Reproduced with permission from Tax PlanningInternational Indirect Taxes, 13 IDTX , 3/31/15. Copyright �2015 by The Bureau of National Affairs, Inc.(800-372-1033) http://www.bna.com

VOLUME 13, NUMBER 3 >>> MARCH 2015

Malaysia’s GST—Just Days AheadWan Heng Choon and Levinash RavindranPwC, Malaysia

As the implementation date draws near for GST in Malaysia, thegovernment is keen not to repeat the mistakes of the sales andservice tax regime.

Benjamin Franklin famously said ‘‘In thisworld nothing can be said to be certain,except death and taxes’’. What is certain is

that the implementation of a new tax, which forcesbusinesses to analyze every product and contract, re-quires the planning and synchronization of a militarymarching band.

Introducing GST be one of the most extensive tasksa Malaysian business will undertake in this decade.

I. Wait, We Already Have a GST, Don’t We?

In the mid-70s while the U.K. was busy introducingthe VAT as a condition to join the European EconomicCommunity, Malaysia introduced its Sales and Ser-vice Tax regimes (‘‘SST’’).

In Malaysia today, sales tax at the rate of 5%, 10%and other varying rates, depending on the type ofgood, is levied on the manufacture and import ofgoods into Malaysia.

Separate from that, service tax at 6% is imposed ona relatively narrow base of prescribed services, includ-ing the provision of services by professional engi-neers, lawyers, accountants, hotels, restaurants andtelecommunication providers. Notably, neither taxallows for recovery of the tax paid by the consumer.

Critics of the SST are quick to point out that the taxremains opaque to the end consumer. Final sellingprices have embedded elements of tax. Businesses atthe tail end of the supply chain make a margin on taxembedded prices, leading to an eventual effect of taxcascading to the end consumer. Studies by Royal Ma-laysian Customs have shown that effective SST ratesare much higher than those published.

Tax leakages brought about by a bounty of exemp-tions and smuggling activities have rendered the SSTinefficient and unattractive to the government. To abusiness, implementation of the SST remains a rela-tively simple task without the need for sleek cutting-edge IT systems. From our experience with certainclients, the calculation and declaration of their liabil-ity can be done with pen and paper alone.

Over the past 40 years, the service tax rate has onlybeen revised once, moving one percentage point upfrom 5% to 6% in 2011. Not much else has changed.However, in 2014 the Malaysian government collectedan estimated 13.8 billion ringgit (US$3.8 billion in to-day’s terms) from both taxes.

April 1, 2015 will mark the repeal of these humbleand rather inefficient tax systems in favour of a longoverdue goods and services tax (‘‘GST’’). The GST hasfaced multiple postponements since 1989. The Malay-sian variant of GST is founded on the principles of theU.K. VAT framework and is similar to the systemimplemented in neighbouring Singapore in 1994.

As one of the last countries in the ASEAN region toadopt a national value added tax system (countries yetto adopt include Brunei and Myanmar) the govern-ment, with consultation from its Tax Review Panel,has gazetted an introductory standard rate of six per-cent. Once implemented, this standard GST rate of sixpercent would represent the second lowest in Asia,just one percent higher than the current titleholder,Taiwan.

II. Now or Never

Prime Minister Najib Razak announced the introduc-tion of GST 17 months ahead of its implementation,giving businesses ample time to prepare. Previous dis-cussions mooted by the government were faced withresistance for fear of increased cost of living amongstlower income segments of the public (‘‘rakyat’’).

It would appear that some businesses may have dis-missed the Prime Minister’s announcement expectingthe GST to be postponed once more. However, on De-cember 31, 2014—the deadline for mandatoryregistration—the government’s estimate of 300,000registered businesses was exceeded.

III. Remapping Business Processes

Malaysian businesses are now in the midst of procur-ing and training resources to ensure that there is suf-

Wan Heng Choonis SeniorExecutive Directorand LevinashRavindran is Con-sultant at PwC,Malaysia

2 03/15 Copyright � 2015 by The Bureau of National Affairs, Inc. IDTX ISSN 1741-0886

ficient expertise within organizations to allow for theexecution of this transaction-based tax.

Unlike traditional corporate tax, every supply andpurchase made by the GST-registered business carriesa potential GST consideration, extending to the small-est of transactions such as the purchase of office sta-tionery. This has never before been a cause of concernto businesses under the outgoing SST. The impendingimplementation of a transactional tax such as the GSTforces businesses to take on this role.

In one case, a business that is determined to maxi-mise its input tax recoveries has decided to establish aprogramme where it only deals with GST-registeredvendors. These GST-registered vendors typically havea lower cost base due to their own recovery of GST onraw material inputs. In addition, a GST-registeredvendor will issue a tax invoice, enabling the recoveryof any GST charged on the supply.

The client’s procurement process had no formalchecks—the existing process was simply anecdotal.The procurement team found it a challenge to developa new process from scratch as part of their operatingprocedure.

IV. Balancing Cost and Benefit

In the 2015 Budget speech delivered in October 2014,Prime Minister Najib spoke of an increase in govern-ment revenue from the implementation of GST. Hisgovernment estimates a 41% increase (5.6 billion ring-git) in collection over the current SST, grossing a total19.4 billion ringgit over the current 13.8 billion ring-git.

While allowing the government to broaden its rev-enue base, it has promised that 4.9 billion ringgit ofthe additional revenue will be channelled to lowerincome groups via cash assistance programmes. Thisis in recognition of the increased living costs and re-gressive effect of the tax. Net increase in governmentrevenue after distribution will only amount to 690million ringgit.

Costs associated with the implementation of thistax must be considered. In the run up to April 1, pri-vate businesses have invested to ensure GST, IT andproject management consultants are on hand. Assetshave been diverted from usual business activities tofocus on implementation.

Given the mandatory registration threshold of just500,000 ringgit, even medium and small-sized busi-nesses are now required to register for GST. Formedium-sized enterprises, the cost of system up-grades can run up rather quickly.

For the small enterprise (for example the popularneighbourhood restaurant in downtown KualaLumpur), their cash till will be decommissioned tomake way for a modern point of sale system. Systemswill be set up to semi-automate GST compliance.

What remains to be seen is whether the cost ofimplementation pushes this segment of the privatesector into the red.

Given the above, one must consider if the additional690 million ringgit revenue per year estimated to bederived from implementation of GST justifies the in-troduction of the tax.

V. Profiteering from the GST

Petrol and sugar have long been under scrutiny for thesubsidies allocated by the government each year. With

the government tightening its belt, a subsidy rational-isation scheme has been in place to let market forcesplay their role.

It is apparent to the Malaysian consumer that—allthings being equal—unscrupulous traders may in-crease the price of a glass of quintessential Malaysianteh tarik (milk tea) by 0.20 ringgit for every 0.20 ring-git reduction in subsidy for a kilogram of sugar.

In light of potential profiteering by businesses andto manage inflationary pressures come April, the PriceControl and Anti-Profiteering Act 2011 and its subse-quent amendments in late 2014 were brought intoforce.

The Ministry of Domestic Trade, Cooperative andConsumerism has been empowered to convict and pe-nalize both registered and non GST-registered traderswhere they are seen to be profiteering from the intro-duction of GST over a controlled period.

Spanning 18 months, the control period came intoforce on January 1 this year. Upon conviction, penal-ties range from 500,000 ringgit for the first offence to1 million ringgit for subsequent offences.

VI. On the Other Side of the Fence

One must not discount the fact that the administratorof a broad-based tax like GST has plenty of homeworkto do to make sure the same mistakes that made theSST inefficient are not repeated.

Internally, officers from Royal Malaysian Customshave been cajoled from their roles in SST enforcementinto developing new skills within the GST environ-ment. GST audit trainings are held every so oftenequipping officers with GST audit experience fromAustralia and neighbouring Singapore.

While the collection of back taxes and penalties arelikely to be incorporated into the key performance in-dicators (‘‘KPIs’’) of front line officers, the governmentis expected to allow businesses a two-year morato-rium. Notwithstanding this, GST audits will still beconducted in the first two years to educate and trainregistered businesses.

Royal Malaysian Customs have made it clear thatsuspected cases of GST fraud will not be tolerated.Maximum penalties under the GST Act are some ofthe most punitive around, even in comparison withthose imposed by counterparts in the Inland RevenueBoard of Malaysia in respect of corporate and per-sonal income tax.

VII. Concluding Remarks

With April 1, 2015 fast approaching, businesses haveput their GST implementation projects at the fore-front of corporate priority for the financial year 2014/2015. Medium and small-sized enterprises under theGST radar have come to terms with the additionalburden of compliance that the GST places on them.

The government and Royal Malaysian Customs arelooking forward to a bigger slice of their cake. The restof us, well, we will be watching the show unfold sip-ping on our reasonably priced teh tarik for comfort.

Wan Heng Choon is Senior Executive Director at PwC inMalaysia and can be contacted by email atheng.choon.wan@my.pwc.com.

Levinash Ravindran is Consultant at PwC in Malaysia and canbe contacted by email at levinash.ravindran@my.pwc.com.

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