Understanding GST and SST
Published on: Saturday, December 27, 2014
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The impending GST in Malaysia had put many in confusion though the Customs department and other relevant authorities had conducted road-shows in the country to explain the benefits of introducing GST as one of our taxation systems.
I have read and seen postings in the social media from several people who made an allegation that the GST which is to be enforced only in April 2015 had already been in effect. Emotionally, they criticised the government as liars. To prove their unhappiness, they confidently showed the bills they had received from licensed outlets that charged them the 6pc GST without knowing the truth that that is a different type of tax.
The present acronym of GST is the Government Service Tax and not the proposed Goods and Services Tax. They are unaware that service tax enforced under the Service Tax Acts 1975 and which had undergone amended tax rates since its inception had already been implemented since 1975. The initial rate of Service Tax was 5pc but later it was raised to 6pc and that rate remains until today.
The present Service Tax are collected by business outlets such as restaurants, hotels, bars, night clubs, workshops, law firms, Telekom, Astro and other service providers and which had reached the stipulated threshold are licensed under the Service Tax Acts 1975.
Therefore, their allegations that the government is not transparent with regard to this issue are not true.
Nonetheless, as far as the present service tax is concerned, the rate remains when the actual GST will be introduced in April 2015 since the present rate is equivalent to the rate the government had decided to implement except that it the present service tax may have disadvantages due to price manipulations.
The difference between the present Sales and Service Tax (SST) and the Goods and Services Tax (GST) is the level of taxation. SST is more of a direct taxation.
For sales tax which is regulated under Sales Tax Acts 1972, only the local manufacturers who reached the required threshold are licensed under the acts and taxed with the rate of 10pc while the process of the distribution of goods beginning from the manufacturer of goods or the initial services provider to the wholesalers, the retailers and finally to the consumers are non-taxable.
The process may affect the end-prices of the delivered goods or services. The prices can be higher or lower from the actual prices. This is because the line of distribution from the manufacturers to the consumers is a free-for-all profit taking that, in turn, can impact the discrepancies of the actual consumers’ prices tag.
It is the same with service tax that has a rate of 6pc. The end-services-products may be influenced by the uncontrolled pricing of the services in the distribution lines, thus negating the true prices of the services rendered to the consumers.
However, with the introduction of GST, the prices during the distribution of manufactured goods and the rendering of services from the first suppliers of goods and services to the consumers are monitored by the GST Acts 2014 where every level of distributions are regulated by such law until it reached the consumers.
Therefore, the prices at the retail store should not bear any differences with other retailers because with a constant GST rate of 6pc, a constant price should be the norm for every level of retailers.
Hence, the winners are always the consumers. The only problem that will come along with the introduction of this tax to the end-users namely the purchasers is the addition of the 6pc GST which can be construed as an additional prices compared to the present method of GST-less payments.
Presently, the price seem non-addition of tax but in actual fact the compounding of prices during the process of transferring the goods and services from the initial producers to the consumers may have been manipulated with unknown profit.
Now let us dissect a bit about the experiences of countries such as the UK and the USA during the infancy implementations of GST/VAT in their respective countries. The article titled VAT/GST: The UK Experience Revisited published in the Revenue Law Journal, Volume 10, Issue 1, Article 5 written by James Simon on January 1, 2000 revealed the UK and the USA experiences when they were about to implement GST/VAT.
In his introduction, James Simon also quoted Warren N. (1993) that described the experiences of seven countries including the UK and which subsequently influenced Australia to adopt that same taxation systems. He found that every country that implements this type of tax are met with arguments of its usefulness.
Simon James (2000) noted that the three main arguments that usually go with the GST implementation are firstly, its influence on prices and wages. Secondly, the assumption effects that it will stifle the growth of distribution of income and thirdly the anticipation of higher administrative costs. And I think, these fears are also in the minds of most Malaysians.
According to Simon James (2000), the UK which introduced the VAT tax systems in 1973 began with the rate of 10pc which was later reduced to 8pc in 1974. However, luxury rate of 25pc on several selected items was enforced in 1975.
The big differences between the two rates of two categories of items led to further reduction to 12.5pc in 1976 and because it is quite difficult to implement as it involved permit reduction for income tax, it was amalgamated at 15pc in 1979. Subsequently, due to the negative impact of the poll tax in 1991, the tax was once again raised to 17.5pc.
Meanwhile in the USA, they were also having the interest to implement such a tax. Irving Fisher (1906) believed that income does not necessarily be the money that is saved. Later, he referred it as taxation.
He clearly stated that “The income from our capital is simply that which it does for us. Whether it brings us money or other return does not matter; the flow of its services is its income”.
But after Australia endorsed the implementation of GST in 2000, the US still did not follow suit and became the only member of the Organization for Economic Cooperation and Development (OECD) that had not decided to be among the GST/VAT implementers.
Currently, there are 160 countries that had already implemented GST/VAT. 53 countries from Europe, 44 from Africa, 19 each from Asia and Caribbean, Central and North America and 7 each from Asean and Oceania, respectively.
The highest rate is 40pc being implemented in Gambia and the lowest rate of 5pc can be traced in 7 countries namely Canada, Japan, Taiwan, Iran, Jersey, Niue and Nigeria. The pioneers of GST/VAT are initiated by two Latin countries, Brazil and Honduras.
These two South Americans countries started this type of tax in 1964. And in 2015, Malaysia will be among the newest that will be added to the lists of countries practising the GST. It will be regulated under the Goods and Services Tax 2014.
Now, what are the effects of GST on Malaysia’s economy? The Ministry of Finance through its portal had anticipated that though it stimulates the economy, the people may control their spending habits when they feel that they are taxed for their basic needs.
The Ministry is confident that the business operating costs can be reduced with the introduction of special schemes to alleviate the cash flow problems, the credit offset mechanism and a claimable input tax based on the production of verifiable genuine invoices.
Other plausible effects that will take place will be its influence on competitive pricing, competitive export because of it becoming zero-rated and the increase in GDP.
On the other hands, it is predicted that the reduction of consumers’ consumption of goods and services will prevail because they tend to be more selective in their spending habits.
They may prefer to purchase only non-taxable goods to avoid paying GST.
Whether GST can help to fulfil the hopes of strengthening Malaysia economy is yet to be seen. What is sure to happen is that the people will be ushered to GST-phobias in the coming year, 2015.
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