GST in Malaysia : So How?

An article by: Dr Veerinderjeet Singh, Chairman of Taxand Malaysia Sdn Bhd

(Chairman for the upcoming WK Malaysia GST Compliance Conferences held in both Malaysia and Singapore)

So we saw that the introduction of the GST on 1 April 2015 was not an April Fool’s joke after all. It is here and as usual, there were some hiccups and uncertainty that some businesses faced and that was to be expected.

GST a replacement tax?

What was a good start was that on April Fool’s day, a number of car distributors announced price reductions of most models of cars . A very positive thing indeed as we all know that GST is a replacement tax and not a new tax other than for those goods and services that were never subjected to a sales tax or service tax before. In some cases, a sales tax at 10% is being replaced by a GST at 6%... so this should translate into some savings!

The GST Unit of the Customs Department has been inundated over the last year or so with many issues and questions related to treatment of various transactions and business arrangements and it has tried to respond to most though some remain unanswered to this day. In some cases, the clarifications given were cut and dried responses directly drawn from the legislation whereas the relevant industry was seeking for practical approaches to deal with the many different ways business is being currently undertaken.

There will no doubt be mistakes and we could see some interesting situations how some outlets were issuing invoices. Some examples of these invoices have gone viral and have been circulated via electronic media.

Reality Check

What we must all understand is that the GST is here to stay and consumers will do well to be active and ask questions of the businesses if they feel that the amount stated in the invoice does not look right. Remember that all invoices which have a GST included therein must have a valid GST registration number stated. Consumers need to be vigilant and raise issues through the various modes made available on the websites of the agencies involved in enforcing the GST and the Price Control & Anti-Profiteering legislation.

What is now essential is that the tax authorities must move about enforcing the GST in an inclusive manner taking into account that many traders will make mistakes and education and guidance is the way at least for the first year. The onus is now on the tax authorities to meet their target in terms of GST revenue. The onus is also on the Ministry of Domestic Trade, Co-operatives & Consumerism which has to counter profiteering by traders who increase their prices unnecessarily and this will be a challenging task indeed.

No doubt, there will be numerous questions and issues surrounding the preparation to be GST-compliant, but in the midst of these uncertainties, one thing is certain -- businesses have to comply. For those that are still not ready (and there are bound to be some!) , you must review processes and supply chains to identify the incidence of GST at each stage of the supply chain, review contracts and trading terms and ensure appropriate systems and documentation are in place to account for and ensure GST compliance. 

The Nitty-Gritty

A GST implementation exercise involves an analysis of all expenditure and revenue streams arising from various business processes within the supply chain of the business. The incidence of GST has to be identified for each stage of those processes. Contracts and trading terms  have to be reviewed for GST implications. Intercompany transactions need to be reviewed to determine the exposure to GST. If intercompany arrangements are exposed to GST, there may be a need to reassess the structure and terms of those arrangements to make them more efficient. It is necessary to understand the incidence of input GST on a business (i.e. is it recoverable or not recoverable) in undertaking a pricing review exercise.

Enterprise information systems have to be reconfigured to incorporate GST modules into the systems. Crucially, accounting and billing systems will have to produce GST reports and tax invoices so as to ensure GST compliance in an accurate and timely manner, especially in view of the penalty provisions for non-compliance under the GST framework.  Employees need to be trained on the application of GST on business processes.

GST not a business cost

In general, GST is not a cost to the business. This is because for businesses that are registered for GST purposes, the GST paid on the business inputs can be claimed (except for exempt goods/services and some blocked inputs) as tax credits against the output tax collected on sales. In other words, such businesses can claim the input taxes that they have paid on purchases of intermediate goods and services against the GST charged on the final goods and services that they have managed to sell.

For business organisations, preparing for GST has clearly involved much time and resources across different functions within the organisation. The authorities in turn must continue to improve on the relevant guidelines so as to provide certainty and clarity as well as to keep up with the times.

It is suggested that the existing GST law and regulations should continue to be monitored so that it takes into account the changes in business activities and also takes cognisance of developments in the legislation in other developed countries as in the next few years, the need to be in compliance with global GST or VAT guidelines and standards will become important.

The Government's Role

One key decision that ultimately has to be taken will be which branch of the tax administration shall be responsible for the GST. The organisational set-up in most developed countries with a GST suggests that the GST should be closely integrated with the income tax. Where the same officers deal with both taxes, joint audits are the rule. It has been argued that a comparison of both GST and income tax returns, and a comprehensive joint audit, provide the tax officer with a better overall view of the taxpayer’s business. In Malaysia, the Royal Customs Department currently administers indirect taxes incuding GST. However, there should be a move to bring about greater integration of the GST and income tax so as to reduce costs, counter evasion activities, etc. It is suggested that over the next few years, Malaysia must seriously consider integrating the Inland Revenue Board and the Customs Department so as to achieve greater efficiency and optimum results.

The fact remains that the theoretical simplicity of  a GST is, however, reduced in practice by political or administrative needs of Governments to have a long list of exempt and zero-rated items, to have separate regimes for certain businesses, etc. The system can operate more easily if exemptions are kept to a minimum, but in most countries with a GST system, certain businesses, goods and services are exempted. Malaysia is no exception other than the fact that for political expediency, a long list of exempted and zero-rated items was issued that has added more complexity to the GST and this will have consequences not least of which is the impact on the projected revenue expected to be collected. So, if we are thinking that GST will be a boon in terms of revenue generation, it will not be as it has been watered down tremendously but a review may be necessary after a few years depending on the economic situation and the income levels of the population and over time, if administered effectively, the GST should make a positive contribution.

However, we have to all ensure that the extra revenue generated will be utilised effectively to fund the development of the nation and so accountability of the spending of the revenue is a key component.

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Dr Veerinderjeet is Chairman of Taxand Malaysia Sdn Bhd which is a member of the TAXAND Global Organisation, the first global organisation of independent tax advisers with a presence in nearly 50 countries. He is a member of the Global Board of TAXAND.  He is also a Past President of the Chartered Tax Institute of Malaysia and a Council Member of the MICPA and the MIA. He is Chairman of the International Fiscal Association-Malaysia Branch and a member of the Commission on Taxation of the International Chamber of Commerce based in Paris. He can be contacted at vs@taxand.com.my. The views expressed are the personal views of the writer.