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Small and Medium
Small and Medium
Goods and Services Taxes (GST) and its possible impacts on Malaysian
Small and Medium-Sized Enterprises (SMEs)
Intro
The Prime Minister of Malaysia Mohd. Najib Tun Abdul Razak unveiled the
Malaysian Budget for the year 2010 on October 23, 2009. The theme of the
Budget was “1Malaysia, Together We Prosper”. The three main strategies
focused in the Budget are namely, driving the nation towards a high-income
economy, ensuring holistic and sustainable development and focusing on well-
being of the people. The government also announced initiatives for SMEs to more
innovative and competitive. However, the highlight of the budget was the
proposed implementation of Goods and Services Tax (GST) by mid-2011.
The initial rate for GST is expected to be 4 percent and the new tax
system is scheduled to be implemented by the middle of 2011. GST will replace
the present sales and services tax (SST) which ranges from 5 percent to 10
percent. A sum of RM222 million has been allocated as initial cost to ensure the
smooth and effective implementation of the Goods and Services Tax (GST)
system in Malaysia. The allocation will cover the cost of developing the GST
computerisation system at RM139 million and the additional operations cost of
RM83 million for the agency implementing the system, Malaysian Customs
Department. The maintenance cost each year is estimated at RM8.5 million
The plan to introduce GST has attracted a great deal attention from the
economists, NGOs, politicians, businesses and the consumers. The attention it
received was overwhelming and the critics spared no leniency in attacking the
move by the government. It is understood that, as in other nations applying the
GST, that the immediate effect will be a sudden instantaneous inflation with all
goods and services going up in prices. The worse affected will be the consumers
with the Small and Medium Enterprises (SMEs) likely to be adversely affected as
well in their operations and the demand for their products.
The government has since moved to quell the negativity surrounding the
proposed tax system, will the Second Finance Minister saying that the GST
implementation would be a win-win situation for all, as the Government would
receive an additional RM1bil in revenue for the first year while the business and
export sectors would save RM4.1bil and RM1.4bil, respectively. Besides, the
government is proposing GST at a rate lower than the current sales and services
tax rates, and to allow certain exemptions from GST, especially on essential
goods such as rice, vegetables, basic food (rice, sugar, flour, cooking oil), fish,
meat and chicken, to ensure it will not burden the public, especially the lower
income group. The government also stated that the main purpose for introducing
GST is to make the current taxation system more comprehensive, efficient,
effective, transparent and business friendly.
SME defined
Malaysian SMEs can be defined according to size, turnover and activity. Two
broad categories of SMEs are as the following:
1
Multi-national Corporations
2
Government-Linked Corporations
3
The Small and Medium Industries Development Corporation
Notes:
Scenario A Scenario B
Case1:
• A small exempted SME imports an item for RM100 + RM4 GST= RM104.
• It then sells it to a big company A for RM107.
• The big company A would in turn sells it to the end user for RM120 +
RM4.8 GST =RM124.80.
• Total GST collected by the government for the imported item is RM4 (from
small SME) + RM4.8 (from A) =RM8.4 which is 7percent of RM120.
• The gross margin enjoyed by this SME is RM3 (RM107-RM104) and A is
RM13(RM120-RM107)
Case 2:
• Now if another big time importer with GST licence, also imports the RM100
item and sells it to A for RM107+ RM4.28 GST=RM111.28.
• A then sells it to the end user for RM120 + RM4.80 GST=RM124.80.
• Net GST to be paid by the importer to custom is RM4 upon importation +
(RM4.28-RM4 upon sale transaction) =RM4.28.
• Net GST to be paid to custom by A is RM4.80-RM4.28=RM0.52.
• Total GST collected by custom is now only RM4.28 + RM0.52=RM4.80
which is 4percent of RM120.
• The gross margin of big importer in this case is RM7 (RM111.28-RM100-
RM4.2 and A is still RM13 (RM124.80-RM111.28-RM0.52)
This means big importer has a much bigger gross margin (RM7 compared
to RM3) and therefore can be more competitive than small SME due to taxation
system. The net effect is, having more SME companies exempted from GST that
are not directly selling to final end-users, may actually mean more GST revenue
to the government, assuming these exempted companies can survive against
the non exempted ones.
The GST is an equivalent to value added tax (VAT) employed in many countries
like Britain, Canada and Singapore. The underlying principles are the same but
there can be many variations in its implementation in different countries. It is a
tax on the estimated market value added to a product or material at each stage
of its manufacture or distribution, ultimately passed on to the consumer.
Personal end-consumers of products and services cannot recover GST on
purchases, but businesses are able to recover GST (input tax) on the products
and services that they buy in order to produce further goods or services that will
be sold to yet another business in the supply chain or directly to a final
consumer. In this way, the total tax levied at each stage in the economic chain of
supply is a constant fraction of the value added by a business to its products,
and most of the cost of collecting the tax is borne by business, rather than by the
state.
By the timing of collection, GST (as well as accounting in general) can be either
accrual or cash based. Cash basis accounting is a very simple form of
accounting. When a payment is received for the sale of goods or services, a
deposit is made, and the revenue is recorded as of the date of the receipt of
funds — no matter when the sale had been made. Checks are written when
funds are available to pay bills, and the expense is recorded as of the check date
— regardless of when the expense had been incurred. The primary focus is on
the amount of cash in the bank, and the secondary focus is on making sure all
bills are paid. Little effort is made to match revenues to the time period in which
they are earned, or to match expenses to the time period in which they are
incurred. Accrual basis accounting matches revenues to the time period in which
they are earned and matches expenses to the time period in which they are
incurred. While it is more complex than cash basis accounting, it provides much
more information about your business. The accrual basis allows you to track
receivables (amounts due from customers on credit sales) and payables
(amounts due to vendors on credit purchases). The accrual basis allows you to
match revenues to the expenses incurred in earning them, giving you more
meaningful financial reports.
The fundamentals of supply and demand suggest that any tax raises the cost of
transaction for someone, whether it is the seller or purchaser. In raising the cost,
either the demand curve shifts leftward, or the supply curve shifts upward. The
two are functionally equivalent. Consequently, the quantity of a good purchased
decrease, and/or the price for which it is sold increases.
This shift in supply and demand is not incorporated into the above example, for
simplicity and because these effects are different for every type of good. The
above example assumes the tax is non-distortionary.
A GST, like most taxes, distorts what would have happened without it. Because
the price for someone rises, the quantity of goods traded decreases.
Correspondingly, some people are worse off by more than the government is
made better off by tax income. That is, more is lost due to supply and demand
shifts than is gained in tax. This is known as a deadweight loss. The income lost
by the economy is greater than the government's income; the tax is inefficient.
The entire amount of the government's income (the tax revenue) may not be a
deadweight drag, if the tax revenue is used for productive spending or has
positive externalities - in other words, governments may do more than simply
consume the tax income. While distortions occur, consumption taxes like GST
are often considered superior because they distort incentives to invest, save and
work less than most other types of taxation - in other words, a GST discourages
consumption rather than production.
Criticisms on GST
The "value-added tax" has been criticized as the burden of it relies on personal
end-consumers of products. Some critics consider it to be a regressive tax,
meaning the poor pay more, as a percentage of their income, than the rich.
Defenders argue that excising taxation through income is an arbitrary standard,
and that the value-added tax is in fact a proportional tax in that people with
higher income pay more at the same rate that they consume more. The effective
progressiveness or regressiveness of a GST system can also be affected when
different classes of goods are taxed at different rates. To maintain the
progressive nature of total taxes on individuals, countries implementing GST
have reduced income tax on lower income-earners, as well as instituted direct
transfer payments to lower-income groups, resulting in lower tax burdens on the
poor.
Revenues from a value added tax are frequently lower than expected because
they are difficult and costly to administer and collect. In many countries,
however, where collection of personal income taxes and corporate profit taxes
has been historically weak, GST collection has been more successful than other
types of taxes. GST has become more important in many jurisdictions as tariff
levels have fallen worldwide due to trade liberalization, as GST has essentially
replaced lost tariff revenues. Whether the costs and distortions of value added
taxes are lower than the economic inefficiencies and enforcement issues (e.g.
smuggling) from high import tariffs is debated, but theory suggests value added
taxes are far more efficient.
Certain industries (small-scale services, for example) tend to have more GST
avoidance, particularly where cash transactions predominate, and GST may be
criticized for encouraging this. From the perspective of government, however,
GST may be preferable because it captures at least some of the value-added. For
example, a carpenter may offer to provide services for cash (i.e. without a
receipt, and without GST) to a homeowner, who usually cannot claim input GST
back. The homeowner will hence bear lower costs and the carpenter may be able
to avoid other taxes (profit or payroll taxes). The government, however, may still
receive GST for various other inputs (lumber, paint, gasoline, tools, etc.) sold to
the carpenter, who would be unable to reclaim the GST on these inputs (unless
of course the carpenter also has at least some jobs done with receipt, and claims
all purchased inputs to go to those jobs). While the total tax receipts may be
lower compared to full compliance, it may not be lower than under other feasible
taxation systems.
Because exports are generally zero-rated (and GST refunded or offset against
other taxes), this is often where GST fraud occurs. In Europe, the main source of
problems is called carousel fraud. Large quantities of valuable goods (often
microchips or mobile phones) are transported from one member state to
another. During these transactions, some companies owe GST, others acquire a
right to reclaim GST. The first companies, called 'missing traders' go bankrupt
without paying. The second group of companies can 'pump' money straight out
of the national treasuries. This kind of fraud originated in the 1970s in the
Benelux-countries. Today, the British treasury is a large victim. There are also
similar fraud possibilities inside a country. To avoid this, in some countries like
Sweden, the major owner of a limited company is personally responsible for
taxes. This is circumvented by having an unemployed person without assets as
the formal owner.
Awareness of responsibilities:
Notwithstanding the size of the business, the law imposes the same
compliance obligations once the registration threshold is reached. Once the
registration threshold is announced, affected businesses will need to follow
closely the developments and to understand their responsibilities under the GST
regime.
While the business is essentially just collecting and remitting GST for the
Government, non-compliance will result in penalties on the business itself. It is
hoped that the Government would leverage off the experience from other
countries that have successfully implemented GST and roll out comprehensive
awareness programs to help, in particular SMEs, prepare for the GST. These
could include organizing briefings at various locations, setting up small offices,
kiosks, helpdesks and hotlines throughout the country.
Compliance cost:
In addition, where a business pays cash or has short credit periods from its
suppliers, this may result in the business needing extra finances to purchase
supplies when GST is first introduced. This is a timing issue which should iron
itself out over time as credits are claimed. In this respect, there have been
requests that the tax return cycles for SMEs be extended to ease the cashflow
burden under the GST regime.
Like customers, businesses should also plan their purchases during the
GST transition period. This is because currently many goods (particularly capital
goods) have an embedded sales tax in them which is not deductible or
creditable.
On the other hand, buying the same goods by the business after GST
would allow the business to claim a credit for the GST (which will replace sales
tax). This is an advantage for the business and the effective cost of the goods
would then be lower (other things remaining equal). As a rule of thumb, while
household consumers are likely to shop before GST is introduced, businesses
which are GST registration candidates should perhaps delay purchases to a time
when GST is effective. This does, however, require some assumption that prices
will otherwise remain static.
Some businesses will inevitably fall below the registration threshold. While
it may appear a good thing that the business is not subject to the compliance
burden of the tax, other factors need to be taken into consideration whether or
not to register.
For one, unless the business is licensed, it would not be entitled to claim
the input tax credits on purchases. This leads to input tax paid being a cost to
the business (this may be a good thing from the customers’ perspective; GST is
not imposed when they purchase the goods).
However, in a situation where the customers of the business are other GST
registered businesses, the supplier may be obligated to license itself as it is likely
that the customer would insist on buying from another registered person to
enable him to claim the input tax credit.
Noting the additional burden that GST puts on SMEs, the Government
could consider making concerted efforts in conducting education campaigns as
well as addressing and deciding on compliance issues before the introduction of
GST. Treatment of specific transitional issues needs to be announced upfront to
facilitate a smooth transition to the GST regime.
Price competitiveness:
GST registered SMEs will have an advantage in terms of cost due to the
fact that they only pay GST. The fact is explained in the illustrations. However,
they will have to charge higher prices to the customers, eroding their price
competitiveness.
GST will hit the cash flow of SMEs, leaving many with the challenge of
finding additional finance or having to make the difficult decision to get tougher
on customers in order to meet GST liabilities. Businesses with significant funds
tied up in unpaid invoices will be the worst affected. Businesses rely heavily on
these deposits for the cash flow needed to meet their immediate liabilities to
suppliers, staff and the IRA4, particularly around tax time. Businesses with
already tight cash flow will either have to source the additional finance from
within the business e.g. from savings or increase borrowings just to meet GST
liabilities. For many, the cost will have to be passed on through higher deposits
or stiffer terms of trade - steps which could make small businesses less
competitive. Therefore, businesses need to be proactive in their approach to
cash flow management and develop and implement a strategy to ensure cash
flow is consistent. GST will have a serious negative impact on the cash flow of
the SMEs if there isn’t an efficient tax refund mechanism in place.
-The likely GST treatment for products / services and the impact on pricing
strategies.
-The impact of GST on long term contracts.
-The GST cost of outsourcing versus internal supply.
-Timing of purchases pre and post the implementation of GST.
-Impact of GST on benefits-in-kind to staff and provision of samples and gifts.
How government can help SMEs to adapt to the new tax system and
cushion the impact of GST.
1. Give the SMEs more time to adjust their present accounting system
4
Internal Revenue Agency or Lembaga Hasil Dalam Negeri in Malay
The Associated Chinese Chambers of Commerce & Industry of Malaysia
(ACCCIM) says 2012 will be the appropriate time for the government to introduce
the Goods and Services Tax (GST).
A majority of businesses felt that they should be given at least 24 months to
prepare for the new tax system.
The government needs draw up a clear timetable and provide more details
so that the public have sufficient time to understand and prepare accordingly. By
having sufficient preparation, the public, especially the businesses will not be
caught by surprise or have any resistance and misunderstanding of the GST.
While burden of GST is on consumers, businesses will still have to pay GST
upfront on inputs and then claim for their refund.
The rate of 4 per cent is lower than the existing sales tax but pending the
list of exemptions, potential tax cuts and also grants that will be given to the
lower income group to enable to sustain their living it would be difficult to assess
the reasonableness of the rate. Thus it is recommended that when determining
the rate of GST the government should not target for a substantial positive GST
return compared to rebate and offset provided. This is crucial to avoid
inflationary pressure that are already diminishing the purchasing power capacity
of lower income families and also affecting most middle income families.
We may feel that we are ready for GST as Malaysia’s poverty rate is low.
However, the reason for low poverty rate in Malaysia is because the income level
per month used to determine the poverty is only RM720 in peninsular Malaysia.
As such, after the GST implementation the income level used to assess poverty
needs to be reassessed due to the inflationary impact.
In addition in Malaysia 38 per cent of the 5.6 million household in Malaysia
has an income level of less than RM2000 a month. This shows that while GST can
still be implemented the impact on 2.12million household needs to be weighed
carefully as food and transport represent a high portion of their expenditure from
their monthly income.
• The job of implementation of the GST should not be limited to the Ministry
of Finance. The Steering Committee should also be represented by the
Ministry of Trade and Industry, SME Department, the Department of
Customs and Excise and etc.
There are various subsidies, allowances, and also benefits given to the
lower income group to help alleviate the burden of the consumers. However
most of these subsidies do not reach the target group for e.g. RM720million is
spent yearly on rice subsidy but sadly the poor still could not get the hands on
the required quantity of rice. The government’s current initiative to use the list of
names from e-kasih5 to distribute the rice subsidy had to be postponed as
majority of those verified as requiring assistance by the Welfare department was
not included.
GST systems with multiple rates and multiple exemptions would result in
confusion by both the authorities and the public. This will likely result in
countless and unnecessary disputes with the businesses on the scope of tax.
Multiple rates and exemptions also pose higher compliance burden on the
businesses. A complex system with multiple rates could potentially lead to more
abuses. Thus a single flat rate should be considered.
5
A portal containing databases and information regarding poverty alleviation.
would fit into the actual operations of particular lines of business. This is crucial
to help to fine-tune the GST in order to prevent the GST system from becoming
unnecessarily complicated and affecting business adversely.
A comprehensive tax like GST will definitely increase prices instantly and
real disposable income of consumers will fall and their demand for goods and
services will categorically plummet, affecting businesses of all sizes. However,
the worst affected will be the SMEs who do not have the ability to compete in
pricing and cost minimization. Given the need for funds to reduce deficits, the
GST is deemed as a very effective measure. Nevertheless, the government must
realize the fact that tax is only maximized at a certain level until it reduces the
incentives to spend, work and do business after which it will not bring anything
to the economy and state but losses.
At present there is not much details in the information released on the proposed
GST by the government. The threshold is still unclear and the product
exemptions are yet to be released in detail. The SMEs need time to fully
understand the proposal and how they will be affected. They will also need
further time to prepare for and adjust to the new tax system. The plan to fully
implement GST by mid-2011 will not be consistent with the policy to assist SMEs
as the time for preparation is not sufficient. Furthermore, the government has
not given any assertion of how the this fiscal measure will benefit in an
acceptable manner as being studied by the panel investigating into
implementing the GST in Malaysia. The detailed mechanisms of how ST will work
must be explained to the business community and the consumers to avoid a
backlash which cancel out whatever the positives the GST may have for the
economy at large.
This paper has only been able to analyze the impacts of GST based on the
experiences of other countries due to the lack of details in the explanation by the
government. So much information is still unavailable for the discussion to
forecast the full extent of consequence of GST on SMEs and the Malaysian
economy at large.
Hence, the paper concludes that there is so much to be researched before the
GST can be implemented and the government will have come out with measures
to make the GST a new tax system benefitting the SMEs. The new fiscal measure
must not be introduced just for the sake of reducing budget deficit or employed
in a rush using the perceived success in other countries a basis to paint a
beautiful picture of life after GST. There must be continuous exchanges of views,
prior to and after the implementation, between the government, businesses and
consumers as well as academics so that a proper formulation of GST suited to
the Malaysian economy can be produced and GST revenue will not be crowded
out by losses on the side of SMEs which form the backbone of the economy of
Malaysia.
References
Kamaruzaman Hj. Ampon, Syed Azizi Wafa (2004) Malaysian Small and Medium
Enterprises (SMEs) And Innovation, SMIDEC, SME Performance 2003 Report, Kula
Lumpur, Malaysia.
Ram Consultancy Services Sdn Bhd (2005), SME Access to Financing: Addressing
The Supply Side Of SME Financing
Abood Mohammad Salmeen, Goods And Services Tax, Problems And Effects Of
Implementation
Chew Theam Hock (2009), How GST affects small, medium businesses The Star,
November 23, 2009
Sivarajan 2009
GST WILL MAKE WORKING CLASS POORER http://www.kotadamansara.net/
2012 Will Be Right to Introduce GST, Says ACCCIM, Malaysia SME Online
publication 26 July 2010, online available
http://www.malaysiasme.com.my/index2.php?
option=com_rss&feed=RSS1.0&no_html=1
SME Corp Malaysia Official Website (2009)Businesses can start preparing for GST
http://www.smecorp.gov.my/taxonomy/term/10
Chua T.K. (2009), Keep info flowing on how the GST works, the star (opinion
section) publication December 31, 2009, online available
http://thestar.com.my/news/opinion
Yow Hong Chieh (2010, SMEs not ready for GST, online available
http://www.themalaysianinsider.com/rss/feed
Cecilia Kok (2010), Hoping for a good deal out of a taxing issue, The Star
publication January 16, 2010, online available
http://biz.thestar.com.my/news/story.asp?
file=/2010/1/16/business/5449113&sec=business
Chua Tee Yong (2010), GST yes, but steps must follow
http://www.themalaysianinsider.com/mobile/opinion/columnist/chua-tee-yong