The shift in the Malaysian tax landscape: GST coming into force as from 2015
Kah Seong Fan of Deloitte says it is essential for businesses to understand the impact of GST on their business and the operational, process and system changes that they must undertake to be GST-compliant by 2015.
With the introduction of goods and services tax (GST) at 6% taking effect from April 1 2015, Malaysia has announced the most impactful tax reform ever.
In recent weeks the Malaysian government has sent a very clear statement to both the international and local investment communities and the Malaysian public, that there will be no policy flip-flops and that no public opposition or rallies are going to derail GST implementation this time round.
With the passing of the GST Bill 2014 in the lower and upper houses in the Malaysian Parliament on April 7 and May 5 respectively it is now official that government dependency on direct taxes as its main revenue source will be rebalanced by GST.
The impetus for change
In effect, Malaysia has realised that the country could no longer rely on direct taxes collection to fund its development needs. A realisation supported by economic data such as:
The tax to GDP ratio dropped by 2.6% between 2000 and 2012
In 2012 taxes on incomes and profits (direct taxes) represented 71% of Malaysia's total revenue
Revenue from corporates accounts for 77% of total income taxes
As a trend revenues from income and profits taxes were increasing and revenues from consumption taxes declining
General consumption taxes accounted for 6% of total taxes in Malaysia in 2012
Specific consumption taxes (excise duties) accounted for 15% of total taxes in 2012
The revenue from taxes on goods and services (consumption taxes) declined steadily from 10% of GDP in 1990 to 4% in 2012. At the same time the share of consumption taxes in total revenues declined from 46% to 21%.
(Source: OECD Revenue Statistics in Asian Countries 2014: Trend in Indonesia and Malaysia)
The Malaysia fiscal budget has been in deficit since 1998 (16 years in a row), with the recent 2014 budget also projecting a deficit. This is clearly not sustainable in the long run, particularly the reliance on direct tax collection as the main source of revenue – dependent on a small pool of people (it is estimated that only 10% of the working population are taxpayers). It is clear that the tax burden at present is not shared evenly by the people of Malaysia.
OECD data on many countries that have adopted GST show that the tax, being one based on consumption rather than income, spreads the tax burden more evenly and widens the tax base. A broad based GST also has the potential to produce significant revenue (for example, by taxing the hidden economy) to help address the deficit problem. Accordingly a smooth introduction of GST in Malaysia is critical.
Outline of the GST regime
The proposed GST framework is quite similar to other VAT or GST frameworks that are being applied in many other countries. All suppIies of goods and services in Malaysia in furtherance of business will be subject to 6% GST. Importation of good and services into Malaysia will also be subject to GST. Two rates are proposed to help alleviate the regressive feature of GST:
1) Zero rates and exemptions for essential goods and services, and
2) A low standard rate for all other goods and services.
Table 1: Examples of zero rating and exemptions
The full list is available at the dedicated GST portal at www.gst.customs.gov.my.
Examples of zero-rated supplies
Examples of exempt supplies
• Exports - goods and services, i.e. including international services
• Agriculture products - fresh vegetables
• Foodstuff - rice, sugar, table salt, plain flour, cooking oil
• Livestock supplies - live animals, meat of cattle, buffaloes, goat, sheep and pig (fresh or frozen)
• Poultry - live and unprocessed meat of chicken and duck
• Egg (fresh and salted) and fish
• Supply of the first 300 units of electricity to domestic users
• Supply of treated water to domestic users
• Sale and lease of residential property
• Financial services (including life insurance and family takaful)
• Highway tolls
• Private health and education
• Domestic transportation of passengers for mass public transport by rail (KTM, LRT, ERL, Monorail, ships, boats, ferries, express bus, state bus, work bus, school bus, feeder bus and taxi)
• Land for agricultural purposes and land for public use (Government building and burial grounds)
Strictly, GST is not a new tax in Malaysia; but a replacement tax for the present services tax (6%) and sales tax (10%). Sales tax is a single-stage tax imposed on taxable goods manufactured locally and/or imported. Service tax is a single-stage tax levied and charged on any taxable services. It is hoped that GST will remove some of the known inefficiencies with these existing taxes such as:
Table 2: Current sales tax and service tax
• Narrow tax base
• Cascading and compounding tax
• No complete relief for export as there is no credit mechanism
• Transfer pricing and vertical integration – tax avoidance
• Classification issues – only selected taxable goods and services are subject to tax
• Sales tax productivity has been declining over the last seven years
The Royal Malaysian Customs (RMC) has been tasked by the government with regulation and administration of the GST regime. They have already set up a dedicated GST portal to update and upload information about the GST for taxpayers. The GST 2014 Bill and more than 50 general and industry-specific guides have been uploaded to the portal together with 26 type of forms (registration, scheme applications, GST returns, for example) for taxpayers.
The RMC has also been preparing both the public and businesses in Malaysia via a variety of free-of-charge forums, open dialogues, consultations and seminars nationwide, all of which are essential given the short implementation time of slightly less than a year. It is essential for businesses to understand the financial impact of GST on their business and the operational, process and system changes that they must undertake to be GST-compliant by 2015.
Kah Seong Fan