GST to SST: Is it a simple journey?

By Thenesh Kannaa, a licensed GST Agent and author of Master GST Guide.
This article was first published in Tratax - Thenesh, Renga & Associates’ Facebook page, 11 May 2018.

The leaders of the present government have expressed commitment to abolish Goods and Services Tax (hereinafter “GST”), which was implemented effective 1st April 2015. Although no fixed dates have been announced, the momentum suggest that this would be sooner than later.

I firmly believe that enforcement bodies and the GST agents licensed by the government must assist in the implementation of the government’s policy, despite any differing views that one may have. There are many nitty-gritties involved in the process of dismantling GST. There are many potential technical issues which requires involvement of GST experts. Yes, that’s right - GST cannot be effectively dismantled without participation of accountants and GST agents.

The accountants and GST agents who passionately implemented GST in 2015 should now express the same passion to ensure the process of dismantling GST in 2018 is an effective one. Some may ask – “What is so difficult? – just revoke the GST Act la!”. Well, ponder upon the following ten matters.

1. Ensuring lower cost of living – by regulation or by market forces?

It would be meaningless to abolish GST if it does not translate to price reductions and hence lower cost of living. How will we ensure this result is achieved? Are we going to expect the Ministry of Domestic Trade, Co-operatives and Consumerism (hereinafter “MTDCC”) to enforce yet another anti-profiteering regulation?

The first anti-profiteering regulation was gazetted with the objective of ensuring businesses do not unduly profiteer during the implementation of GST. Were the results impressive – or at least satisfactory? Is it fair to pass the entire enforcement responsibility to MTDCC?

Or, should we move forward with a free-market, whereby demand and supply freely determine price of goods and services?

These are serious questions that must be diligently dealt with before we rush to abolish GST. After all, we do not want a situation where rakyat does not benefit while the government coffers forgo over RM20 billion annually.

2. Should consumers expect 6% reduction in prices across the board?

It is important to bear in mind that the result of abolishing GST would often be not as simple as ‘prices go down by 6 per cent (or 6/106th)’. Why not? Tun Dr Mahathir Mohamad, the Prime Minister of Malaysia has expressed that the Government will not just abolish GST but will replace it will the previous Sales Tax and Service Tax (hereinafter collectively referred as “SST”).

Assuming the SST is re-introduced without any changes, many products (goods) manufactured locally or imported would be subject to sales tax – generally at 10 percent (this is not necessarily higher than the 6 percent GST in dollar terms as the Sales Tax is imposed only on the manufacturer’s price – i.e. there would be no consumption tax levied on the ‘profit margin’ of the distributor/retailer). Services, on the other hand, are subject to service tax at the rate of 6 percent.

It is too simplistic to make direct comparison of the tax rates. It is vital to remind ourselves that SST is not as comprehensive as GST – this is the main reason why one would expect that transition from GST to SST to lead to lower cost of living (more clearly in some cases than the rest).

Here’s an overview on expected price changes on goods or services that are now subjected to GST.

Note: For simplicity the diagram does not reflect the implications that arise due to difference in revenue thresholds for business operators to register for GST or SST. Also, the diagram is simplistic as it does not include items which are either zero-rated, exempted or relieved in the present GST regime - certainly, prices would not reduce by 6 percent for such items.

If we take a typical non-essential item in a retail outlet, it would be subject to 6 percent GST now (essential items are zero-rated). In the SST regime, those items are not subject to any tax at the retail level but there would be sales tax on the factory price, which is cascaded down as the retailer’s cost. Hence, any price reduction at the retail level may not be as much as 6 percent. So, how much would the price reduction be? That depends on many factors – the rate of sales tax, the ratio of the distributor’s and retailer’s margin to the factory price and most importantly the market perceptions and behavioural aspects.

At this juncture, I remind myself that credit cards were subjected to RM50 service tax (RM25 for supplementary cards) until 31st March 2015. If we revert to the old SST regime, will those charges will make a comeback?

Based on the above it is clear that the prices will not reduce by 6 percent across the board but there are many possible outcomes – even before we factor in the behavioural aspects and market reactions. With so many possible quantum of price changes, how are we going to manage the consumer expectation? Let me raise this question again – would the role of government/MTDCC be limited to merely create awareness among rakyat who would self-govern the free-market - or should the government/MTDCC be involved in regulating the price/profit movements? In the end, we must ensure the rakyat are entitled to the benefits that they rightfully deserve – taking into account not only the direct benefits but also any indirect benefits that either approach may have.

3. Long-term contract with GST included in the contract price – can the supplier keep the 6 percent?

We must also put some thoughts into the prevailing contracts. Take property developers for example. If Sale and Purchase Agreement (“SPA”) for sale of commercial property had been signed with the property price agreed upon inclusive of GST but the Certificate of Completion and Compliance (CCC) or vacant possession takes place in the SST era (i.e. after GST is abolished), can the developer charge the same price and retain the 6 percent as additional profit? Are we going to leave the terms of the respective agreement to determine this - or are we going to enact a law that, regardless of the terms of the agreement, adjust the prices agreed in the contract to reflect abolishment of GST?

4. Transitional period – inventory on hand?

At the first sight, the transition from GST to SST appear more simplistic than the transition from SST to GST some three years ago. For example, a special sales tax refund was granted for inventory-in-hand on 31st March 2015, i.e. on the transition from SST to GST. At the first sight, it appears that there’s no need for such special refund as any GST incurred on the purchase of inventory would have been credited as input tax as per the normal mechanism of GST.

A careful examination, however, leads one to think that some special measure is needed to maintain the price equilibrium during the transitional period. On typical non-essential goods bought from retail outlets, the long-term effect of replacing GST with SST may lead to price reductions but not as much as 6 percent if the entire value chain takes place in the post GST era (reasons for this is elaborated in heading 2 above). However, if the goods are already in the hands of the retailer at the date GST is being abolished, the prices at which the consumers purchase those goods should (at least in principle) be exactly 6 percent lower than the prices during the GST era. This is because sales tax cannot be imposed on the goods which are already in the hands of the retailers before SST is re-introduced.

In other words, if retailers were to make a pricing decision for each unit of inventory individually (which is impractical in reality), the prices post-GST should be lower by 6 percent until the new inventory arrives whereby the price are higher again due to SST (hopefully the increase is not as much as 6 percent), as portrayed in the diagram below.

Many would agree that if the real-life prices were to move in the direction of a ‘sudden dip’ above, the market would be disrupted and consumers would be left confused. It is possible to resort to paragraph 5(8) of First Schedule of the GST Act to require all GST-registered persons to account for 6 percent output tax on all goods on-hand on the date GST is abolished. I personally do not advocate the application of paragraph 5(8). Nevertheless, I recognise the need to implement some kind of transitional measure to ensure the smooth transition of the prices from GST era to SST era; as it should not be a dip as portrayed in the diagram above.

5. How about goods (e.g. land and building) held by persons who are not GST-registered?

The narrations in 4 above were on the assumption that the person who holds the inventory is GST-registered. Attention must also be paid to cases where the goods were acquired by a non-registrant.

A good example for this would be property investors. Say, a person who is not GST-registered acquired commercial property in 2017, he would not be entitled to claim input tax credit in respect of GST incurred on the acquisition. However, he would have hoped to claim special input tax credit on the date that he subsequently registers (e.g. when he earns substantial money from renting or disposing the property). This is provided for by Regulation 46 of GST Regulations 2014. If GST Act is revoked without any transitional measure, this investor would permanently lose the possibility of claiming input tax credit in respect of the acquisition that he made in 2017. Again, a special transitional rule is necessary.

6. Supply overlapping the transitional period

How about output tax accounted on advances whereby the actual supply (e.g. delivery of goods or provision/completion of services) falls on the SST era? Would the output tax be refunded? Remember, the supply was not made during the GST era but output tax was accounted due to merely technical reasons.

If there is any refund in respect of GST accounted on advances, would the refund be limited to scenarios where the supplier can demonstrate that the customer did not claim any input tax credit? What if the customer is a mixed supplier?

How about GST accounted on progress payment of commercial property whereby the CCC date is in the SST era? Would the GST accounted on progress payment be refunded?

7. Overdue GST refunds

If the GST Act is to be repealed, there is an urgency to refund to businesses any refund owed by the Government to the businesses in the ordinary course of the multi-tier nature of the GST mechanism. The government must commit to a timeline within which all refunds must be disbursed. Or else, businesses may fear of these amounts being irrecoverable and prudently regard such amounts as business cost, which may eventually affect pricing decisions.

8. Should GST audits and enforcement activities be discontinued immediately?

While I presume that most businesses would fully comply with all prevailing laws including GST, there ought to be some less-compliant and non-compliant ones. So, what would happen to a business that has collected GST from customers but owe the money to the government. Should the debt be forgone when GST is abolished? I don’t think so.

There should not be a step-down in the enforcement activities for recovery of overdue GST and the conduct of GST audits. Instead, the Customs should commit to a period (say, a year) within which all GST audits will be conducted and completed. The GST audit function within Customs should not be fully dismantled until then.

In order to be fair to the vast majority of businesses that were compliant with the rules, those who did not comply with the GST requirements during the GST-era should be brought to book. On that note, Customs should be forthcoming in waiving penalties for voluntarily disclosure on any unintended non-compliance.

9. Balancing the fiscal deficit

Abolishing GST would result in more than RM20 billion of revenue loss to the government.

I recall an article prior to GE14 which said that there are three possible outcomes for this:

1. Reduce the government's spending.
2. Offset with increase in other sources of the government revenue. This could be as simple as recovery of oil prices- or involve the broadening of teh existing taxes or introduce new taxes.
3. Increase the government's borrowing.

In my personal view, the primary intention should be to cut the wastage and leakage in the government spending; which means reduce the government’s spending without compromising the developmental goals of the country.

Increasing personal or corporate income tax rates should never be the priority as the world is heading in the opposite direction. However, the tax base should be widened by taxing the digital economy – without burdening rakyat. This would be in line with the global trend. In-depth studies on this must be made on an urgent basis as the technological advances are taking place at a rapid pace.

10. Compensation for businesses and GST agents

Since 2014, many businesses have spent substantial amount to adopt their systems and train their people to comply with GST. While many businesses may welcome the way forward without GST, would there be any compensation by the government for the substantial one-off and recurring costs incurred to comply with GST?

Also, since 2014 the government has licensed thousands of individuals as GST agents. This license was given after attending either a 10-day or a 6-day paid course, followed by an examination. They were/are required to comply with various requirements to maintain their licence which is due for renewal every two years. As a GST agent myself, I look forward to the followings.

The expertise of these GST agents are much needed to ensure effective dismantling of GST. For this, I appeal to the government to automatically renew the license of all prevailing GST agents for at least another 2 years – regardless of whether the criteria such as CPD points and number of clients are met. This is important as GST agents may have to represent businesses during any GST audits or recovery actions that may be carried out during the post-GST era (especially, within one year from the time GST is abolished - remember that the audits carried out just after the GST-abolishment date may be very comprehensive as it is the ‘last opportunity’ for Customs to address any possible non-compliance).

Just last month, some of the GST agents attended the My GCAP course conducted by Customs, which was followed by examinations and interview. These participants should be compensated for their course fee and loss of time.

I hope the contributions of accountants and GST agents for the effective implementation of GST are valued and remembered. Without us, the implementation of GST would have been a more painful one – for the government, the businesses and the rakyat.

Concluding Remarks

I trust the questions raised above highlight the pertinent issues that affect various stakeholders and shed some light to possible technical issues that may arise in the process of dismantling GST. My message is two-fold.

First, dismantle with care. A lot of attention and care is needed in the process of dismantling GST. If some of the questions raised in this article appear complex, let me remind that these are only the theoretical aspects. I have not included the behavioural aspects – such as possible stock building by retailers to take advantage of the interim period where goods are taxed neither by GST nor SST.

Second, we need to study whether SST should be re-introduced in its form as at 31st March 2015 – or with some changes? I would advocate for studies to be made on possible amendments to the SST rules before it is re-introduced. As an example, the service tax regime had multiple revenue thresholds to determine whether businesses to register and charge service tax – from zero threshold for professionals such as accountants and lawyers to RM3 million revenue-threshold for restaurant operators. This should be studied and possibly harmonised before SST is re-introduced.

While it is important to act quick, it would be pointless to haphazardly change back and forth. Patience is essential to prevent mistakes, confusions and market shocks. I urge for detailed transitional rules to be first drafted and given to the professional bodies and industry organisations for feedback before it is actually made into law.

Views expressed in this article are views of the author and are not necessarily the views of any firm or institution.

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