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What can Malaysia’s new SST learn from GST?

Petronas Towers

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.


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 success."

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 tax invoicing."

"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 competitiveness.

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 Malaysia.

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 months.

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 allegedly involved.

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 introduced.

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.

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