It was replaced with the Sales and Service Tax (SST), giving Malaysians a three-month tax holiday. Since then, reinstating the GST has become a double-edged sword - reinstating it can increase revenue and mitigate issues such as tax evasion, leakages, and the shadow economy. Still, at the same time, there is concern about potential public backlash that could affect political stability.
As the call for reinstating the GST grows louder and even becomes a tool used by the opposition to attack Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim, the premier has repeatedly said that the government has no intention of reintroducing the tax in the short term. This is due to global challenges such as inflation, uneven economic recovery, the ongoing Russia-Ukraine conflict and the recent Israel-Palestine strife, which would inevitably lead to public resistance if the GST were to be reintroduced.
However, we must face reality and acknowledge that reinstating the GST is an unavoidable decision. In the World Bank's Malaysia Economic Monitor reports released in February this year, several recommendations were made for the country, including exploring new sources of revenue. One of the best methods suggested was the implementation of a consumption tax. Thus, the question now is not whether to reinstate the tax but rather, when is the best time to do so.
In a recent TV interview, I gathered insights from the public and small business owners who have experienced both the GST and the SST. It was evident that people now have a better understanding of the GST compared to its initial introduction in 2015. They no longer believe that all goods would instantly become more expensive once the tax is implemented. However, to avoid confusion and potential inflation caused by misconceptions, the government must make additional efforts to educate the public on the proper operation of the tax and the rationale behind its reinstatement.
Addressing concerns about the impact of the GST on low-income individuals, it should be noted that essential items such as cooking oil, sugar, flour, eggs, unprocessed livestock, poultry, and fish were subject to a zero-tax rate during the initial implementation. Certain essential services, like education, health and public transportation, were also exempt from the tax. For those who primarily purchase necessary items and basic services, the GST does not significantly increase their burden. If the government believes it is necessary to assist this group, they could consider offering targeted cash subsidies.
From a business perspective, the GST does not directly increase product costs with its input and output tax mechanisms, as the tax paid when purchasing raw materials can be offset (excluding exempted items or services). This input and output tax mechanism ensures that prices are not unjustly raised.
Why did I say that GST and the current SST are just a difference in name? I believe the essence of the GST has already been implemented in our lives under the guise of the SST. Firstly, let's examine some key elements of the GST. As the name suggests, it is a tax imposed on consumption and paid by consumers. The basic principle is that those with greater purchasing power should contribute more in taxes. Now, let's take a look at the High-Value Goods Tax (HVGT) that the government plans to implement in May 2024. Its principle is the same, where consumers who can afford high-priced goods will pay higher taxes. Even the provision for tourist tax refunds follows the same operational principle as the GST.
Next, let's take a look at tax invoices. During the GST implementation, businesses were required to issue tax invoices that included their GST registration number, the original selling price of goods and services, and the total GST charged. These tax invoices provided the government with vital information about the supply chain, reducing the underground economy and tax evasion. The upcoming full implementation of electronic invoices (e-invoices) in July 2025 serves a similar purpose, as it will contain even more details, facilitating the government's ability to compare transactions between businesses. Inland Revenue Board chief executive officer Datuk Mohd Nizom Sairi also stated recently that e-invoices were designed to complement the GST mechanism, meaning businesses won't need to make any changes once the GST is reintroduced.
Additionally, Budget 2024 expanded the service tax to cover logistics, brokerage, underwriting and karaoke services, indicating the government's intention to broaden the tax base. While all traded goods or services will be subject to taxation, certain essential items, food and specific services are zero-rated or exempt; this is also an important feature of the GST. On the other hand, the registration for the SST is based on turnover thresholds, limiting the tax base compared to the era of GST.
This can be seen from the government's projected tax revenue for 2024. Despite raising the service tax to 8% and expanding its scope, the revenue from the SST is projected to increase by only RM16bil, from RM342bil to RM358bil, accounting for 11.6% of the total revenue. In contrast, the revenue from the GST in 2017 was RM44.3bil, making up 20.1% of the total revenue. If the government had not abolished the GST, I assume that our current revenue from the GST would likely have reached nearly RM60bil, whereby the Treasury would not face constraints and the government would not be caught in the dilemma of removing subsidies and aid to the people.
It is clear that the government is preparing for the reintroduction of the GST, if not a GST alike consumption tax with a different name. As I have emphasised multiple times, if the government decides to reintroduce the tax, it must provide early notice, allowing sufficient time for preparation. It should start with a low tax rate, give people time to adjust and provide a clear timeline with specified adjustment rates and dates for the public. It is crucial to educate businesses and the public, especially those outside urban areas, to ensure everyone has sufficient awareness. Strict price monitoring and enforcement should be implemented to prevent price manipulation by businesses, which would further burden the people. As for price regulation, the government should not neglect traders and smaller businesses, as most people conduct transactions with them.
In conclusion, regardless of when the GST returns, its essence is already in our lives. We cannot avoid it, so as business owners or consumers, we must be prepared to face it.
Datuk Koong Lin Loong JP
• Managing Partner, Reanda LLKG International
• Treasurer General cum Chairman of SMEs Committee, The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM)
~ this article was published in Star Biz dated 14th November 2023