|Malaysia only introduced GST
in 2015, but the tax proved highly unpopular
Malaysia will bring in a sales and services tax (SST) in
September 2018 to replace the unpopular goods and services tax
(GST). Tax practitioners expect a "hybrid" SST regime that
retains some GST features.
Details around the new SST, which will be implemented on
September 1 2018, are thin, but it is safe to assume it will be
similar to the regime which preceded the GST, which was
implemented on April 1 2015.
In addition, Malaysia's tax authority, the Inland Revenue
Board of Malaysia, might abandon ongoing GST cases.
What can the new SST learn from GST?
"GST wasn't a failure," said Saravana Kumar Segaran, partner
at Lee Hishamuddin Allen & Gledhill, with a sigh. "It
contributed MYR 44 billion ($11 billion), it broadened the tax
base, in ensured proper tax compliance. In this sense it was a
Indeed, given the fall in oil prices shortly after Malaysia
introduced the tax in 2015, GST can be regarded as having
safeguarded government finances at a crucial time. However,
given that the new government has been able to half the budget
for the Prime Minister in less than a month, the public may be
less convinced of such an argument.
"From a political perspective, though, it was a failure,"
said Segaran. "There is a new government and whether you like
it or not, we have to support it. We have to sink or swim
together for the next five years, and they've done a lot in the
last month. There is cause for optimism."
While it is safe to say that GST is gone for good under the
new government, some elements of it may be retained.
"How will SST be introduced? I think it will be a hybrid
system of the old sales and service tax together with
compliance aspects of the GST law we have now, said Segaran.
"It may not have input tax, but they may require things like
"Like it or not, GST introduced transparency. I don't think
the government, when introducing SST, will want to forgo the
compliance aspects such as the filing of returns and things
like that. But the scope and application of SST will be
limited, I doubt it will be broad based. Especially given the
government's manifesto is to reduce the cost of living."
"One thing I will add is that if the government wants to
make SST successful, there must be transparency in the customs
department," Segaran concluded.
Details on the new SST will be released in the coming
months, but businesses should start planning immediately.
"There will be the foreseeable need for companies to
redeploy resources and to reconfigure accounting and IT systems
to transition from GST to SST, and this might contribute to an
increase in costs," said Yvonne Beh, partner at Baker McKenzie
Wong & Partners. "Many of the clients that we are advising
are beginning to review their pricing strategies to ensure the
SST incurred will not increase their bottom line costs."
Perks for the services sector
A number of sectors are set to benefit in the long term as
the country transitions to a new SST, most notably the service
sector, but challenges remain.
Beh said the pre-2015 service tax was imposed only on
selected services, such as hotels, food and drink and
professional services and, therefore, most of the service
industry could gain from the shift to a SST regime.
A challenge for businesses, though, will be that the old SST
did not have an input/output tax mechanism.
"Businesses will have to bear the tax unless they are able
to factor the tax cost into the price of products or services
sold, which may have implications to their profitability and
This is not to say, however, that GST was universally loved
by the business community. It was not administrated perfectly,
which sometimes led to delays.
"It should be noted that many businesses did find the
administrative costs associated with complying with the GST to
be high as well as the cash-flow costs due to delayed payments
of refunds," said Senthuran Elalingam, Asia Pacific indirect
tax clients, markets and industries leader at Deloitte
Until SST is re-introduced in a revised structure, the GST
has been zero rated. This means that while businesses will
still have to do the compliance work around the tax, Malaysians
will enjoy an indirect tax holiday for the next three
As a result, "businesses will likely see an increase in
overall consumption from consumers looking to benefit from
lower prices during this tax-free period", said Beh. "This will
be more evident for the luxury and retail industry and
particularly big ticket consumer purchases such as vehicles and
commercial properties." Tourism could also increase under the
zero-rated GST as there was no reduced GST rate for tourism
under the GST regime.
Prime Minister Mahathir Mohamad, who was also prime minister
previously for 22 years until 2003 and is now 94 years old, ran
on a ticket of anti-corruption. Many Malaysians were angry
about the 1MDB scandal, and Mahathir has started pursuing those
This also means that the new government is likely to enforce
anti-profiteering rules more strictly, so businesses must
ensure to pass on GST savings to their customers, said Beh.
This requirement will continue to apply when the new SST is
In addition, there will be a more robust attitude to fraud,
and leakage from the new SST is likely to be far lower than
under the pre-2015 SST.
It is also noteworthy that the new Finance Minister Lim Guan
Eng is facing corruption charges and will not be able to take
office until he is cleared. Mahathir is taking charge of the
finance ministry until such time.