Wednesday, 27 June 2018

Brief IDEAS No 9 – Post-GST Malaysia: Recommendations for Reformed Sales and Services Tax (RSST)

By Adli Amirullah & Ali Salman

This paper was first published (June 2018) on the IDEAS website.

Executive Summary

This Brief IDEAS recommends that the government utilize the opportunity of the GST abolition and replacement with SST, to implement a new tax system that is transparent and effective, called a Reformed SST.

Based on experience from the previous GST and SST, we recommend the framework of the new tax system include:

Introduction

One of the most important promises on which Pakatan Harapan (PH) ran its GE 14 campaign was abolishment of the Goods and Services Tax (GST) that it viewed as a regressive, anti-poor tax (Pakatan Harapan, 2018). PH also promised to re-introduce the Sales and Services Tax (SST), which was replaced by GST in 2015, claiming that SST is fairer to both citizens and businesses. On 1st June 2018, PH fulfilled its first promise practically by reducing the GST to zero-rate. While the government now deliberates on the new SST, which will be levied in September, this Brief Ideas provides some thoughts on its structure thus hopefully making a contribution in an important fiscal policy debate. This paper considers the lessons learned from both the rocky implementation of GST and the imperfect SST that came before it. We recommend that rather than simply bring back the original SST, the government should introduce a new Reformed SST (RSST). We will use the term Reformed SST or RSST in this brief to refer to this proposed framework.

Business Perspectives

RSST should be a single stage tax without refunds

The sales tax component of SST was only paid at the initial stage of distribution, whereas GST was paid at every stage in the process. Businesses were able to offset GST paid on inputs against GST received. However, this led to a complex, burdensome and time consuming process for filing refunds.

Under GST, the businesses were performing the following functions:













RSST should return to single stage taxation. As a result, businesses will not be required to file any refunds and their payment to the treasury will be considered final liability.This will also increase the working capital which is critical to healthy functioning of all firms, but particularly SMEs, which are often run on private equity.
Under RSST[1], the businesses will be required to perform the following:








The government will need to consider how to avoid tax being paid on inputs in this scenario and should consult closely with industry on how best to do this. Under SST, raw material and other inputs could be purchased tax free by licensed manufacturers, but the process of acquiring these licenses was burdensome and bureaucratic - so this will need to be simplified.

RSST should maintain the higher threshold, and exempt export of goods and services

Under the previous SST regime, businesses were required to charge Sales Tax if their annual sales turnover exceeded RM100,000. When GST was introduced, the threshold increased to a minimum of RM500,000 of taxable return per annum or higher. When the threshold level increases, the marginal benefit from the collection of tax revenue will increase significantly. We recommend maintaining the minimum threshold of taxable return of RM500,000 for the RSST, to ease the burden on small businesses, and maximize the marginal benefit.

The government should also maintain the current practice from the GST regime of exempting the export of goods and services from the RSST, to encourage development of Malaysia’s export sectors.

Payment of RSST should be as simple as possible

According to the World Bank (2018) Ease of Doing Business report, Malaysia was ranked at number 73 in terms of paying taxes. Under the chapter of paying taxes, it records the taxes and mandatory contributions that a company must pay or withhold in a given year, as well as measuring the administrative burden in paying taxes. The rank is significantly lower than the 24th overall rank in the Ease of Doing Business that Malaysia enjoys.

This indicates that there is a wide margin by which the Malaysian government can improve the country’s ranking on ease of paying taxes by utilizing this opportunity of introducing a new tax.

Figure 3: Malaysian score on paying tax in Ease of Doing Business Index
Source: World Bank












The new SST should be business friendly by having standardised and simplified administration procedures, and incorporating GST best practices.

For instance, the modes of payment for SST should remain online, and the web-page needs to be user- friendly with explicit instructions. In addition, the time that businesses take to pay the tax needs to be revised. The government should ensure that businesses are encouraged to pay taxes promptly, with appropriate measures and incentives.

Establish Fund for RSST Compliance

The government established a fund to compensate for the costs associated with the introduction of GST, and a similar fund should be attached to the implementation of RSST. The government’s decision not to have GST will create extra disturbance for businesses and conversion to the new RSST platform will entail additional costs for businesses. We recommend an allocation of RM100 million for all SMEs, to cover the cost of installing software and imparting necessary training.

Consumer Perspectives

RSST should be transparent

A criticism of the previous SST regime was that the sales tax component of the final price paid for goods was not know to the consumer. GST improved the transparency of pricing as businesses were required by law to state the amount of GST charged in any given receipt. Under RSST, we recommend that the government maintain the same level of transparency as the GST regime by requiring businesses to state the amount of sales tax paid for a given product in the final receipt.This will require this information to be passed from the manufacturer along the supply chain to the retailer so that they can provide the information to the consumer. Unlike GST, the amount will not change at each stage. Businesses should not be required to report all their costs, or how much profit they are making, but since the sales tax is intended to be passed to the consumer it is reasonable to require that the exact amount is made know to them.This requirement for transparency will also support the government in enforcing fair practice among businesses once the new tax is introduced.

RSST should be fair, standardised and as broad as possible

When the GST was introduced it replaced the multiple rates of the SST with a flat rate of 6%. In order to reduce complexity and variability in prices we recommend that RSST should also adopt a standard rate for both the sales tax and service tax elements, and for different products.The government will need to consider carefully how to set the rate. Even if the rate for RSST is set at 6% or higher the amount is likely to be lower than under GST, as the tax is only applied at the initial stage. We propose an initial rate of 5%.

We also recommend that RSST maintain the exemptions of the GST regime, including the 30 plus items that were zero-rated. The coverage of taxable goods and services should also remain as it is under the GST regime.

A criticism of the SST was that sales and services taxes could “cascade” such that the consumer was paying a higher effective tax rate. This could occur when a consumer purchased a taxable good as part of taxable service, such as buying a soft drink in a hotel bar. In order to avoid this situation, we suggest that the government could require service providers to deduct the sales tax paid from the value of the bill before calculating the service tax. This should be possible, if the earlier recommendation of requiring that business state the amount of sales tax paid is adopted.

Government Perspectives

Maintain High Standards of Enforcement

Under SST, businesses were only required to acquire a license if they reached the RM100,000 threshold. Under the RSST, we recommend that businesses be required to register under Royal Malaysian Customs if they meet the proposed RM500,000 threshold, not just acquire a licence, as is the regular practice under GST. Registration of businesses will increase the transparency of the tax system and will enable customs officials to more easily identify businesses that are trying to escape from paying the new taxes.

Frequent reporting, record-keeping, and invoicing based on the practices introduced during the GST regime are highly recommended. Returns should be filed not later than the last day of the month after the end of every two months. These practices will discipline the businesses to be accountable and professional in money making and paying taxes thoroughly.

Reduce Unnecessary Government Expenditure

Since the government is expected to collect less revenue with the abolishment of GST, the federal government needs to exercise greater fiscal discipline. Prime Minister Tun Dr. Mahathir’s decision to abolish some of the departments in the Prime Minister’s Office (PMO) unit such as Land Public Transport Commission (SPAD) and Jabatan Hal Ehwal Khas (JASA) is a commendable move. The previous government has allocated RM17.43 billion for the PMO itself. Some of the bodies under PMO has a redundant role with existing ministries, such as SPAD and the Ministry of Transport, Perumahan 1 Malaysia (PR1MA) and Ministry of Housing and Local Government, and many more. Therefore, by reducing the budget allocated to PMO and restructuring some of these units into relevant ministries, the government may cut its expenditure and reduce fiscal deficits.

Conclusion

The government should use this opportunity to improve compliance, simplification and equity in Malaysia’s tax structure. Education of tax payers is critical to manage their expectations, as historical data is not supportive of the popular claim that GST caused price hikes. Businesses should support the new government measures by cooperating and adopting the new tax structure. RSST should be structured like a reformed tax and has to be made to look like one.

The policy recommendation on RSST as detailed in this brief tries to adapt the best parts of each tax system.The table[2] below provides a summary of the various similarities and differences between GST, SST, and the Reformed SST:


GST
SST
RSST
Rates
Standard Rate at 6%
Vary from 6 - 25%
Standard Rate at 5%
Registration
Mandatory threshold at RM500k per annum of taxable return
Requirement to be licensed if annual sales turnover exceeded RM100k
Mandatory threshold at least RM500k per annum of taxable return
Input Value Added Tax Deduction
Entitled to a credit of input tax
Licensed manufacturers entitled to deduction of sales tax paid on inputs. No deduction or recovery of input tax for services.
Simplified process for manufacturers to deduct sales tax on inputs. No deduction or recovery of input tax for services.
Invoicing
Required to issue invoices with detailed requirements as to the information the invoice must include.
Required to issue an invoice but no detailed requirements as to the information the invoice must include.
Required to issue invoices with detailed requirements as to the information the invoice must include.
Reporting
Must account for Malaysian GST in a return no later than the last day of the month following the end of his taxable period.
Required to file a service tax return or sales tax return within 28 days after the end of each two-month taxable period.
Required to file a tax return not later than last day of the month after the end of each two month period.
Record Keeping
Required to keep full and true records of all transactions for period of seven years
Required to keep all duplicate invoices, receipts, books of account for a period of six years
Required to keep full and true records of all transactions for a period of seven years


References

Department of Statistics Malaysia. (n.d.). Ministry of Finance Malaysia. (n.d.).

Pakatan Harapan. (2018). Buku Harapan: Rebuilding our nation fulfilling our hopes. Pakatan Harapan.

Schofield, M. (24 April, 2015).The Bureau of National Affairs. Retrieved 23 May, 2018, from Bloomberg BNA: https://www.bna.com/malaysias-new-gst-b17179925799/

World Bank. (2018). Doing Business 2018: Reforming to create jobs. World Bank Group.

This paper has been reviewed by Raja Kumaran, Executive Director of Indirect Tax Advisory Group (ITAG) at PWC.

Adli Amirullah is a researcher under the economics and business unit at IDEAS Research and Publications Division. He received his Bachelor’s Degree in Economics from the International Islamic University Malaysia (IIUM). He was a Royal Education Award recipient for 33rd IIUM Convocation who has shown outstanding performance in academic and co-curricular activities.


Ali Salman is Chief Executive Officer at IDEAS. An economist and public policy expert, he is author of more than thirty independent studies, reports and monographs on wide range of topics including regional trade, public finance, competition policy, innovation, and youth policy.


IDEAS is inspired by the vision of Tunku Abdul Rahman Putra al-Haj, the first Prime Minister of Malaysia. As a cross-partisan think tank, we work across the political spectrum to improve the level of understanding and acceptance of public policies based on the principles of rule of law, limited government, free markets and free individuals. On 2 September 2016, IDEAS was ranked as the 17th think tank to watch globally in a survey of more than 6,800 think tanks in 143 countries by the University of Pennsylvania’s 2015 Global Go To Think Tank Index Report.

Please support us by making a donation.You can make a contribution by cheque payable to “IDEAS Policy Research Berhad” or by transfer to our account CIMB 8008852042. We can only survive with your support.

© 2018 IDEAS. All rights reserved.


[1] Assuming 5% rate
[2] Based on analysis by Schofield (2015).

Thursday, 21 June 2018

World cup fever: How HR can keep staff in check

Author: Nurhuda Syed

This story originally appeared here: www.hrdmag.com.sg

With the 2018 FIFA World Cup set to kick off in Russia on Thursday (14 June), football fans in Singapore are gearing up for late nights at the local waterhole to root for their favourite teams.

Luckily for those who have to make their way to the office the next day, the favourable time difference between the two countries will not disrupt much of their sleep — with most matches taking place between 6 pm and midnight. Only about a fifth of the 64 games will air at 2 am Singapore time.

Regardless, employers may still face with a slip in discipline from some staff, so HRD got in touch with employment lawyers from Clyde & Co, Chris Holme, partner, and Corinna Harris, professional support lawyer, for a guide on handling possible issues from ardent sports fans.

Requests for time off

C&C: Inevitably during major sporting events, employers can receive a higher number of holiday requests. These should be dealt with in the normal way — on a first come, first served basis.
Employers should treat each request in the same way, without giving preference to some requests over others, as this could be deemed discriminatory.

A rise in absenteeism

C&C: Employers should not automatically assume that absence on the day of, or the day after, a big match is not genuine.

Before deciding whether disciplinary action is appropriate, employers should investigate the particular circumstances (including the employee’s explanation and any evidence for the absence, such as a doctor’s note).

Absenteeism is less likely if employees are made aware that absences are monitored and that unauthorised absence may lead to disciplinary action. At the same time, employees may not take non-genuine sickness absence if they are shown a degree of flexibility — such as allowing them to follow matches at work to some extent, or to leave work earlier and make up the time.

Working shorter days

C&C: The morning after the night before: what if employees come in late the day after a World Cup match?
Employers may decide not to take a strict approach, especially if the employee regularly works longer hours than required. But in other circumstances, employers may take action in the usual way, initially by speaking to the employee on an informal basis and then taking more formal action if this reoccurs.

Watching matches at work

C&C: If employees are allowed to use IT systems to watch or follow World Cup matches during work time, employers should provide guidance on what is permitted.
For example, it should be made clear that any such use must not be excessive and should not interfere with business needs, and whether there are limitations on what can be viewed or downloaded to work systems.

Showing inappropriate behaviour — “football hooligan-ism”

C&C: Healthy banter at work can be beneficial to the business, helping build team spirit and morale. That said, there is a risk of harassment or discrimination where rivalries create a hostile, degrading or intimidating working environment and if that happens, employers should take appropriate action.
Employers may consider taking positive steps to remind employees that such behaviour may lead to disciplinary action.

If employees are intoxicated at work, it will normally be appropriate to suspend them immediately. An investigation into their conduct should be carried out, which might include identifying whether there are any underlying reasons for this (such as alcoholism), before taking any disciplinary action.

If the inappropriate behaviour takes place outside work, employers should not assume that this will automatically lead to disciplinary action. It will usually depend whether the behaviour has any connection with the employee’s work and the extent to which it may bring the organisation into disrepute, taking into account the employee’s role and their behaviour.

Tuesday, 19 June 2018

Revenue increase in Malaysia 2018

Dave Ananth is a senior lawyer, a former Magistrate and advocate in Malaysia before taking up a position with the Inland Revenue Department in New Zealand as a Prosecutor. He now practises as a Tax Barrister, based in Auckland. He is an expert in taxation and tax policy. He also writes extensively on direct and indirect tax issues in Malaysia and New Zealand.  He is a consultant for Wolters Kluwer Malaysia. He can be reached at davetaxnz@gmail.com.




Taxes are the backbone of any government. It is important for a country to develop a stable tax policy that can withstand pressure and deliver revenue, especially during times of global uncertainty.

Malaysia has successfully diversified its economy from one that was initially agriculture and commodity-based, to now include robust manufacturing and services sectors. However, her economy is still reliant on agriculture and commodity-based industries. For example, Malaysia exported RM158.72 billion (17% of total exports) worth of mining and agriculture goods in 2017.[1] Reliance on such industries are inherently risky as commodity prices can be uncertain, due to external factors such as currency fluctuation, political and global demand.

Therefore, the focus should be on strengthening revenue collection and broadening revenue base without disrupting the lives of local residents and containing inflation.

With the removal of GST, the government stands to lose about RM44 billion per year, based on 2017 figures. The government estimates that with the implementation of SST, it stands to earn about RM4 billion[2] in 2018, and RM30 billion[3] in a calendar year.

The Finance Ministry has announced that federal government debt has exceeded RM1 trillion. It has identified RM10 billion of expenditure cuts, which includes downsizing, delaying or cancelling expensive projects and non-urgent spending. These measures will no doubt help, however, they are short-term. What the government needs to look at is creating tax policies that remain competitive and promote sustainable revenue increase.  

The focus of Malaysia’s revenue policies should be on identifying approaches to increase revenue by leveraging on existing opportunities rather than relying on products such as timber, oil and gas which are subject to market conditions.

Below are several options that the government may consider to increase its revenue collection.

Luxury tax

Luxury tax is a tax imposed on products or services that are deemed to be non-essential. Generally, it is a transactional tax, imposed on the consumer who purchases or uses the good or service. Luxury tax is usually associated with products enjoyed by the ultra-wealthy such as private jet plans, expensive jewelry and cars like Ferraris, Rolls Royce, etc. The administration of this tax could be placed under the Royal Malaysian Customs Department (RMCD). The RMCD shall determine the type of products that are considered “luxury” for tax purposes. However, the list of such products need to be reviewed over time, especially if Malaysia moves towards becoming a high-income nation.

Regulating charity services

The Registry of Societies Malaysia (ROS) is responsible for monitoring all societies in Malaysia, which includes non-profit organisations and charities. However, although most of the established charities operate in accordance with the law [especially if they are approved organisations under s 44(6) of the Income Tax Act 1967], there are small-scale, independent charities that operate with minimal supervision. As such, there may be a lack of control and transparency on how some charities are run, especially when it comes to fundraising.

A Charities Commission could be set up as a monitoring body under the ROS to govern the activities of charities in Malaysia. Its roles could include:

1. Regulating financing and fundraising activities of charities.
2. Ensuring that charities provide truthful information on their activities and expenditure.
3. Monitoring charities to ensure that there are no tax abuses.

The Charities Commission should work closely with the ROS and Inland Revenue Board (IRB) to ensure that there are no tax fraud/abuse of financing for personal gain. Their activities will assist in promoting public trust and confidence in the charitable sector domestically and internationally as it will bring about good governance and transparency among charitable organisations.[4]

Compulsory tax number for ALL

Rather than imposing new direct taxes, the Government could focus on enforcing tax compliance among the existing income-earning population in Malaysia.

To do so, the government could consider imposing a requirement where residents and non-residents who open bank accounts in Malaysia must register with the IRB and obtain an income tax number. Having an income tax number would enlarge the pool of potential taxpayers under the IRB’s purview. This should make it easier for the IRB to monitor taxpayers’ activities and determine if they would be liable to tax.

This allows the establishment of a stronger paper trail as there will be communications between the IRB and the banks via Bank Negara Malaysia (BNM). Apart from that, banks are required to report any suspicious transactions to BNM which should allow IRB to act quickly on any possible tax evasion cases.
 
Increase timber premium and/or mining royalty

The government can take advantage of the low value of the ringgit. As it has made Malaysian goods cheaper overseas, this could possibly lead to an increase in foreign demand for such goods. Currently, state governments impose timber premium and/or mining royalties. In 2017, Sarawak increased its hill timber premium from RM0.80 to RM50 per metric meter of logs harvested.[5] As such, other state governments can consider increasing its timber premium and/or mining royalties.

Tax on “worldwide income” for individual residents

Income tax in Malaysia is imposed on income accruing in or derived from Malaysia except for residents engaged in banking, air and shipping enterprises, which are taxed on a worldwide basis.

Malaysia could consider shifting to the worldwide taxation system to increase its revenue, where individual taxpayers are taxable on their worldwide income regardless of where the income is derived. For example, Malaysians who are working or doing business abroad, but with families staying in Malaysia, should be liable for tax in Malaysia.

New Zealand is an example of country that taxes its individual residents on their global income.

Taxing foreign workers

As a rule, there is no tax for those with income less than RM5,000 per month. However, this privilege is also enjoyed by all foreign workers who fulfill the tax residency rules.

As they also benefit from the use of Malaysian facilities (e.g., public amenities), foreign workers who earn above RM2,000 or RM3,000 should be subject to Malaysian taxes. Subject to a comprehensive study, a flat rate tax of, say 2% to 5%, could be imposed on these individuals.

Tax on money transfer using non-banking facilities (eg Western Union)

In Malaysia, there are no taxes imposed on remittances overseas. Tax is only imposed on the fee charged by the remittance company. However, with GST abolished in Malaysia, no tax will be imposed on remittance transactions. At time of writing, it is unclear whether service tax under the SST regime will be imposed on such services.

The government can consider imposing a tax of RM5 for remittance below RM1,000 and RM10 for remittance above RM1,000, per transaction. By doing so, the government could gain some revenue from the outflow of money.

There is an estimated 1.7 million legal foreign workers in Malaysia as of 30 June 2017.[6] By merely taxing the legal foreign workers would yield a revenue of at least RM8 million, i.e. 1.7 million x RM5 = RM8.5 million. By imposing a tax on the money transfer, this could possibly act as a catalyst to the legalisation of illegal foreign workers.

The implementation of revenue policies must be strategic and aligned to the government’s fiscal development plans. The abovementioned methods will bring in additional revenue, however, there are other factors to consider – compatibility with the Malaysian taxation policy and socio-economic issues, etc. – before any implementation is done.




[1] Anon., 2017. Components of Malaysia's Exports 2017. [Online]
Available at: http://www.matrade.gov.my/en/28-malaysian-exporters/trade-statistics/3793-components-of-malaysias-exports-2017
[Accessed 11 June 2018].
[2] Amarthalingam, S., 2018. RM21b GST revenue loss to be plugged. [Online]
Available at: http://www.theedgemarkets.com/article/rm21b-gst-revenue-loss-be-plugged
[Accessed 11 June 2018].
[3] Hassan, H., 2018. Malaysia keeps deficit goal despite GST removal. [Online]
Available at: https://www.straitstimes.com/asia/se-asia/malaysia-keeps-deficit-goal-despite-gst-removal
[Accessed 11 June 2018].
[4] For further reading on the governance of charities, please see “Not all charities are honourable and honest”.
[5] T.W., R., 2017. Sarawak to raise tax on hill timber by more than 6,000%. [Online]
Available at: http://www.freemalaysiatoday.com/category/nation/2017/05/09/sarawak-to-raise-tax-on-hill-timber-by-more-than-6000/
[Accessed 14 June 2018].
[6] Nasa, A., 2017. More than 1.7 million foreign workers in Malaysia; majority from Indonesia. [Online]
Available at: https://www.nst.com.my/news/nation/2017/07/261418/more-17-million-foreign-workers-malaysia-majority-indonesia
[Accessed 14 June 2018].

Monday, 11 June 2018

Pictorial Employment Contracts — a legitimate craze, or just plain crazy?


Author: Stephen Booth (Coleman Greig)





Now here’s a new idea: the pictorial employment contract.
As part of its focus on innovation, global engineering and advisory company Aurecon is introducing a visual employment contract, effectively eliminating the bulk of the text from their employment contracts by using pictures to accompany the contract’s wording. As reported in the Australian Financial Review, this is the first time that an Australian company has introduced this type of visual employment contract.

The drive behind utilising the visual contract is to make the document as accessible and understandable as possible for those involved in the employment process. Aurecon is also hoping that the introduction of this new type of contract will result in a focus on the day-to-day relationships between the company and their employees, rather than creating an overload of threatening (and for some, difficult to understand) legal text.