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EPPE 6144 Public Finance

GST in Malaysia

Name: Izzuddin Bin Yussof


Registration No: P73499
Course: EPPE6144 Public Finance
Lecturer: 1) Dr. Riayati Ahmad
2) Prof. Md. Zyadi Md. Tahir

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

1. Introduction
Malaysia, an emerging economy is currently on its way to one of the biggest tax reformation
ever faced by the country. The government of Malaysia is planning to substitute the current
Sales and Services Tax (SST) with Goods and Services Tax (GST) or more well known
internationally as Value Added Tax (VAT). However the public was outraged by this action,
fueled by negative sentiments and misunderstanding, lots of voices and anti-GST rally has been
conducted to push the government to retrace the idea. The Peoples Alliance, an informal
political coalition of three opposition parties had been leading rallies and spreading anti GST
sentiment to the people. However they are not totally against the idea of GST, they are making a
stand that now is not the right time to introduce GST.

However, there seems to be a lack of understanding among the majority member of the public
on the real structure of GST, particularly among those joining the anti-GST rally. As such, this
paper is intended to explain the reasons for GST implementation, the impact of GST to different
stakeholders, the process of GST and comparison between GST and SST.

GST, which is more commonly known internationally as VAT, was first introduced at national
level by a French economist Maurice Laur which was also Joint Director of the France Tax
Authority in 1954. However the origin of the idea was traced back to both German businessman
Wilhelm Von Siemens in 1918 and American economist Thomas S. Adams in his writing between
1910 and 1921.

As Cnossen (1998) wrote, the nearly universal introduction of the VAT should be considered the
most important event in the evolution of tax structure in the last half of the twentieth century.
To date, more than 160 countries are currently adapting the VAT as the main consumption tax.
However United States is one of the few developed countries without VAT. Out of 9 ASEAN
countries, currently only three countries which has yet to implement VAT namely Malaysia,
Brunei and Myanmar.

GST was first been announced to be put into implementation in Malaysia under the era of fifth
Prime Minister of Malaysia, Tun Abdullah Badawi in the 2005 budget. In the budget, it was said
that the GST will replace the current SST and was intended to eventually allow income tax to be
reduced. It was planned that the GST would be introduced in 1 January 2007. However in
February 2006, the plan was deferred since the government decided they would need more time
to get the opinion of the public.

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

Later in November 2009, under the ruling of sixth Prime Minister Dato Seri Najib Abdul Razak,
the idea of GST was presented in Dewan Rakyat, a lower house of the Malaysian Parliament. It
was proposed that GST would be implemented 18 months after the second reading with an
expected rate of 4%. However the second reading never took place due to lack of input from the
general public.

The latest idea of GST was again announced in the 2014 budget, where the Prime Minister who
is also the Finance Minister of Malaysia, Dato Seri Najib Abdul Razak informed the public that
GST will replace SST with an expected rate of 6% in April 2015. This is confirmed in the latest
budget with expected additional revenue from GST being approximately RM5.6 billion.

The paper will proceed with a brief explanation of indirect tax system in Malaysia. Next the third
chapter will explain the reasons why GST was chosen to be implemented. Chapter four will be
the main finding where the process and impact towards consumers between the GST and SST
will be compared. The last chapter will conclude the finding of this paper.

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

2. Indirect Taxation in Malaysia

In Malaysia, there are overall five indirect taxes currently being imposed. They are the import
and export duty, excise duty and sales and services tax. The last two are also considered as
consumption tax and will be replaced with GST effective 1 April 2015.

Import Duty

Import duty in Malaysia is levied in ad valorem basis with a rate ranging from 2% to 60%.
However beginning 1 April 2008, Malaysia implemented tariff rate quota (TRQ) on selected
agricultural products such as chicken, milk, sugar and cabbage. Imports within the quota will
enjoy a lower tariff rate while imports with volume higher than the quota will be imposed. As an
example in for 2015, the annual quota volume for chicken eggs would be approximately 83
million eggs. As long as the import does not exceed the limit, the in-quota tariff would be 10%.
Going above the limit would lead to an out-quota tariff of 50%. Firms who would like to import
these TRQs product would have to first apply for import license from the authority. The quota is
decided by the Department of Veterinary Services.

Manufacturers may apply for exemption for certain type of goods which are eligible to claim.
Among the exempted goods are:
i)

Raw materials and components used directly for the manufacture of goods for export and
domestic markets.

ii)

Dutiable machinery and equipment which are used directly in the manufacturing process.
Raw materials, machinery, essential foodstuffs and pharmaceutical products are generally nondutiable or subject to lower rates.
Export Duty
Export duties are generally imposed on the countrys main commodities such as crude
petroleum and palm oil for revenue purposes. The rate is an ad valorem form but dependent on
the price of the commodity in the market. As an example for crude palm oil, if the CPO price in
the market is at RM3,450 per tonne, the export duty will be at 8.5%. However if it is below
RM2,250 per tonne as in at the end of 2014, the commodity will be exempted from export duty.

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

Excise Duty
Excise duties are imposed on goods which are manufactured in Malaysia or imported into
Malaysia. Excise duties vary from a composite rate of 10 cent per litre and 15% for certain type
of spirituous beverages to as high as 105% for motorcars. Goods which are subject to excised
duty include beer, rice wine, cigarettes, motor vehicles and playing cards. In general, duty is
payable at the time the goods leave the place of manufacture. However for a predefined list of
motor vehicles, the duty is payable once the vehicle is registered with Road Transport
Department, up to a maximum of 4 years from the date of removal from the factory. No excise
duty is payable on dutiable goods that are exported.

Sales Tax
Sales tax is a single-stage tax imposed on certain locally manufactured goods and on similar
imported goods. Although being a consumption tax, the tax is actually paid to government at
the manufacturing level. It is assumed that the manufacturer will then collect the tax from the
customer via increased price. In the case of imported goods, the tax is collected from the
importer at the time the goods are released from customs control. The sales tax is inapplicable
at free zone area such as Labuan, Langkawi and Tioman.

The current rates are as follows:


Goods

Rate

Fruits, certain foodstuff, timber and building material

5%

Cigarettes and Tobacco

25%

Liquor and Alcoholic Drinks

20%

All other goods except petroleum and goods not


specifically exempted

10%

Live animals and essential food items


Medical, educational and sports equipment
Photographic equipment and films
Motorcycles below 201 cc and bicycles for adult use
including parts and accessories
Machinery for selected industry
Primary commodities (e.g. cocoa, rubber) and their
related products
Naturally occurring mineral substances, chemical, etc.
Helicopters, aircraft, ships and other vessels

Exempted

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

Service Tax
Service tax is levied and charged on any taxable services provided by any taxable person. The
rate is set at 6% ad valorem effective from 1 January 2011, a 1% increase compared to the
previous rate. However for the provision and issuance of charge or credit card, the service tax
will be RM50 per year on the principal card RM25 per year on the supplementary card. The tax
for charge or credit card will be chargeable on the date of the issuance or renewal of the card
and every 12 months thereafter.

Any taxable person who carries on business of providing taxable service must apply for a
license. No fee is payable for the issuance of a license. A summary of taxable person and taxable
services are as follows:

Taxable Person

Minimum Annual
Sales Turnover

Operator of hotels with more than 25 rooms

N/A

Operators providing food, drinks and tobacco products wholly eat-in or

N/A

partly take-away located in hotels with more than 25 rooms


Operators providing food, drinks and tobacco products wholly eat-in or

RM300,000

partly take-away located in hotels with less than 25 rooms (with some
exclusion)

Operators providing food, drinks and tobacco products wholly eat-in or

RM3 million

partly take-away
Operators of food courts

RM300,000

Operators of night-clubs, dance halls and cabarets

N/A

Operators of approved health-centres and massage parlours

N/A

Operators of 1st, 2nd and 3rd class public house and 1st or 2nd class beer

N/A

house
Operators of private clubs
Operators of golf course or gold driving range
Licensed private hospitals

RM300,000
N/A
RM300,000

Insurance companies

N/A

Communication service provider

N/A

Agent for import and export activity

N/A

Agent for import and export activity that is stored in the licensed

N/A

warehouse or inland clearance depot

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

Operators of parking space for motor vehicle

RM150,000

Courier-services companies

RM150,000

Operators of motor vehicle service and/or repair centres

RM150,000

Licensed private agencies

RM150,000

Employment agencies

RM150,000

Hire-and-drive car and hire-car service companies

RM300,000

Advertising companies

RM300,000

Public accountants

N/A

Advocates and solicitors

N/A

Professional engineers

N/A

Architects

N/A

Licensed or Registered Surveyors / Registered Valuers, Appraisers and

N/A

Estate Agents
Consultants (subject to some exclusion)

N/A

Management companies

N/A

Provider of charge and credit card services

N/A

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

3. Reasons for GST by Government

Amid mounting criticisms and voice of the public against the idea of GST, the current
government is keen towards its implementation. There are overall 10 reasons provided by the
government on why GST is a better tax system compared to the current system. However it
needs to be mentioned that any comparison between GST and SST is purely on the structure
without taking into account the rates imposed.

The first reason given by the government is through GST implementation, the citizen will have an
improved standard of living overall. The revenue from GST could be used for development
purposes in all areas such as education, healthcare, public transport etc. However this will also
mean that the GST planned by the government will have a higher tax collection which is a
burden to the citizen. Higher collection of revenue is considered the main purpose of GST as
government is currently in the process of reducing their budget deficit to gain investors
confidence. Whether the additional tax collection will bring a better standard of living is highly
dependent on the efficiency of the government in managing their projects.

The second argument provided by the government is lower cost of doing business. Under the
current system, some business may end up facing cascading tax, which result in them paying the
tax multiple times. This may occur when an input of the company is already taxed by the
government and they are again taxed for their output. However under GST, the business will be
able to claim for the tax of their inputs. As such, cascading tax will not occur under GST. However
it needs to be mentioned that GST covers a wider range of goods and services compared to the
current SST, particularly in the services sector. Whether the overall cost will actually be lower for
business remains to be seen.

The third reasoning provided is GST will enable government to build the nation to become a high
income nation. Once again, it was claimed that the higher revenue due to GST implementation
will help the government financially which will lead to more projects and development being
done for the nation. The weakness of this proposition is again whether the higher revenue will
be used efficiently to neutralize the loss of real income due to higher tax collection.

Fairness and equality is one of the arguments from the side of the government. The method of
SST particularly the services tax is all services will not be imposed tax except stated otherwise. As
such, there are significant number of services which are not subject to SST such as the financial
industry. On the other hand, GST will in general be imposed on all type of goods and services
except stated otherwise. As a result, taxes are levied fairly among all the businesses involved,

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

whether they are in the manufacturing, wholesaling, retailing or service sector. However this will
also mean that the overall cost of living will increase particularly in the service industry since
services which is not subject to SST previously will be imposed tax under GST.

Another advantage of GST is it will increase global competitiveness. This may be achieved as
business which involves in export will be able to claim back the taxed they have paid for their
inputs while no GST will be imposed in exporting the goods. On the other hand as the current
SST possesses no such rebate, the export price has already absorbed the cost of taxation.

The government said that the current SST has many inherent weaknesses making administration
difficult. On the other hand, GST system has in-built mechanism to make the tax administration
self-policing and therefore will enhance compliance.

GST will also reduce red tape, which is bureaucratic system that is present in the current SST. For
example, in order to be exempted from tax, businesses must apply for approval to get tax-free
materials and also for special exemption for capital goods. However the rebate system where
the business is responsible to claim back the tax input from the government is yet to be known
whether it will be less bureaucratic than SST.

As mentioned previously, as GST will avoid cascading tax issue, it will eventually lead to fair
pricing to consumers. Although consumers may be able to avoid paying the price of goods plus
twice the tax, the overall consumer price may increase due to the broader range of goods and
services subject to GST.

Lastly, GST will allow greater transparency compared to SST. As GST is imposed at every level
albeit the rebate for input tax, each buyer will be able to see exactly the amount of tax theyre
paying from the receipt. Consumers will also be able to know if the goods or services they are
paying for is exempted or zero rated.

In a nutshell, compared to the current SST, GST will be less bureaucratic for the firms and the
issue of cascading tax will be avoided. However the impact to the government and consumer is
dependent on the rate imposed. From analysis made by the government, GST will provide higher
revenue for the government which will be able to be used for development purposes and other
financial responsibilities including debt payment. On the other hand for consumers, there will be
higher tax overall need to be paid which will result in higher prices and hence lower real income.
Therefore it can be said that the current planning for GST will help both firms and government
but may cause an additional burden to the citizen.

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

4. Goods and Services Tax


4.1. Process of GST
One of the main advantages of GST / VAT compared to SST is the ability to avoid cascading
tax. As the name implies, VAT will only tax the additional value imposed by the respective
business and will provide a rebate paid for the input tax. As such, there will be no risk of
double taxation as long as each firms claim their input tax from the government.

Under GST, all goods and services will be divided into three categories i.e. standard rated,
zero rated and exempted. Standard rated supplies are taxable supplies of goods and
services which are subject to the standard rate. Zero rated supplies are taxable supplies
which are subject to a zero rate, that is not liable to GST at the output or input stage.
Exempt supplies are non taxable supplies which are not subject to GST at the output stage
that is, when supplied to the consumer. However, the GST paid on input by the businesses
cannot be claimed as tax credit.

All businesses with turnover of more than RM150,000 per year is compulsory to register for
GST. Businesses with turnover lower than the said threshold may register for GST
voluntarily. An illustration of the GST process is provided as below.

For the goods and services previously taxed at 6% rate under SST:

EPPE 6144 PUBLIC FINANCE


GST in Malaysia
For the goods and services previously taxed at 10% rate under SST

For the goods and services previously not taxed under SST

Izzuddin Bin Yussof


P73499

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

4.2. List of zero rated and exempted supply under GST

Below is the list of zero rated and exempted supply under GST. As mentioned previously,
the zero rated supply are supplies which are not liable to taxation for both input and output
while the exempted supply are supplies which are not liable to taxation for output but is
liable for input. However businesses are allowed to claim for tax input.

Zero Rated Supply

Exempted Supply

Live animals, animal products, vegetable Land and building used for residential,
products and some prepared food.

agricultural, burial and religious purposes.

Goods supplied to Labuan, Langkawi and The operation of any current, deposit or
Tioman
Goods

savings account*
supplied

in

connection

with The provision of any loan, advance or credit

international shipping and air services

or other similar facility*

Supply of treated water (unlimited) to The transfer of derivatives/securities*


domestic consumers
First 200 units of electricity to domestic Unit trust transactions*
household
Supply of raw materials and components for Life insurance*
approved toll manufacturing scheme
Services and spare parts in connection with Islamic financial services will be given the
shipping and aircraft (excluding private use)

same treatment as conventional financial


services*

International transportation of passenger Education services


and goods
Leasing of goods outside of Malaysia

Childcare services

Services rendered in connection with goods Healthcare services


or land outside Malaysia
Services rendered to a person outside Rental
Malaysia

of

residential

accommodation (more than 28 days)

Specified services provided in Malaysia to a Public transport


person (in his business capacity) who
belongs outside Malaysia
Insurance relating to export of goods; Toll
services connected with the export of
goods; Insurance of risk outside Malaysia

properties

and

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

Telecommunication services provided to Funeral, burial, and cremation services


outside Malaysia
Services supplied relating to location of Qualifying

supplies

by

societies

and

computer servers in Malaysia belonging to a associations


person outside Malaysia
Advertising services made available outside
Malaysia
International mail
Qualifying inbound/outbound tour services
Lease of air or sea containers
*It is to be noted that any fee, commission, or similar charges associated with the above
services will be treated as a taxable supply.

From the list, it can be said that most of the zero rated supplies are the ones relating to
international relationship, except for the foods and utilities up to a certain threshold.
Although there is a long list of exempted supplies which give direct effect to the consumers,

the exempted supplies are only non-taxable on the output, not on the input. As such, it is
most likely that consumers will still face a rising price for the overall goods and services.

Despite that, it needs to be mentioned that Malaysia has one of the longest zero rated and
exempted list of goods and services for its GST.

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

4.3. Comparison on the price of goods and services


Not all price of goods and services will be heading towards the same direction. There are
some goods and services will face a price increase, no effect and some may decrease after
GST implementation. This is because although GST covers a wider range of supplies, the
sales tax for manufacturing products actually falls from 10% to 6%. As a result, as long as
the business did not incur a higher cost due to GST, the price of the supplies should
decrease.

Below are the price direction for some goods and services provided by the Malaysian
Custom

Decrease

No GST

Increase

Television

Bread, white and wholemeal

Mobile phone

Refrigerator

Cooking oil

Computer

Air-Conditioner

Beef, mutton, lamb, chicken iPad and Tablet


and pork

Spark plug, brake pad and Local and imported fruit

Photocopy machine

car battery
Home theatre system

Diesel

Digital photo printing

Hair dryer

Petrol unleaded 95

Transportation of goods

Electric fan and toaster

Rice

Drinking water

Gas cooker double burner

Fresh vegetable

Magazines

Electric iron

Fresh fish and prawns

Fish balls

Cotton bath towel

Powdered-milk for infant

Canned sardine & tuna

Colour pencil

Chicken and duck eggs

Lipstick

Toothbrush

Public transport

Nail colour

Dettol, antiseptic

Motor oil

Motorcycle 110cc

Dining set (6 chairs)

Engine oil

Watches

Diapers

Private-clinic x-ray

Ice cream

Car 850cc

Toll

Cheese

Toothpaste

Chilli

Oats and cereals

Soft drink
Plastic mat
Imported fruits

Chilli sauce, oyster sauce etc

EPPE 6144 PUBLIC FINANCE


GST in Malaysia

Izzuddin Bin Yussof


P73499

5. Conclusion and Recommendation


As a conclusion, GST system by itself may prove to be a better tax system compared to the
current SST. However as government is expecting additional revenue from GST, it would only
mean that the government is planning to increase consumption tax collection along with the
introduction of GST. The government is currently forced to collect higher revenue to reduce the
level of government debt and to convince international investors that Malaysia remains an
attractive investment destination.

In order for GST to be successful, the government needs to ensure that there is full compliance
among all businesses and make sure no businesses will take advantage of GST and raises the
price irresponsibly. Besides that, it is also the task of the authority to minimize the risk of
confusion among stakeholders especially consumers and businesses upon GST implementation.
Furthermore, close observation need to be done on the impact of GST on low-income
household. This is important to guarantee the well-being of the group, which is most likely to be
highly affected by GST.

6. References

Cnossen, S. (1998). Global Trends and Issues in Value Added Taxation. 5 International Tax and
Public Finance 399

GST in Malaysia. [ONLINE] Available at:


http://savemoney.my/gst-in-malaysia-how-the-goods-and-services-tax-affects-you
[Accessed 24 January 2015].

James, K. (2011). Exploring the Origins and Global Rise of VAT. Tax Analysts, 15-22

Malaysia, (2004, 2013 and 2014). Budget Speech, Ministry of Finance.

Royal Malaysian Customs Department . [ONLINE] Available at:


http://www.customs.gov.my/en/cp/Pages/cp_abt.aspx. [Accessed 24 January 2015].