Zero-Rated GST Effective from 1st June 2018

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The Sales and Services Tax (SST) will be reintroduced as part of the fiscal reform and will replace GST

With the new government in place after a shock win in the GE14, the public went abuzz when Prime Minister Tun Dr Mahathir Mohamad, announced that the Goods and Services Tax (GST) will be zero-rated (0%) effective 1st June 2018 onwards.

A statement from the Ministry of Finance (MOF) stated that expenditure reduction will begin with rationalisation, efficiency measures and reduction in wastages and the re-introduction of Sales and Service Tax (SST) is part of the fiscal reform initiative by the newly formed Pakatan Harapan government.

The statement also urged registered business owners to comply with the zero-rate imposition, while also ensuring that prices of goods and services comply with the Price Control and Anti-Profiteering Act 2011.

Registered traders are also subject to the current rules set forth in regards to tax invoices, the delivery of tax returns within the prescribed period of charge, and input tax credit claims.

The reintroduction of the SST is supposed to offset any shortfall in revenue but no exact date has been given as to when SST will come into effect and whether the MOF will reinstate the SST based on the previous thresholds and rates (between 5%, 6% and 10%) or whether they will introduce new thresholds and rates in order to simplify it compared to the previous SST.

SST is a single state consumption tax system whereas GST is a multi-stage consumption tax system.

What this means is that under SST, the tax is charged only once by the manufacturer or service provider and there is no subsequent claiming of input tax and re-charging of output tax as in GST.

Apart from the single stage and multi stage tax, another major difference between GST and SST is that the former is based on accrual basis whereas the latter is on cash basis.
What this means is that under GST, the tax must be paid to the Royal Malaysian Customs Department (RMCD) as long as the invoice has been issued, regardless of whether or not the customer had actually paid for the supply.

SST on the other hand is based on cash receipt basis, i.e. the tax registrant pays the tax based on actual cash collected from customers.

As such, GST imposes heavy cash flow burden on businesses as they need to pay the GST output tax even if they have yet to collect the payment.

In the case where a business is reliant on overdraft facility, the business incurs financing cost for the GST paid to RMCD while waiting for the payment from the customer.

Therefore, in order to recover the overdraft interest costs and to manage operating cash flow, businesses tend to increase prices so that the cash flow collected would be sufficient to pay for the tax liability in the next period.

Further, it is a fact that the RMCD takes a long time to refund GST to tax payers as they need to conduct an audit whenever there is a significant amount of GST to be refunded. However, this adds to the cash flow burden of the businesses.

With multi stage taxation, it also means that multiple parties need to file GST returns and compliance. This would increase compliance costs to between RM250 to RM2,500 per submission, where this job is outsourced to an accounting firm.

Annually, this would translate to between RM1,000 to RM30,000 in additional compliance costs. This excludes software upgrade costs, training costs and Consultant fees incurred to attend to GST Audits.

During SST, i.e. pre 1st April 2015, even though the rates were higher in some cases, most businesses didn’t feel the pinch because of the cash basis of payment and the lower compliance cost.

But with the zero-rated tax in place from June onwards, it is possible that buyers’ sentiments may boost as previously the public was burdened with high cost of goods plus GST. With the new system, the people’s purchasing power may improve.