The Goods Service Tax In Malaysia

The Goods attend value In MalaysiaIS THE grounding OF THE GOODS SERVICE TAX (GST) IN MALAYSIA GOOD OR BAD?Chapter 11.0 INTRODUCTION.In the new world- enormous economy, to a greater extent(prenominal) companies be operating cross b tramp, and as such atomic numerate 18 faced with the compulsion to eliminate efficaciously with m some(prenominal) assorted appraise in flummoxes, a computable deal in many different countries, each with different lay outs, judgment and application. Coupled with this, the regulatory environment is increasingly ch onlyenging. The IMF has been trying to push for every(prenominal) countries to adopt the Goods Service measure (GST), or in leadition known in certain countries as set Added value (VAT), so as to create a more seclude ram playing field amongst vocation nations. Direct measure r fifty-fiftyue enhancementes throw off in the past been use to camouf throw awaye protectionism policy of certain countries. High dut y on certain return like motorcar has prevented healthy competition amongst trading nations. The general populations of that acres be go away without a choice merely to consume the local products, as merchandi advertd products gather in become more addressly with the uplifted tariff. Often, be perk up of this, the local products tend to be inferior in timberland as in that location is no real in centive to contend.In the 2005 compute, the regime of Malaysia in take in that GST lead be work throughed on Jan 1 2007 to replace the current gross gross revenue enhancement and suffice assess (SST). Following humanity outcry, on 22 February 2006 it announced a deferment to allow lead metre to businesses for electric potential changes in processes, development of softw be system and somebodynel training.The source reading of the GST Bill was control boardd in December 2009 and the arcminute and third reading is evaluate in April 2010.The Prime see recently an nounced that the add in revenue pass judgment from the foot of GST get out be used of importly to finance the hike in accomplished Servants salary and to finance some other infrastructure works for the benefit of the nation at large.Problem con screen outationIs GST really needed for Malaysia? If so, how does it act up the general popular and the country as a whole? The aim of this paper is to discuss and take up to attention the problems which we top executive face with the murder of the GST, or if we argon to extend status quo with the SST.Chapter 2 belles-lettres reviewThe Ministry of finance drinked the compriseing information to highlight on GST. It decl bed that it would be part of the boilers suit revenue enhancement revenue reform to overcome the inherent weaknesses in the SST and to reduce the faith on revenue from speak measurees and pet exerciseum. GST is a more efficient and good revenue system as it is self policing and has an in-build cross c hecking features. It enhances valuate accord and deals with less(prenominal) bureaucracy. It is also a more stable base of revenue compared to income task and less susceptible to economic downturn due to the exercise nature of the tax.The briny types of taxes are direct and confirming taxes. Direct taxes are Corpo prescribe tax, Personal Income revenue enhancement, Real Property Gains Tax and Stamp duty whilst validating taxes are Tariff (or Customs Duty), Excise Tax, SST (currently practiced in Malaysia) and GST. Contri barelyion from petroleum revenue to hail revenue change magnitude from 29.1% (1990) to 40.1% (2008). The current high petroleum revenue is non sustainable as it is a depleting re ancestry on that chargefore and alternative source gravel to be seek.With the present average birth rate of 2.2, it is pass judgment that by 2030, 12% of the population allow be to a higher(prenominal)(prenominal) place 60 years doddery which al around double the curren t number. The working population stipendiary taxes entrust thitherfore reduce, putting a smashinger charge up on a lilliputianer classify of volume. GST is a broad-establish tax that distri justes the shoot of tax income among a larger section of the population based on consumption.GST preserve the incentive to work and encourages attempt as it is non a im spotless income tax. The tax rate does not accession according to income take aim it is flat at the determined rate. It is levied at the production and dissemination stages, thereby incorporating a self-policing mechanism that facilitates disposition and makes it more difficult to reverse or evade. This gain ground reduces the possibility of revenue loss through under bid of tax evasion.The GST model utilize in Malaysia is not expect to rich person cascading, or pyramiding, effect as the tax on a particular good depends upon its final value, and not the number of production and distribution bestow it passes thro ugh. Furthermore, the output tax to be paid provide be set out against the introduce tax, and there is no GST levied over GST.GST is expected to provide a more stable source of revenue as consumption is less mended by economic cycles compared to income tax. It can be an effective tax on the arse economy, as those involved would consume, and thus return indirect taxes through GST. It is credibly that those involved in such activities would buy luxury goods, which would be subjected to GST.The presidential term activity is cutting its operating usance for 2010 by 13%. This shows it is witting of the growing deficit that has widened due to the stimulus package. Recently, Fitch rating power has cut the rating of the ringgit, which whitethorn cause imported inflation if it depreciates, and the International M angiotensin-converting enzymetary Fund commented that the GST necessarily to be apply jolly alongntly.Malaysias cipher 2010 reports on GST is that, it is currently a t the final stage of completing the orbit on the implementation, where analysts are criterion the companionable impact of its presence in Malaysia. The Malayan government verbalize that it could be possible for them to implement this in the near future. Looking at Malaysia in a broader scale, GST pass on not only affect big businesses, but small and medium enterprises (SME) as well. Although there were busy of past information verbalism that a pabulum outlet can only charge GST if its one-year turnover is above RM3 million (3,000,000 Ringgit Malaysia), the GST compliance requirements and doors has not been officially announced.If we were to take into account GSTs implementation into goods and profits, we ingest to assume that it ordain incur to all stages of the supply chain which means from the acquire of raw materials or start-up goods all the way to end-user (consumer ready) products ready(prenominal) for sale. Ultimately in a product, GSTs charged to every le vel are passed on to the next person and in the end, the consumer.A Tax Review dining table was formed in bosom of 2005, and it has come out with a Discussion Paper intended for businesses to understand the primary administrative requirements and procedures when GST is implemented so that they know the impact of GST.Secondly, the Tax Review Panel invites the business community and other germane(predicate) organizations and associations to review the proposal in that paper.Thirdly, by having a humanity consultation, it provides an appropriate forum for both the usual and private institutions to exchange views with members of the Tax Review Panel so as to understand the rationale stern the proposals initiated.The GST was supposed to be implemented in Malaysia in the year 2007 however the government has to defer the drive due to critical reviews by certain quarters. After losing four States to the opposition, it has to tread on a minute path in order not to lose more public support. It cannot afford to make any more major mistaking in the wake of its dismal performance in the last habitual Election.GST is chiefly known as a tax system which resolves in regressivity (i.e. people with less pay a greater handle of their resources than those with more), in contrast with the ideal aim of progressivity which is generally sought when implementing a tax. It is sometimes argued that a GST system does not work in a sad arena such as Africa, where roughly countries have heavy external debt freights, malnutrition, civil wars and lack of solid food and medicines which often result in cold-blooded living conditions. Nevertheless, with the support of the IMF, VAT/GST systems were designed in many African countries to combat or at least alleviate the adverse effect of VAT/GST regressivity by having a identify of saveions and zero-ratings which apply (generally speaking) to basic foodstuffs and other basic necessities.GST is not always simple to administer , contrary to what the advocates of GST would unavoidableness countries to be broodve during the transformation stage. Unless a proper GST arrangement, supported by modern technology and electronic communication systems can be implemented, GST administration impart inevitably be followly for both the tax revenue governing and the business sector. The output/ commentary mechanism of the GST system, coupled with GST refunds, may provide the ideal opportunity for subterfuge where corrupt officials and unscrupulous businesses mould weaknesses in the system. This again results in a defensive attitude from the Revenue Authorities, resulting in bad communication, notes flow and other GST cost.In 1992, a Free Trade intellect (FTA) was signed which reduced import tariffs between ASEAN member countries. In the first three years of the FTA, exports amongst the ASEAN countries grew from US$43 billion to US$80 billion. In 1997, the leaders of ASEAN adopted the vision to build a stable , prosperous and highly agonistical economic region, in which there is a absolve flow of goods, work and investments, a set downr flow of groovy, candid economic development and reduced poverty and socio-economic disparities.The figure is to remove all tariffs for the six more unquestionable countries by 2010 and for all countries by 2015. The summit also progressed the efforts to integrate ASEAN with the oftentimes larger economies of Asia- Pacific, specifically China, Japan, confederation Korea, India, Australia, and radical Zealand. China signed a pact to introduce the worlds largest free trade zone by 2010, covering almost two billion people. Japan signed a similar agreement to take effect by 2012. India agreed to join in by 2011. Australia and New Zealand have agreed to talks starting next year to free up trade at heart a decade. The master plan is to have a free trade zone that can compete with the US and EU. In southwest East Asia, Malaysia remains one of the fe w countries yet to adopt the GST system, which would indirectly be in the way, if we compliments to be part of this master plan.In Malaysia, it was announced that obligatory goods and service leave not be subjected to GST, but fears that GST go forth spark a chain reaction that go away incr move the prices of most non-controlled items should not be dismissed. We have seen numerous guinea pigs of when there is an increase in a certain commodity it sparks a price rise in most goods and services. For ex wide, when the petrol price increased to RM2.70, prices of most goods, foods and services were hiked. except later the petrol price dropped, there has not been a material correction in the prices of goods, food and services.The relevant ministries are powerless to mitigate the situation and curb the obligatory inflation. A recent example is on the removal of the subsidy on white bread resulting in price increase of one loaf of bread by 20 to 30 cents. The Deputy domesticat edated Trade, Cooperative Consumer Affairs Minister can only comment that the price adjustment was not necessary, urge traders to practice embodied social responsibility and call on the consumers to execute their power in hand. both these statements will not effectively curb excessive profiteering and traders taking opportunity to increase the price of goods and service. The public would want to know how the government intends to avoid the similar predicamentWhat is GST and how does it work?GST is a consumption tax charged on a wide range of domestic international products, goods and services. Its a broad-based tax compel on every level of a product, from raw materials all the way to finished goods. The proposed implementation of GST will replace the current Malaysian service tax and gross gross gross revenue tax.Broadly, GST works by offsetting GST paid on purchases ( enter tax) against GST due on sales or supplies made (output tax). This is referred to as the credit offset mechanism. The multi tier stages of tax helps to chink that GST paid by businesses for purchases does not end up beingness a permanent cost. However, the consumer in the long run bears the burden of the tax. Conceptually, GST is imposed on the value added to goods or services by each separate processor in the production and distribution chain.This can be seen in the simple illustration at a lower place.GST to GovernmentRM 4 + RM2 = RM6(i.e. 4% x RM 100) i.e.4% x RM 150 = RM6 Output tax i.e. 4%x150Less RM4 Input taxRM2 Net4% is the fancied standard rate of GST. It is assumed that the entire output is taxable and all input taxes are creditable. lowest CONSUMERCost to consumer = RM 156SUPPLIERSelling price = RM100GST(4%) = RM 4Total = RM 104manufacturing businessCost = RM 100 abide by added = RM 50Total = RM 150GST (4%) = RM 6Total = RM 1562.1 SOME head ache ABOUT THE INTRODUCTION OF GST.thither were some concerns that Malaysians could suffer even more with the introduction of t he Goods and Services Tax (GST). GST-driven inflation would be a calamity that the struggling lower-income group could do without.The GST Bill was tabled in sevens at the end of the Budget sitting that ended on 17 December 2009. At its first reading, the bill was just mentioned, but there was no explanation of the bill or any debate. The moment reading is when the bill is spread for debate and proposed amendments. This may come as early as adjoin 2010 for the GST Bill. Once approved, the new tax can be implemented as early as 2011.The table below lists the governments tax revenue for 2008 which contributed RM112.9 billion or 70 per cent of total government revenue.Government Tax Revenue in 2008Personal Income Tax RM 15.0 bilCompany Tax RM 37.7 bil oil color Tax RM 24.2 bil exporting and import duties RM 5.4 bilExcise duties RM 10.7 bil gross sales and Services Tax RM 11.7 bilAs shown in the table, the biggest source of tax revenue is company tax, which at 26 per cent of declared profits, currently brings in RM37.7 billion into government coffers. Petroleum tax makes up the second biggest tax item while the tax levied on the 1.5 million individuals who are now currently paying ain income taxes in Malaysia makes up the third biggest. All these taxes are deemed progressive for they tax the copiousest individuals and the companies that are make profits. Progressive taxes do not burden the low-downer sectors of society. Progressive taxes tend to extend to out income differences between the generative and the poor in society.It was argued that regressive tax regimes, on the other hand, burden the poor. Sales taxes are generally regressive as they tax consumption and not income. only when sales tax in Malaysia has different pass judgment for different types of goods and the government can make them less regressive by levying sales taxes solely on good that are consumed by the richer sectors of society such as expensive cars, big houses, abroad travel, ex pensive restaurants and other luxury items.The Goods and Services Tax, however, is perceived to be even more regressive for it is levied at a flat rate on a very wide range of products including many items that the poorer people need to buy. It might lead to a rise in prices and would unimpeachably hit the poorest the hardest. As in most countries with the GST in place, a reduction of corporal tax and personal tax will follow suit. This indeed, is seen as the real reason that the GST is being brought in to make Malaysia more business friendly? by cutting corporate tax (which has already been reduced markedly from the 40 per cent level in 1988 to its current 26 per cent).2.2 LACK OF INFORMATION AND CONFUSION ON GST.The step-by-step release of information is creating great concern among the people and in the business sector. For exampleWill the political science furnish an extensive list of item that will be charged GST, and what will be releaseed?If a product, like rice or chic ken is exempted, does the exemption apply across the board regardless of the form of the product? For example, is cooked rice or cut, frozen or marinated chicken also exempted?What is the difference between exempt and zero-rated GST?Will there be any reduction in personal and corporate tax?What changes will be made to the sales and service tax?There is a perception that as GST is a multistage tax, it would result in high(prenominal) effective tax rate than 4%. As GST is very technical, most people are un assured how it will impact them.When will the GST rate be reviewed?Recent media statement on its impact did not improve opinion on the introduction of GST. It is reported that under the sales and services tax system, the burden on the poor is 2.38%, but under the GST it will be 2.17%. For the higher income group, the tax burden will be reduced from 13% to 2.74%, according to the finance Ministry. The general savings for households will be between RM14.52 and RM346.92 yearly. This clearly contradicts other statement from politicians, and the public perception, that the GST will be inflationary. But as no further details are provided on how the savings are arrived at, public legal opinion remains negative on GST.CHAPTER 3EXPECTED IMPACT OF GST3.1 Impact on the people in the street.The public is generally implicated that the introduction of GST will hit their wallets directly. In an initial assessment, as the GST is expected to be lower than service tax, the bill for a restaurant meal will be 1% lower as the service tax rate is 5% and GST is 4%. For other services apt to service tax, a GST rate lower than service tax should result in a brush off decrease in charges if the cost of the other components in providing the service remain the same.On goods that attract sales tax, the current rate seems higher than the proposed GST, hence there might be a reduction if there is no further adjustment. stream rate are as follows Fruits, certain foodstuff and building materials (5%) habitual goods, including motor vehicle (10%) pot likker and alcoholic drinks (20%) Cigarette and cheroots (25%)For hawkers even though they do not have a turnover of RM500,000 yearly, so are not required collect GST, the material procured, for example, noodles, fish balls, bear upon meat, chicken, equipments for the stall may be subjected to GST, resulting in price hike. But without detailed fellowship or mapping, or even information on the duties charged, the people are uncertain whether the prices of goods and services will remain stagnant, increase or decrease.3.2 IMPACT ON BUSINESSES.The implementation of GST is expected to impact business in the following way of lifeCompliance costs are expected to be incurred as there is requirement to track the input tax and output tax to determine refund or tax to be submitted. Even though some Malaysian companies are already paying sales tax or service tax, there was no input tax to be monitored and accounted for to of fset against output tax.Business process and procurance need to be mapped out, peculiarly with jimmy to suppliers and promotional items. For example, a new car attract GST, but items provided for free during promotion like sports rims or a GPS system may not be eligible for an input tax claim. Likewise the corporate souvenirs and hampers given out by businesses may not be eligible. The procurement department should start flesh out the sales tax or the animated tax paid for their items used a raw material. As the GST is expected to be lower than most current indirect tax, there should be some potential cost savings. This is also to avoid being overcharged by supplier that intends to add the GST over the existing price of its supplies after sales tax, there should be some potential cost saving.Human resource chemical element New staff may need to be employed to ensure a business is docile and conversant with the GST requirement. As most staff have not been undecided to GST, t raining needs to be conducted.Accounting system and account payable The business would require an appropriate accounting system to guard track of the GST amounts. Most systems could be upgraded, and it is important to notify software vendors to test run the data to avoid any potential complication.Cash flow management Businesses should be aware that output GST may have to be settled before settlement of sales invoices by customer. Meanwhile, payables on which input tax has been claimed but remains unpaid after six months have to be accounted as output tax and are to be reclaimed as input tax only after payment is made. Businesses are have-to doe with about the timeliness of the refund process as delays would results in a higher working capital cost.In addition, businesses that have thin margins are worried about the advance of the refund for input tax, especially if the business is mainly exported-oriented and procure its raw material locally.3.3 OTHER IMPACTSThe expected impact on corporate and income taxes are as published in the news recently. Deputy finance Minister Chor Chee Heung quoted that Malaysia will see a gradual reduction in its corporate and income tax rates once the proposed Goods and Services Tax (GST) is in place by mid-2011.He does not think that there was a timeline for achieving this reduction in corporate and income taxes, as this is a long-term objective of the government. Once the GST come into play, it will be a broad based tax and the trend is, once GST is implemented, corporate and income taxes will gradually be reduced.Chor also disclosed that businesses related to services such as those in the food and transportation sectors, would be exempted from the proposed GST. He gave assurance that the cost of living and lifestyle of the people would not increase or be affected with the implementation of a GST.He also added that the implementation of GST would not cause inflation. Once the GST is in, the service tax and sales tax (now im posed) would be abolished. Both taxes are quite high at 10 per cent and five per cent respectively. The GST at four per cent is considered very low.Meanwhile, the Finance Ministrys Tax Review Panel Chairman, Ms. Kamariah Hussain, said there would be revenue gains of about 1.0 Billion Ringgit for the government with the GST implementation.She explained that the introduction of the GST was part of an overall tax reform in the country. With the GST, the government would have a give way mix of revenue, and not be too dependent on income tax and petroleum income.Second Finance Minister, Ahmad Husni Hanadzlah had indicated that while the GST would replace the existing sales and services taxes, it would not put pressure on prices and to ease the burden of consumers, staple foods such as rice, sugar, cooking oil and flour would be exempted from it.3.3.1 IMPACT OF GST ON SMALL MEDIUM opening (SME).SMEs form the backbone of the business activities of a nation. Other than encouraging the of fshoot of new industries such as tourism and biotechnology-based industries, the Government (2004 Budget Proposals) too has singled out SMEs to spearhead domestic growth.However, there is a group of unhappy people representing non-governmental organizations (NGOs) and the public who have expressed their non-approval for the introduction of the proposed GST. Their main argument is that GST favours the rich and burdens the poor at large. Their contention is that it will burden the people and contribute to the widen gap between the rich and the poor, not to mention the rise in the inflation rate?.However, tax practitioner, Beh Tok Koay is of the opinion that perhaps this small group lacks an understanding of the whole system of GST. It is supposed to be broadbased and will replace the service and sales tax system, and this in turn will help to reduce income tax rates?. There could be two GST rates a lower rate for SMEs and a higher rate for large enterprises. distinguished two GST ra tes is, however, difficult to administer as they provide ample board for tax turning away and increase compliance cost. Lowering the compliance cost of GST would ease the burden of SMEs. If there is convincing data to show that the compliance cost of SMEs are lower if the accounts are computerized, then the Government could provide software packages to the licensees to enable them to correctly compute GST. Free training and seminars including visits should be lengthy to SMEs to enable them to have a better understanding of the compliance requirements. One other option is to exempt small businesses from GST altogether but such a decision too has its drawbacks.The Government has to analyze the revenue gain as compared to the compliance cost before making a decision to determine the threshold limit. With the two-year window end before GST is in force, all of us have a role to play in bring towards the development of a better broad-based consumption tax system which ultimately woul d help reduce the rates of income tax. No doubt, everyone especially the SMEs will eagerly await the final introduction of the GST system and the extent of the expected income tax rate cuts.The business community, NGO and charity organization are concerned about the cogency of the authorities to implement GST smoothly. Australia, for example, had to bring in foreign experts to help in rollout of GST. It would undermine investor confidence if the GST is not implemented in a structured manner with minimal hiccup.Burdening the poor and those economically vulnerable some(a) 32% of the household in Malaysia have an income under RM2,000 per month. The introduction of GST without the necessary revamp of subsidies will result in a heavier financial burden on poor and low-income families. Families with an income below RM2,000 a month do not have to pay personal income tax. With GST, things that are not basic necessities toys, processed food, can food, megabucks drinks, and so on, could in crease existing inflationary pressures. The ongoing restructuring of the subsidy will also create the tension, uneasiness and dissatisfaction as people eligible for subsidy could unintentionally be left out as the government establishes and tries to refine its method of distribution.CHAPTER 44.0 CONCLUSIONGST is unavoidable. It will just be a matter of time when it will be implemented. It may not be a perfect system, but has worked well as a revenue base for other countries. Malaysias problem may lie more in public education, implementation and enforcement.To move forward, Malaysia has to conform to the free trade vision of ASEAN and cannot lag behind the other countries. As of today, apart from Malaysia, only Myanmar and Brunei has yet to implement the GST. GST modernises the tax system by addressing tax evasion affiliated by free riders who want every benefit but respond to pay for it, or preferably have others to pay for them. GST will certainly be a good platform to increase the Governments revenue. Concerns of it being regressive can be overcome by careful and discreet classifications of zero rated supplies and exempt supplies for essential items as against standard supplies for non essential and luxury items.One good point of starting late is the business leader to learn from the mistakes of others. The government has to be fully transparent in the implementation of the proposed GST.In this borderless world, news and knowledge cannot be curbed. The masses are getting more intelligent and informed. It will not be provident for the government of the day not to move forward towards a more modern tax system. sooner than blind opposition, critics should provide examples and lessons learnt from the weaknesses of other nations in the implementation of GST or VAT.However, based from past experience, the skeptism voiced is understandable. We have heard of past Auditor General Reports on the wastage and the leakage of public funds into the pockets of the we ll attached of RM 25 screw drivers being bought through tender at a price of RM200 commissions running into millions of ringgit for the purchase of Sukhov jets and submarines and billions swallowed in the PKFZ scandal. The sums involved are astronomical. Then we have newly create hospitals that cannot be used, court room complexes with leaked ceilings and stadium roofs that collapsed in the absence of even a small earthquake.So, whether the GST will finally proved to be good or bad for the country will remain a question mark until its veridical implementation. The actual salary increase as promised by the government might not be the expected pot of gold at the end of the rainbow if the GST is not properly implemented.The Goods Service Tax In MalaysiaThe Goods Service Tax In MalaysiaIS THE INTRODUCTION OF THE GOODS SERVICE TAX (GST) IN MALAYSIA GOOD OR BAD?Chapter 11.0 INTRODUCTION.In the new global economy, more companies are operating cross border, and as such are faced with the need to deal effectively with many different taxes, often in many different countries, each with different rates, ruling and application. Coupled with this, the regulatory environment is increasingly challenging. The IMF has been trying to push for all countries to adopt the Goods Service Tax (GST), or also known in certain countries as Value Added Tax (VAT), so as to create a more level playing field amongst trading nations. Direct taxes have in the past been used to camouflage protectionism policy of certain countries. High tariff on certain product like motorcar has prevented healthy competition amongst trading nations. The general populations of that country are left without a choice but to consume the local products, as imported products have become more expensive with the high tariff. Often, because of this, the local products tend to be inferior in quality as there is no real incentive to compete.In the 2005 Budget, the Government of Malaysia announced that GST will be imple mented on Jan 1 2007 to replace the current sales and service tax (SST). Following public outcry, on 22 February 2006 it announced a deferment to allow lead time to businesses for potential changes in processes, development of software and personnel training.The first reading of the GST Bill was tabled in December 2009 and the second and third reading is expected in April 2010.The Prime Minister recently announced that the increase in revenue expected from the introduction of GST will be used mainly to finance the hike in Civil Servants salary and to finance other infrastructure works for the benefit of the nation at large.Problem StatementIs GST really needed for Malaysia? If so, how does it affect the general public and the country as a whole? The aim of this paper is to discuss and bring to attention the problems which we might face with the implementation of the GST, or if we are to remain status quo with the SST.Chapter 2 Literature reviewThe Ministry of Finance presented the f ollowing information to highlight on GST. It stated that it would be part of the overall tax reform to overcome the inherent weaknesses in the SST and to reduce the reliance on revenue from direct taxes and petroleum. GST is a more efficient and effective tax system as it is self policing and has an in-build cross checking features. It enhances tax compliance and deals with less bureaucracy. It is also a more stable source of revenue compared to income tax and less susceptible to economic downturn due to the consumption nature of the tax.The main types of taxes are direct and indirect taxes. Direct taxes are Corporate Tax, Personal Income Tax, Real Property Gains Tax and Stamp duty whilst indirect taxes are Tariff (or Customs Duty), Excise Tax, SST (currently practiced in Malaysia) and GST. component from petroleum revenue to total revenue increased from 29.1% (1990) to 40.1% (2008). The current high petroleum revenue is not sustainable as it is a depleting resource therefore and a lternative source have to be sought.With the present average birth rate of 2.2, it is expected that by 2030, 12% of the population will be above 60 years old which almost double the current number. The working population paying taxes will therefore reduce, putting a greater burden on a smaller group of people. GST is a broad-based tax that distributes the burden of taxation among a larger section of the population based on consumption.GST preserve the incentive to work and encourages enterprise as it is not a progressive income tax. The tax rate does not increase according to income level it is flat at the determined rate. It is levied at the production and distribution stages, thereby incorporating a self-policing mechanism that facilitates administration and makes it more difficult to avoid or evade. This further reduces the possibility of revenue loss through understatement of tax evasion.The GST model implemented in Malaysia is not expected to have cascading, or pyramiding, effe ct as the tax on a particular good depends upon its final value, and not the number of production and distribution channel it passes through. Furthermore, the output tax to be paid will be offset against the input tax, and there is no GST levied over GST.GST is expected to provide a more stable source of revenue as consumption is less affected by economic cycles compared to income tax. It can be an effective tax on the shadow economy, as those involved would consume, and thus pay indirect taxes through GST. It is likely that those involved in such activities would buy luxury goods, which would be subjected to GST.The government is cutting its operating expenditure for 2010 by 13%. This shows it is aware of the growing deficit that has widened due to the stimulus package. Recently, Fitch rating agency has cut the rating of the ringgit, which may cause imported inflation if it depreciates, and the International Monetary Fund commented that the GST needs to be implemented urgently.Mala ysias budget 2010 reports on GST is that, it is currently at the final stage of completing the study on the implementation, where analysts are measuring the social impact of its presence in Malaysia. The Malaysian government said that it could be possible for them to implement this in the near future. Looking at Malaysia in a broader scale, GST will not only affect big businesses, but small and medium enterprises (SME) as well. Although there were nimble of past information saying that a food outlet can only charge GST if its annual turnover is above RM3 million (3,000,000 Ringgit Malaysia), the GST compliance requirements and thresholds has not been officially announced.If we were to take into account GSTs implementation into goods and services, we have to assume that it will happen to all stages of the supply chain which means from the purchase of raw materials or start-up goods all the way to end-user (consumer ready) products available for sale. Ultimately in a product, GSTs cha rged to every level are passed on to the next person and ultimately, the consumer.A Tax Review Panel was formed in middle of 2005, and it has come out with a Discussion Paper intended for businesses to understand the basic administrative requirements and procedures when GST is implemented so that they know the impact of GST.Secondly, the Tax Review Panel invites the business community and other relevant organizations and associations to review the proposal in that paper.Thirdly, by having a public consultation, it provides an appropriate forum for both the public and private institutions to exchange views with members of the Tax Review Panel so as to understand the rationale behind the proposals initiated.The GST was supposed to be implemented in Malaysia in the year 2007 however the government has to defer the move due to critical reviews by certain quarters. After losing four States to the opposition, it has to tread on a careful path in order not to lose more public support. It c annot afford to make any more major mistake in the wake of its dismal performance in the last General Election.GST is generally known as a tax system which results in regressivity (i.e. people with less pay a greater share of their resources than those with more), in contrast with the ideal aim of progressivity which is generally sought when implementing a tax. It is sometimes argued that a GST system does not work in a poor region such as Africa, where most countries have heavy external debt burdens, malnutrition, civil wars and lack of food and medicines which often result in inhuman living conditions. Nevertheless, with the support of the IMF, VAT/GST systems were designed in many African countries to combat or at least alleviate the adverse effect of VAT/GST regressivity by having a list of exemptions and zero-ratings which apply (generally speaking) to basic foodstuffs and other basic necessities.GST is not always simple to administer, contrary to what the advocates of GST woul d want countries to believe during the transformation stage. Unless a proper GST administration, supported by modern technology and electronic communication systems can be implemented, GST administration will inevitably be costly for both the Revenue Authorities and the business sector. The output/input mechanism of the GST system, coupled with GST refunds, may provide the ideal opportunity for fraud where corrupt officials and unscrupulous businesses exploit weaknesses in the system. This again results in a defensive attitude from the Revenue Authorities, resulting in bad communication, cash flow and other GST cost.In 1992, a Free Trade Agreement (FTA) was signed which reduced import tariffs between ASEAN member countries. In the first three years of the FTA, exports amongst the ASEAN countries grew from US$43 billion to US$80 billion. In 1997, the leaders of ASEAN adopted the vision to build a stable, prosperous and highly competitive economic region, in which there is a free flow of goods, services and investments, a freer flow of capital, equitable economic development and reduced poverty and socio-economic disparities.The plan is to remove all tariffs for the six more developed countries by 2010 and for all countries by 2015. The summit also progressed the efforts to integrate ASEAN with the much larger economies of Asia- Pacific, specifically China, Japan, South Korea, India, Australia, and New Zealand. China signed a pact to introduce the worlds largest free trade zone by 2010, covering almost two billion people. Japan signed a similar agreement to take effect by 2012. India agreed to join in by 2011. Australia and New Zealand have agreed to talks starting next year to free up trade within a decade. The master plan is to have a free trade zone that can compete with the US and EU. In South East Asia, Malaysia remains one of the few countries yet to adopt the GST system, which would indirectly be in the way, if we want to be part of this master plan.In Ma laysia, it was announced that essential goods and services will not be subjected to GST, but fears that GST will spark a chain reaction that will increase the prices of most non-controlled items should not be dismissed. We have seen numerous examples of when there is an increase in a certain commodity it sparks a price rise in most goods and services. For example, when the petrol price increased to RM2.70, prices of most goods, foods and services were hiked. But after the petrol price dropped, there has not been a substantial correction in the prices of goods, food and services.The relevant ministries are powerless to mitigate the situation and curb the necessary inflation. A recent example is on the removal of the subsidy on white bread resulting in price increase of one loaf of bread by 20 to 30 cents. The Deputy Domestic Trade, Cooperative Consumer Affairs Minister can only comment that the price adjustment was not necessary, urge traders to practice corporate social responsibil ity and call on the consumers to execute their power in hand. All these statements will not effectively curb excessive profiteering and traders taking opportunity to increase the price of goods and service. The public would want to know how the government intends to avoid the similar predicamentWhat is GST and how does it work?GST is a consumption tax charged on a wide range of domestic international products, goods and services. Its a broad-based tax imposed on every level of a product, from raw materials all the way to finished goods. The proposed implementation of GST will replace the current Malaysian service tax and sales tax.Broadly, GST works by offsetting GST paid on purchases (input tax) against GST due on sales or supplies made (output tax). This is referred to as the credit offset mechanism. The multi tier stages of tax helps to ensure that GST paid by businesses for purchases does not end up being a permanent cost. However, the consumer ultimately bears the burden of th e tax. Conceptually, GST is imposed on the value added to goods or services by each separate processor in the production and distribution chain.This can be seen in the simple illustration below.GST to GovernmentRM 4 + RM2 = RM6(i.e. 4% x RM 100) i.e.4% x RM 150 = RM6 Output tax i.e. 4%x150Less RM4 Input taxRM2 Net4% is the assumed standard rate of GST. It is assumed that the entire output is taxable and all input taxes are creditable.FINAL CONSUMERCost to consumer = RM 156SUPPLIERSelling price = RM100GST(4%) = RM 4Total = RM 104MANUFACTURERCost = RM 100Value added = RM 50Total = RM 150GST (4%) = RM 6Total = RM 1562.1 SOME CONCERN ABOUT THE INTRODUCTION OF GST.There were some concerns that Malaysians could suffer even more with the introduction of the Goods and Services Tax (GST). GST-driven inflation would be a calamity that the struggling lower-income group could do without.The GST Bill was tabled in Parliament at the end of the Budget sitting that ended on 17 December 2009. At its first reading, the bill was just mentioned, but there was no explanation of the bill or any debate. The second reading is when the bill is open for debate and proposed amendments. This may come as early as March 2010 for the GST Bill. Once approved, the new tax can be implemented as early as 2011.The table below lists the governments tax revenue for 2008 which contributed RM112.9 billion or 70 per cent of total government revenue.Government Tax Revenue in 2008Personal Income Tax RM 15.0 bilCompany Tax RM 37.7 bilPetroleum Tax RM 24.2 bilExport and import duties RM 5.4 bilExcise duties RM 10.7 bilSales and Services Tax RM 11.7 bilAs shown in the table, the biggest source of tax revenue is company tax, which at 26 per cent of declared profits, currently brings in RM37.7 billion into government coffers. Petroleum tax makes up the second biggest tax item while the tax levied on the 1.5 million individuals who are now currently paying personal income taxes in Malaysia makes up the third biggest. All these taxes are deemed progressive for they tax the richest individuals and the companies that are making profits. Progressive taxes do not burden the poorer sectors of society. Progressive taxes tend to equal out income differences between the rich and the poor in society.It was argued that regressive tax regimes, on the other hand, burden the poor. Sales taxes are generally regressive as they tax consumption and not income. But sales tax in Malaysia has different rates for different types of goods and the government can make them less regressive by levying sales taxes exclusively on good that are consumed by the richer sectors of society such as expensive cars, big houses, overseas travel, expensive restaurants and other luxury items.The Goods and Services Tax, however, is perceived to be even more regressive for it is levied at a flat rate on a very wide range of products including many items that the poorer people need to buy. It might lead to a rise in prices and would definitely hit the poorest the hardest. As in most countries with the GST in place, a reduction of corporate tax and personal tax will follow suit. This then, is seen as the real reason that the GST is being brought in to make Malaysia more business friendly? by cutting corporate tax (which has already been reduced markedly from the 40 per cent level in 1988 to its current 26 per cent).2.2 LACK OF INFORMATION AND CONFUSION ON GST.The piecemeal release of information is creating great concern among the people and in the business sector. For exampleWill the authorities furnish an extensive list of item that will be charged GST, and what will be exempted?If a product, like rice or chicken is exempted, does the exemption apply across the board regardless of the form of the product? For example, is cooked rice or cut, frozen or marinated chicken also exempted?What is the difference between exempt and zero-rated GST?Will there be any reduction in personal and corporate tax?What cha nges will be made to the sales and service tax?There is a perception that as GST is a multistage tax, it would result in higher effective tax rate than 4%. As GST is very technical, most people are unaware how it will impact them.When will the GST rate be reviewed?Recent media statement on its impact did not improve opinion on the introduction of GST. It is reported that under the sales and services tax system, the burden on the poor is 2.38%, but under the GST it will be 2.17%. For the higher income group, the tax burden will be reduced from 13% to 2.74%, according to the Finance Ministry. The overall savings for households will be between RM14.52 and RM346.92 yearly. This clearly contradicts other statement from politicians, and the public perception, that the GST will be inflationary. But as no further details are provided on how the savings are arrived at, public sentiment remains negative on GST.CHAPTER 3EXPECTED IMPACT OF GST3.1 Impact on the people in the street.The public is generally concerned that the introduction of GST will hit their wallets directly. In an initial assessment, as the GST is expected to be lower than service tax, the bill for a restaurant meal will be 1% lower as the service tax rate is 5% and GST is 4%. For other services liable to service tax, a GST rate lower than service tax should result in a slight decrease in charges if the cost of the other components in providing the service remain the same.On goods that attract sales tax, the current rate seems higher than the proposed GST, hence there might be a reduction if there is no further adjustment. Current rates are as follows Fruits, certain foodstuff and building materials (5%) General goods, including motor vehicle (10%) Liquor and alcoholic drinks (20%) Cigarette and cheroots (25%)For hawkers even though they do not have a turnover of RM500,000 yearly, so are not required collect GST, the material procured, for example, noodles, fish balls, processed meat, chicken, equipments for the stall may be subjected to GST, resulting in price hike. But without detailed knowledge or mapping, or even information on the duties charged, the people are uncertain whether the prices of goods and services will remain stagnant, increase or decrease.3.2 IMPACT ON BUSINESSES.The implementation of GST is expected to impact business in the following mannerCompliance costs are expected to be incurred as there is requirement to track the input tax and output tax to determine refund or tax to be submitted. Even though some Malaysian companies are already paying sales tax or service tax, there was no input tax to be monitored and accounted for to offset against output tax.Business process and procurement need to be mapped out, especially with respect to suppliers and promotional items. For example, a new car attract GST, but items provided for free during promotion like sports rims or a GPS system may not be eligible for an input tax claim. Likewise the corporate souvenirs and h ampers given out by businesses may not be eligible. The procurement department should start detailing the sales tax or the existing tax paid for their items used a raw material. As the GST is expected to be lower than most current indirect tax, there should be some potential cost savings. This is also to avoid being overcharged by supplier that intends to add the GST over the existing price of its supplies after sales tax, there should be some potential cost saving.Human resource factor New staff may need to be employed to ensure a business is compliant and conversant with the GST requirement. As most staff have not been exposed to GST, training needs to be conducted.Accounting system and account payable The business would require an appropriate accounting system to keep track of the GST amounts. Most systems could be upgraded, and it is important to notify software vendors to test run the data to avoid any potential complication.Cash flow management Businesses should be aware that output GST may have to be settled before settlement of sales invoices by customer. Meanwhile, payables on which input tax has been claimed but remains unpaid after six months have to be accounted as output tax and are to be reclaimed as input tax only after payment is made. Businesses are concerned about the timeliness of the refund process as delays would results in a higher working capital cost.In addition, businesses that have thin margins are worried about the speed of the refund for input tax, especially if the business is mainly exported-oriented and procure its raw material locally.3.3 OTHER IMPACTSThe expected impact on corporate and income taxes are as published in the news recently. Deputy Finance Minister Chor Chee Heung quoted that Malaysia will see a gradual reduction in its corporate and income tax rates once the proposed Goods and Services Tax (GST) is in place by mid-2011.He does not think that there was a timeline for achieving this reduction in corporate and income taxes, as this is a long-term objective of the government. Once the GST come into play, it will be a broad based tax and the trend is, once GST is implemented, corporate and income taxes will gradually be reduced.Chor also disclosed that businesses related to services such as those in the food and transportation sectors, would be exempted from the proposed GST. He gave assurance that the cost of living and lifestyle of the people would not increase or be affected with the implementation of a GST.He also added that the implementation of GST would not cause inflation. Once the GST is in, the service tax and sales tax (now imposed) would be abolished. Both taxes are quite high at 10 per cent and five per cent respectively. The GST at four per cent is considered very low.Meanwhile, the Finance Ministrys Tax Review Panel Chairman, Ms. Kamariah Hussain, said there would be revenue gains of about 1.0 Billion Ringgit for the government with the GST implementation.She explained that the int roduction of the GST was part of an overall tax reform in the country. With the GST, the government would have a better mix of revenue, and not be too dependent on income tax and petroleum income.Second Finance Minister, Ahmad Husni Hanadzlah had indicated that while the GST would replace the existing sales and services taxes, it would not put pressure on prices and to ease the burden of consumers, staple foods such as rice, sugar, cooking oil and flour would be exempted from it.3.3.1 IMPACT OF GST ON SMALL MEDIUM ENTERPRISE (SME).SMEs form the backbone of the business activities of a nation. Other than encouraging the growth of new industries such as tourism and biotechnology-based industries, the Government (2004 Budget Proposals) too has singled out SMEs to spearhead domestic growth.However, there is a group of unhappy people representing non-governmental organizations (NGOs) and the public who have expressed their non-approval for the introduction of the proposed GST. Their main argument is that GST favours the rich and burdens the poor at large. Their contention is that it will burden the people and contribute to the widening gap between the rich and the poor, not to mention the rise in the inflation rate?.However, tax practitioner, Beh Tok Koay is of the opinion that perhaps this small group lacks an understanding of the whole system of GST. It is supposed to be broadbased and will replace the service and sales tax system, and this in turn will help to reduce income tax rates?. There could be two GST rates a lower rate for SMEs and a higher rate for large enterprises. Imposing two GST rates is, however, difficult to administer as they provide ample room for tax avoidance and increase compliance cost. Lowering the compliance cost of GST would ease the burden of SMEs. If there is convincing data to show that the compliance cost of SMEs are lower if the accounts are computerized, then the Government could provide software packages to the licensees to enable them to correctly compute GST. Free training and seminars including visits should be extended to SMEs to enable them to have a better understanding of the compliance requirements. One other option is to exempt small businesses from GST altogether but such a decision too has its drawbacks.The Government has to analyze the revenue gain as compared to the compliance cost before making a decision to determine the threshold limit. With the two-year window period before GST is in force, all of us have a role to play in contributing towards the development of a better broad-based consumption tax system which ultimately would help reduce the rates of income tax. No doubt, everyone especially the SMEs will eagerly await the final introduction of the GST system and the extent of the expected income tax rate cuts.The business community, NGO and charity organization are concerned about the ability of the authorities to implement GST smoothly. Australia, for example, had to bring in foreign exp erts to help in rollout of GST. It would undermine investor confidence if the GST is not implemented in a structured manner with minimal hiccup.Burdening the poor and those economically vulnerable Some 32% of the household in Malaysia have an income under RM2,000 per month. The introduction of GST without the necessary revamp of subsidies will result in a heavier financial burden on poor and low-income families. Families with an income below RM2,000 a month do not have to pay personal income tax. With GST, things that are not basic necessities toys, processed food, can food, packet drinks, and so on, could increase existing inflationary pressures. The ongoing restructuring of the subsidy will also create the tension, discomfort and dissatisfaction as people eligible for subsidy could unintentionally be left out as the government establishes and tries to refine its method of distribution.CHAPTER 44.0 CONCLUSIONGST is unavoidable. It will just be a matter of time when it will be impl emented. It may not be a perfect system, but has worked well as a revenue base for other countries. Malaysias problem may lie more in public education, implementation and enforcement.To move forward, Malaysia has to conform to the free trade vision of ASEAN and cannot lag behind the other countries. As of today, apart from Malaysia, only Myanmar and Brunei has yet to implement the GST. GST modernises the tax system by addressing tax evasion committed by free riders who want every benefit but refuse to pay for it, or rather have others to pay for them. GST will certainly be a good platform to increase the Governments revenue. Concerns of it being regressive can be overcome by careful and prudent classifications of zero rated supplies and exempt supplies for essential items as against standard supplies for non essential and luxury items.One good point of starting late is the ability to learn from the mistakes of others. The government has to be fully transparent in the implementation of the proposed GST.In this borderless world, news and knowledge cannot be curbed. The masses are getting more intelligent and informed. It will not be prudent for the government of the day not to move forward towards a more modern tax system. Rather than blind opposition, critics should provide examples and lessons learnt from the weaknesses of other nations in the implementation of GST or VAT.However, based from past experience, the skeptism voiced is understandable. We have heard of past Auditor General Reports on the wastage and the leakage of public funds into the pockets of the well connected of RM 25 screw drivers being bought through tender at a price of RM200 commissions running into millions of ringgit for the purchase of Sukhov jets and submarines and billions swallowed in the PKFZ scandal. The sums involved are astronomical. Then we have newly built hospitals that cannot be used, court room complexes with leaked ceilings and stadium roofs that collapsed in the absence of even a small earthquake.So, whether the GST will finally proved to be good or bad for the country will remain a question mark until its actual implementation. The actual salary increase as promised by the government might not be the expected pot of gold at the end of the rainbow if the GST is not properly implemented.