What is GST?
GST (Goods and Services Tax) is consumption tax that charged the buyers to pay for a wide range of domestic and international products as well as goods and services. It is also called Value Added Tax (VAT) in some countries. GST is a multi-stage tax on domestic consumption levied on taxable supplies of goods and services. GST is imposed on every level of a product from raw materials all the way to finished goods. However, consumers still need to pay income tax as GST and income tax is totally different. It is a consumption tax charged on imports items and also value added to goods and services provided by a business to the end user. Goods And Services Tax will be borne by the end-user or consumer and is not intended to add burden to businesses. GST is actually a tax to replace our existing sales tax and service tax in Malaysia. The Government has proposed an initial GST rate of 4% which is among the lowest rates in the world. Some basic necessities such as essential food will be zero-rated (0%) which means that the certain items are exempted from GST.
What are the benefits from changing to the GST system?
GST system is a comprehensive and effective way for the government to raise more revenue. The Governments have been turning to GST as a way to broaden the tax base and increase revenue especially when they are facing chronic budget deficits or growing expenditures. Thus, GST is a more stable flow of revenue for the Government compared to income tax because it allows a relatively larger coverage and it can extend its value addition at all stages in the production-distribution chain.
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In addition, GST can be a good source of revenue since it is income elastic and not sensitive to changes in prices of particular goods. Hence, many countries including Singapore, Thailand and Indonesia have adopted GST as a part of their fiscal strategy in order to successfully strengthen their finance position. Furthermore, GST can be used to act as a tool to manage the economy. For example, Britain reduced its Value Added Tax (VAT) standard rate from 17.5% to 15% in December 2008 to boost the consumer demand during the financial crisis.
Besides that, GSTÂ can be used to diversify the source of income for the Government to finance their expenditure. The Government has a narrow revenue base which is currently 40% depends on the contribution from petroleum sector. This is a risky situation for the Government because the contribution from petroleum sector is not a reliable source of revenue. The price of petroleum is volatile and the commodities are depleting natural resources. Thus, the weaknesses in the Governmentâ€™s financial position can be solved through the implementation of GST. The Government can also reduce the dependency on income tax revenue. Thus, it will assist the Government to improve the revenue mix and more tax revenue can be used for financing development or social projects.
Introduction of GST will also give the Government a golden opportunity to lower personal and corporate income tax rates. This has happened in our neighbor countries such as Singapore. A lower corporate and individual tax rates can encourage more foreign direct investment which can generate a stable and predictable tax income in both good and weak economic environment. Thus, a steady revenue base can be maintained which ultimately leads to overall economic growth.
One of the positive aspects of the GST system is its simplicity and transparency. It has a built-in control mechanism to track down defaulters. This will help to minimize the tax evasion by traders since the hidden sectors and industries are encouraged to be in the GST system.
Moreover, businesses that have registered for GST are only required to submit simplified tax returns based on prescribed formats. Hence, GST is expected to increase tax compliance and is easier to administer in view of its self-policing method. The implementation of GST will help to improve the maintenance of proper accounts and financial records. Therefore, this can lead to enhancement in the capability, effectiveness and transparency of tax administration and management.
GST is generally collected based on value added at each stage of supply chain, with the tax burden ultimately borne by the end consumer. This tax will be applicable whenever value is added to goods or a service. Therefore, both producers and consumers are fully aware of the tax liability. There is a difference with the existing sales tax and service tax where taxes are embedded in the price of goods and services. The consumers may not realize that they are actually bearing the taxes. Furthermore, consumers can expect to see a drop in the prices of certain goods and services. This is because some essential goods will be zero-rated while certain items will be exempted from GST. This will also enable the government to subsidize essential controlled items for the needy and thus improve the healthcare of the taxpayers.
Eliminates cascading effects
GST is preferable because it enables the minimization of distortions. The simple excises or the turnover taxes results in the unintended effect of taxing an output together with its input content more than once. Furthermore, it is also applying a tax on the earlier paid input tax leading to cascading. It causes producers to move their capital or resources away from the production of one output to another one which does not suffer from cascading. GST gives credit for input tax earlier paid, avoid the distortion as represented by misallocation or redirection of resources from one economic activity to another.
In addition, GST is the only tax that offers positive alternatives to the negative impact of indirect taxation. It is an accepted fact that commodity taxes create severe cascading effect as the taxes levied at earlier stages of production and distribution get taxed again and again at subsequent points. Consequently, instead of paying taxes on the value addition by a manufacturer, wholesaler or retailer, tax is paid on an inflated value, which includes taxes already paid at earlier stages. Such anomalies escalate prices and encourage vertical integration, where the manufacturer himself tries to wholesale and retail the goods. Vertical integration has been responsible for recession and unemployment particularly in developing countries. GST has an inbuilt device for reducing the cascading effect by restricting the levy to actual value addition. It encourages growth by confining tax burden to the net economic contribution of the taxpayer. Moreover, since the Capital Investment also gets tax relief, GST can accelerate economic growth by encouraging modernization and replacement. Therefore, it does not alter producersâ€™ decisions to produce particular commodities which, in general, should reflect the demands from consumers. However, for this benefit to occur, the GST must give credit for raw materials and capital goods.
Enable Improvement in International competitiveness
Furthermore, since GST has the potential for eliminating cascading, it is possible to design the GST in a manner that will ensure that exports are free from any tax burden (zero-rating). As a result the competitiveness of exports in international markets is enhanced. Even though exports are generally exempt from sales tax and the burden of input tax embedded in the exports is sought to be eliminated through the duty drawback mechanism, nevertheless, the process is cumbersome and the effect is not fully realized. As export competitiveness can be adversely influenced by then tax factor, the capacity to zero rates easily and accurately is an important aspect of the GST.
Although there are feasible options limiting the impact of cascading, the utility of multipoint GST goes much beyond that. Arresting cascading could be considered important to a regime of GST. Nevertheless, the institution of GST in fact should be conceived also as an instrument of tax administration, an administration that checks evasion through a self-monitoring feature, and an account based audit system that is regarded as superior to the system of physical verification. The latter already having fallen into disrepute for causing distress to tax filer needs to be eventually abandoned as its positive impact on revenue yield remains questionable. An account-based audit should not only tighten the tax net but raise revenues through a wider acceptability of a tax administration in the public eye. Much more administrative and documentation requirements arise from the introduction of GST. Compliance costs are bound to increase. Often, adverse situations arise when documentation is inadequate.
Question 1 (c)
How will GST affect the business environment?
A business with annual sales amounting to RM500,000 are required to register to charge GST. A business with sales amounting to less than RM500,000 may volunteer to register to charge GST and claim input tax credit. Businesses must understand their responsibilities under the GST regime and consider how these rules would apply to their own business operations, as failures to do so may result in the loss of credit for input taxes suffered and penalties for non-compliance with the law.
There are pros and cons of the new GST system. The good thing is that GST should have a positive impact on a business that makes taxable supplies. The cost of doing business will go down in the long run, because the business can use input tax to offset output tax or they may choose to pass on the additional costs to its consumer under the GST tax regime. Therefore business should seek to be a taxable with either zero-rated or standard-rated output as this will create less costs for them.
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The GST however requires good and proper record-keeping by businesses that need to be registered. For instances, businesses need to keep tax invoices from suppliers in order for them to claim for input tax credit on purchases.
As there is requirement for additional work to account for the tax, tracking of input tax paid and output tax, undertaking reconciliations and filings of GST returns, the businesses may need to incur additional compliance costs. 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.
In addition, business may need to employ new staff to ensure it is compliant and conversant with the GST requirement. Hence, special training needs to be conducted as most staff has not been exposed to GST. The business would also require an appropriate accounting system to keep track of the GST amounts. Most of the systems will need to be upgraded, and tailored to the profile of the business and the Malaysian GST law. Businesses that do not have internal expertise should consider engaging external advisors.
Another concern is that businesses will experience a cash flow impact. The businesses need to charge GST on sales, so if the customers are late in paying due to credit terms, the businesses will have to pay the tax first. Besides that ,when a business pays cash or has short credit periods from its suppliers, this may result in the business needing extra finances to purchase supplies when GST is first introduced.
Meanwhile, businesses should be aware that 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. Exported-oriented manufacturers will be particularly vulnerable if there is no timely refund of input tax credits. Therefore, the business will need to restructure their cash flow so as to prevent having cash flow problems once the government starts to implement GST.
GST affects all functional areas of business and therefore, businesses should also re-assess their entire business processes, including their supply chains, so as to optimize input tax recoveries. The sales department has to revise selling prices exclusive of GST. The procurement department must plan their purchases because currently many goods, particularly capital goods have an embedded sales tax in them which is not deductible or creditable. Besides that, business should also be aware that free gifts provided during promotion may not be eligible for an input tax claim.
On the other hand, buying the same goods by the business after GST would allow the business to claim a credit for the GST. This is an advantage for the business and the effective cost of the goods would then be lower.
As the household consumers are likely to shop before GST is introduced, it may be necessary for the businesses to do some stock planning to cater for a pre-GST rush. However, the businesses have to understand that when GST is introduced, that stock in hand may not entitle to any input tax credit.
Question 1 (d)
How will GST affect you, the consumer?
The Government has proposed an initial GST rate of 4%. Since the current sales and service tax are at rates exceeding the GST proposed rate of 4%, so there will not be any significant rise on the increase of prices. For goods with lesser sales and service tax, consumers have to pay slightly more with the GST at 4%. Not all goods and services will be charged to tax. They will be classified into three main categories, namely taxable, zero-rated and exempt.
GSTâ€™s implementation into goods and services is from the purchase of raw materials or start-up goods all the way to end-user or consumer products available for sale. GST charged to every level is passed on from the very first transaction to the next person and ultimately, the consumer. For example, some people will think that when the manufacturer sells goods to the agent, he or she pays 4% GST, then agent sells them to wholesaler, another 4% tax is imposed. When the goods are sold to the retailer, another 4% is added. In the end, when customers buy goods, another 4% is levied again. But the GST system does not work that way, there is no double taxation will be charged to consumers.
To ease the burden of low-income group, the Government will not imposed GST on certain basic food and properties include rice, sugar, vegetables, eggs, meats, poultry, domestic transportation, residential property, private health, education and Government services. But the consumers have to pay it if they buy food or services that fall into GST group. The final consumers will pay the tax upon purchasing the taxable goods and services. Purchases from supermarkets and hypermarkets will also be subjected to GST. Petrol stations, toll gates, parking lots, will charge GST and the final consumer is the one who absorbs it all. However, there will be a number of outlets which will not charge GST. For example, anyone who buys a burger from a burger stall will not have to pay GST as these outlets will probably have a sales turnover which is below the prescribed threshold. Similarly, patients seeking medical treatment in clinics and hospitals will not be charged GST. Hence, consumer should understand GST properly.