“I’m trying to see us maintain our competition,” said an experienced indirect tax manager at a multinational oil company, who said she had been working weekends to get ready in time for SST, which replaced the unpopular goods and services tax (GST).
“We don’t want to be any less competitive from our competitors [and] we want to make sure we are in line with the legislation,” she told International Tax Review.
It is difficult for businesses to be patient when profits, reputation and market share are on the line.
As well as the uncertainty around how legislation and included/excluded item lists will develop, companies are struggling with a lack of guidance and having to make changes very quickly.
Adding to the uncertainty is the fact that much of the legislation is still in draft form. Finance Minister Lim Guan Eng has said that the government could still change its mind on whether some goods will be subject to the SST, but businesses are having to muddle through regardless.
“We will study all of these,” he said, referring to prawns, bicycles and motorcycles under 250cc. “We have been going around listening to feedback from the people. Some are asking that certain items affected by the SST be taken off the list. As a concerned government, we will do the needful.”
“Be patient,” added Lim, after a briefing on SST on September 1. “Give us some time and we will make the necessary changes by year’s end.”
Will companies be better or worse off?
The most immediate action companies should take, if they have not done so already, is to analyse whether or not they need to be registered for SST.
“The SST framework is a more targeted regime that only applies to manufacturers of taxable goods or persons providing specific taxable services,” said Yvonne Beh, partner in the tax practice group of Wong & Partners, which is a member firm of Baker McKenzie. “Hence, not all businesses who were previously registered under the GST would need to be registered under the SST regime.”
Many businesses will find that fewer, or even none, of their products are subject to SST. For those that were subject to GST, this will save a lot of time on compliance and allow for more competitive pricing as tax does not need to be applied.
Beh pointed out that the SST will bring in MYR 21 billion ($5 billion) less than GST did for the Malaysian government. Industries that will benefit include real estate and construction because SST does not apply to the sale of properties and may not apply to the leasing of heavy machinery.
“The scope of the SST is narrower than the GST,” said Saravana Kumar Segaran, partner at Lee Hishammuddin Allen & Gledhill. “Almost 60% of goods under the consumer price indexare exempted from sales tax while only a prescribed list of exhaustive services are taxable. For instance, consultancy, IT, management and engineering services are all taxable services but there is no guidance under legislation as to the scope of such services.”
However, most businesses expect to be worse off. While GST has an input tax credit mechanism – effectively allowing the tax burden to move down the supply chain and ultimately be passed to the end consumer – SST has no such mechanism.
“A particular industry which will likely be impacted will be the automotive industry as there will be a 10% sales tax rate for most imported motor vehicles and vehicles manufactured in Malaysia,” said Beh. “The retail sector will also likely see some impact from sales tax, in particular, imported luxury goods.”
The oil industry tax manager said: “As an individual I am very, very sad because coming from a tax background I know the consequences. From a business perspective, as well, it’s definitely hitting the businesses because… now service or sales tax has become a cost to the business.”
“It’s affected our pricing,” she added. “We’ve needed to renegotiate a lot of contracts.”
Similarities to the ‘old’ SST
The new SST regime, as it exists upon implementation and before any change, is largely similar to the old, pre-2015 SST. That is to say, it is two taxes – sales tax and services tax – and only listed items are subject to the tax, as opposed to GST where only listed items were excluded from the tax.
Irene Yong, partner at Shearn Delamore, said the difficulties for companies is the current period of transition from the GST regime to the SST, given the short time frame within which companies have to adjust.
However, there is a positive aspect. “As far as software and IT systems are concerned, those which had been used for GST can be migrated and adapted for SST, hence some cost savings can be expected,” she said.
Such is the confusion around the re-introduction of SST that even customs officials have confronted restaurant workers, demanding to know why they are imposing SST, reported Malaysian news outlet New Straits Times.
All eateries making more than MYR 1.5 million per year must pay SST, unless they are situated in a free trade zone, special or tax-free area.
“Don’t fault these outlets,” said Lim. “They are just being responsible and abiding by the law.”
The situation is in stark contrast to the 2015 introduction of GST, which was conducted smoothly – for businesses at least, but there were individuals rioting in protest – and with plenty of lead time.
“The law has been brought out very, very hastily,” said the oil industry indirect tax manager. “It’s the same body, the same tax authority that was [administrating] GST. When they rolled out GST I thought they did a very good job, I thought they were very organised.”
“The Malaysian tax authority did a great job because there was a lot of information available on the website, there had a lot of programmes where people were able to have sessions and dialogue, [the authorities would] speak to them, get their view and clarify their position.”
The very quick switch from GST back to SST is necessary for political reasons. The now-ruling Pakatan Harapan party, led by Mahathir Mohamad, swept to an unprecedented victory. Key to its success was a promise to repeal GST, which was deeply unpopular with poorer Malaysians, and replace it with SST.
“The tax authority now, moving from GST to SST, we can see that they are rushing because they have a deadline,” the indirect tax manager added.
The bills received Royal Assent on August 28, just four days before becoming effective – and further tinkering is likely until the end of the year, as Lim has stated.
Up-to-date versions of the proposed legislation, in both English and Malay, can be found on the dedicated Malaysia Sales & Service Tax website. The website also includes full lists of which goods and services are affected, and which regions are exempt for which aspects of the sales and services taxes.