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GST for the layperson in Malaysia — The Black Cactus
MARCH 14 — On 24th Of November, Prime Minister Dato’ Sri Mohd Najib Razak had announced the introduction of Goods And Services Tax ( also known as Value Added Tax ) to replace the existing Sales And Services Tax ( of 5 per cent ) in the near future. The date scheduled would be roughly in the third quarter of year 2011. It has faced stiff opposition upon tabling in Parliamentary sittings, stating that Malaysians are not ready to deal with the full brunt of a tax that would ultimately make end users ( consumers ) pay for the entire tax imposed on every purchase amounting to the initial 4 per cent proposed ( which will increase as it did in many other countries implementing this policy ).
The question remains whether the government and most importantly, the citizens of Malaysia, are prepared to embrace this new taxation system wholeheartedly when policy makers do not make it a point to educate the layperson the true nature of this policy and its mechanics. Though it was promised that this system would help bring in a total of RM1 billion in the first year of its implementation, many do not realise that there has been much outflight of capital due to
* Widespread corruption ( a simple example that would strike a chord among readers would be the PKFZ scandal which cost taxpayers around RM 17 billion — equivalent of 17 years of GST ).
* Wastages in expenditure of money in government coffers (for building crooked bridges linking Singapore )
Malaysia has been stuck with fiscal deficits for more than a decade. The budget deficit is projected to have ballooned to a record high of more than 7 per cent of the country’s gross domestic product (GDP) last year, although the Government is determined to bring that level down to 5.6 per cent of GDP this year, and less than 4 per cent of GDP by 2015. Apparently the Government’s revenues cannot keep pace with the growth of its operating and development expenditures over the 12 years.
There are more examples that could have been stated but the above gives a clear impression on how many issues that has to be dealt with before we start to give GST a chance.
Having said that, if GST implemented in the right atmosphere, could spur economic growth and prosperity. It would bring Malaysia closer towards trade liberalisation which is imperative if Malaysians wish to compete on a global business scale. This article will also highlight the benefits of GST shortly.
Hence, the main aim of this article would be raise awareness and educate the layperson on the street about how GST works, what are the stakes that are being raised with its implementation and how would GST affect an average consumer.
• Terminologies Made Easy / What Is GST?
• Terminologies Worth Understanding
Before proceeding further in explaining the details behind GST, it is worthwhile to have a grasp on the frequently used terminologies that one might encounter while reading about any taxation system. The appendix at the end of this article will serve as a reference which might make it easier to comprehend GST ( please read below ).
What Are The Types Of Taxes?
The taxpayers are taxed in two ways ( direct and indirect taxes ). Examples of direct taxes are income tax and road tax ( in which taxpayers will definitely realise their tax burden and pay to the government accordingly ). Another way of taxation is through indirect taxes, where taxpayers don’t realise that they are being taxed since the amount of tax is already included in the selling price ( namely GST ).
What Is GST?
GST basically means Goods And Services Tax ( or Value Added Tax ) which is scheduled to replace the current Sales Tax at 5 per cent. It was invented by a French economist called Maurice Laure in 1954.
GST is an indirect type of tax. The cost of tax is finally imposed on the consumer or end user though each step in the supply chain will collect tax and returned to the government. However, the supply chain can also claim back the GST included in the product that they buy ( a simple way how it works will be depicted in easy to understand diagram in Part 3 : The Mechanics Of GST ).
GST is crucial in the steps leading up to full trade liberalisation. This is done by compensating revenue loss (government money ) by reducing tariffs ( tax on imported goods ) while maintaining gains in production by moving producer prices to world prices. This will make Malaysian business market more competitive in the international market.
The problem is according to studies ( Emran & Stiglitz 2005 ) is that broader taxes like GST will reduce social welfare because developing countries like Malaysia has a large informal sector (refer appendix below for definition ).
What Is The Difference Between GST and Sales Tax?
Both sales tax and GST are consumption based taxed ( meaning it is based on how much and what you purchase ).
The main difference is that sales tax is charged on certain classes of locally manufactured goods and similar imported goods. Some goods are not charged if specifically exempted by order of the Ministry of Finance.
GST is broader, and each step of the process from manufacturer to retailer is taxed
* Tax placed on imported goods and consists of a few types namely — Revenue, Ad Valorem, Prohibitive and Protective
* Designed to increase government funds
* For example, a country not growing bananas can create tariff on importing bananas
* Hence this will allow collecting money from businesses that import bananas
* Economic activity that is neither taxed or monitored by government
Input Tax Credit
* An amount allowed to offset GST included in the price paid for getting a material
* There are some types of supplies that are not subject to GST. These are called GST-free supplies and input taxed supplies
GST Free Supplies
* Some supplies are not taxable and are called GST-free supplies.
* If a supply is GST-free, GST cannot be charged on the supply, but input tax credits may be available for anything acquired or imported for use in the enterprise.
* GST-free supplies include, but are not limited to:
* most food,
* most health services,
* most educational supplies,
* most child care services, and non-commercial activities of charities
Input Taxed Supplies
* If a supply is input taxed:
* GST is not charged on the supply, AND
* input tax credit entitlements are not accrued for anything acquired or imported to make the supply.
* Input taxed supplies include:
* financial supplies which include most transactions relating to money,
* supplies of residential rents,
* supplies of residential supplies (except for the sale of a new house),
* supplies of precious metals, and
* supplies of food by school tuckshops.
The Mechanics Of GST
This part will discuss briefly on how GST works in a nutshell. We will attempt to learn the mechanics of GST through a very easy example. Also what will be taught is the basic calculation anyone could do to determine how much of GST you are paying for any given goods purchased.
GST Made Easy
It is imperative to know that GST is paid at each process involved in the chain of supply. Businesses that has to be registered for GST has a subjective criteria based on the legislation of that particular country, for example
* In Singapore, any business involving more than 1 million Singaporean dollars for the past quarter of the year or exceeds that amount in 12 months has to be registered
* In Australia, all businesses with an annual turnover of A$50,000 or more ( A$100,000 or more for non-profit organisations ) has to register for GST
When a business is registered for GST, it can claim input tax credit ( read the appendix of the previous entry ) for goods, services or anything that is bought for the business from the Internal Revenue Board / Royal Malaysian Customs. This means that the GST taxes flow along the supply chain and is included in the price paid by the consumer. However remember that consumers cannot claim input tax credits.
Also it should be highlighted that GST rests on the supplier of goods and services, not on the consumer. So, even if the business does not include the GST in the price of goods and services supplied, it still has to pay it to the Internal Revenue Board eventually.
Day A In The Life Of GST
Here we are going to illustrate how GST works with a very simple example which is as realistic as it gets. We will set the GST at 4 per cent
• Pak Abu, a timber logger sells timber to Muthusamy, a furniture manufacturer, for RM220 ( including RM9 GST).
• Muthusamy pays the RM9 GST to the Internal Revenue Board
• Muthusamy uses the timber to make a table and sells it to Wai Kong, a furniture retailer, for RM440 (including RM 18 GST )
• Muthusamy is entitled to an input tax credit for the RM9 GST included in the price paid to Pak Abu.
• He offsets this RM9 against the RM18 payable on the supply of the table to Wai Kong and pays RM9 to the Internal Revenue Board
• Wai Kong sells the table to Isabella, a consumer, for RM550 (including RM22 GST)
• Wai Kong is entitled to an input tax credit for the RM18 GST included in the price paid to Muthusamy.
• He offsets this RM18 against the RM22 GST payable on the supply of the table to Isabella and pays RM4 to the Internal Revenue Board.
• Isabella purchased the table for RM550
• Isabella bears the full costs of theRM22 GST as consumers cannot claim input tax credits. Total: RM22
• Still don’t get it? It’s alright, let’s break it down again to all the calculations that were done in a very self explanatory manner
• Pak Abu sells to Muthusamy for RM220
* GST is included by calculating 4/100 x 220 = RM9 GST included to product
Muthusamy makes a table after purchasing from Pak Abu at RM220 ( including RM9 GST ) and sells it to Wai Kong for RM440 plus RM18 GST
* Muthusamy sells to Wai Kong for RM440 from the RM220 he purchased from Pak Abu
* So the Value Added for services here is 440 – 220 = RM220 ( he makes profit here )
* Then Muthusamy calculates the GST of his product by 4/100 x 440 = RM18 GST
* Muthusamy then is entitled to claim RM9 GST input tax credit charged on him by Pak Abu so, RM18 – 9 = RM9 GST paid by Muthusamy
Wai Kong sells the table to Isabella the consumer for RM550 ( RM550 – 440 = RM110 is the Value Added for service charges )
* The charged GST now 4/100 x RM550 = RM22 GST included to product
* Wai Kong can claim RM18 input tax credit ( by the GST charged by Muthusamy ) hence the GST paid by Wai Kong to the Internal Revenue Board is RM22 – 18 = RM4
Isabella as the consumer bears the total cost of tax
* This amounts up all the taxes in the chain of supply meaning RM9 + 9 + 4 = RM22 ( inclusive in the RM550 of the purchase amount )
Understand the whole process yet? If yes, go through once again at the table before the detail calculation narrated above and it will make more sense to you now. If you don’t get it, please read the example above slowly a couple of times and you will be able to figure it out easily. You don’t need to be an accountant to do this.
Reverse Engineering GST From A Product
Alright, so now that you have understood how GST is included in a particular product sold to the end user / consumer, now let us try to figure out how to reverse calculate the amount of GST in a product that might be purchased by you, the customer
* Say a watch is purchased at RM1000, how do you determine the GST charged on you?
* Simple, do a simple algebra like the following with ‘Y’ as the value before GST is added
* RM1000 = 4/100 x ‘Y’ + ‘Y’
* Hence, 1.04Y = RM1000
* Y = 1000 / 1.04 = RM962
* RM962 is the value before the addition of GST
* So the GST added is 1000 – 962 = RM38 to the consumer
Plain arithmetic. So long as the GST is 4 per cent you just need to divide the product price with 1.04, and if the GST is 10 per cent use 1.1 instead.
Practice Makes Perfect With GST
So there you have it, the secrets of GST revealed in a nutshell. And of course, most readers would be dumbfounded by the mathematics explained above. As with most things in life, have another ( or much more ) glances at the calculations and you will realize that it is simple once you get the hang of it. Let me emphasize once again, you need not be a financial analyst, economist or an accountant to figure it out ( I reasoned it out myself with just proper research )
The Rise And Fall Of GST
This section will discuss the technical problems any administrator and taxpayers that might face with the implementation of GST. A brief description on the advantages and disadvantages of GST will be narrated as well.
• Problems Related To Administrators ( Government )
• Proper Computer Knowledge And Trained Staff
An efficient computer system and staff capable of handling such technology is compulsory in order to fully carry out the accounting of GST without a hitch. This is required to ensure that auditing and checking revenues from GST is worked out properly.
Printing of GST invoices has to be counterfeit proof and administering the invoice has to be computer based plus has to be synchronized with all the system in the whole country.
Rate Of Tax And Exemption
Steps must be taken to choose a suitable tax rate that will not burden the poor. For example if a lower tax rate is imposed on necessities, this will only benefit the affluent. The rich would spend less but gain more benefits from the concession.
Impact On General Price Level
In the initial phases of implementation, there can be no denial that prices of items will increase. However according to studies, this might just a transient stage and thereafter, GST will not have a huge impact on inflation. This has been witnessed when GST was started in China in 1994 and in Australia. Hence, GST is seen as not inflationary or deflationary either depending on the implementation.
Problems Related To Taxpayers ( Consumers )
Keeping Track Of Accounting: With the implementation of GST businesses will need to keep their accounting records in check. However, most small businesses nowadays don’t have a proper accounting system of their own. It is worth to note that documentation and accounting records influence tax exemptions in the business.
Accounting records are highly useful when government officers perform audit or investigation.
In Singapore, accounting records has to be kept by a GST registered trader for at least 5 years.
The public and especially businesses need to be fully aware of the mechanics of GST. This will avoid unwarranted increases in price of goods and services. This will require a comprehensive education campaign.
The Fall Of GST
The following are the bane that plagues the implementation of GST in our country.
1. With a recent price hike in petrol, prices of commodities have increased. Do we need another burden called GST?
2. Income tax brackets for high earners are not as ‘expensive’ as middle-to-low income groups.
3. GST is tax on spending. Everything from parking fees to purchasing mattress. Even with GST-exempted items, this would still hit lower income groups in Malaysia.
4. Private sectors are not paying much to Malaysians, other more developed countries like Singapore could afford this due to higher wages & salaries.
5. Other countries such as Britain, India, Hong Kong, Japan and Singapore has GST - Doesn’t mean GST has to be implemented in Malaysia. Their economic status and way of gaining revenue varies from Malaysia.
6. Inflation may happen despite the staunch rhetoric to deny that fact. Introduction of GST, consumers will end up paying the ultimate price.
7. Corruption is rampant in Malaysia - So businesses has already included ‘corruption prices’ in goods & services. How does that not reflect additional costs to consumers?
8. Out of inflation pressures, higher prices for goods & services are sought.
The Rise Of GST
Instead of painting a grim picture on the perspectives of GST ever being implemented in Malaysia, here are a few goodies that GST could deliver to our doorsteps.
1. Implementation will not be abrupt. It will be a slow & steady tax preparation so that individuals and small businesses will not be adversely affected.
2. It will replace the 10+5 per cent services and goods tax. This means taxes are lower now - Consumers need not pay more for one area, but it’s divided into many other source of ‘tax’ payments.
3. GST rates are promised at 4 per cent, out of the normal 10 per cent or 5 per cent charged in restaurants.
4. Implementation will not occur until middle to late 2011 or 2012. Planning time is essential to not put ‘inflation pressure’ on small businesses.
5. Government’s coffers will increase. This will enable further development and budget control to the country, other than relying just on petroleum or income tax revenues.
6. Tax when consumed, not when earned is much better. It allows better control. Spending influences will be “Careful” and “More controlled” when purchasing on higher prices are made rather than “taxable incomes” generated from work.
7. It’s a broad-based tax system. Some items may be slightly more expensive & cheaper. It’s not a overall standardised taxation method.
The government has to weigh in the pros and cons as well as the correct timing of the implementation of GST so that the burden on the society will not be increased. Much issues has to be expunged ( notably inflation, corruption and accountability ) before the bold step of putting GST into action is done.
And the people of Malaysia, it is your duty to educate yourself on how GST works and how it will effect your livelihood.
1. Goods And Services Tax, Problems And Effects Of Implementation ( Abood Mohammad Salmeen Lebel )
2. Australian Trade And Taxation Department
3. Singaporean Trade And Internal Revenue Services
4. Making Sense Of GST, Star Online ( Cecilia Kok )
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