How the GST affects You!

What is the Goods and Services Tax (GST)?

Known across the world as either GST or VAT (value added tax), it is a broad-based consumption tax (tax on your spending!) which affects all parties in a multi-stage taxation system across the value chain from manufacturing to sales, it is based on a tax-on-value-add concept which avoids duplication of taxes. This is in contrast to both the Sales and Service Tax in Malaysia which is just added at one stage (Sales Tax at manufacturer level, and Service Tax at consumer level).

The Goods and Services Tax in Malaysia (GST) was initially mooted by the federal government in 2011 to replace the existing Sales and Service Taxes, but was met with much resistance from the public at large, partially due to the implication of a price hike in essential goods and services, but also partially due to the lack of clarity around the current consumption tax systems in Malaysia.

How does GST work in Malaysia?

In the current tax regime, the 10% Sales Tax (on manufacturing and imports) and 6% Service Tax (on the F&B and professional services industry) is collected by one party (usually the seller) and passed on to the tax authorities.

For example, in the previous 6% Service Tax regime, when you buy a cup of coffee from Starbucks that says RM15 on the menu, you pay RM15.90 (including the current Service Tax of 6%). Starbucks will keep RM15 and pass on RM0.90 to the tax authorities.

In a GST regime (6% GST in this calculation), the following happens:

1. Starbucks buys the coffee beans from the wholesaler to make your cup of coffee for RM10 (RM10+ 6% GST). The Wholesaler keeps RM10 and passes on RM0.60 from Starbucks to the tax authorities.

2. You buy that cup of coffee from Starbucks which the beans were used to make, and pay RM15.90 (RM15 + 6% GST). Starbucks now keeps RM15 and passes on RM0.30 to the tax authorities (RM0.90 - RM0.60). The reason why Starbucks only passes RM0.30 to the tax authorities is because they have effectively already 'paid' RM0.60 in tax earlier on the first RM10, and only RM0.30 tax is left to be paid on the RM5 "value-add".

How will the implementation of GST affect me?

As mentioned, the replacement of Sales and Service Tax with GST is intended to be revenue-neutral to the government's coffers, so in theory, to consumers this may represent a minimal effect to the aggregate prices of everyday goods and services

However, the obvious concern here is to make sure that businesses do not take advantage of just the fact that GST has been introduced as a reason to raise prices of goods and services indiscriminately. To this end, the Anti-Profiteering Act has been tabled to enable enforcement against such practices. In theory though, the multi-stage tax nature of the GST should allow the Customs department to aggregate pricing information far more accurately than they do currently, the implied monitoring of this should serve as a deterrent to unscrupulous businesses (will wait and see how things pan out!).