The Prime Minister announced that Goods and Service Tax (GST) will start in Malaysia on 1 April 2015. At present, the Bill is going through parliament. This is a major change and will have a significant impact for all businesses and individuals in Malaysia.
WHAT IS GST?
GST is a Goods and Service Tax based on consumption. The law will require all businesses to register for GST with the Customs Dept. In some countries like UK it is called VAT.
Essentially a GST registered business can offset GST paid by the business against GST charged on supplies to that business. GST is charged on the value added at each stage of the supply chain. The consumer is at the end of the supply chain and therefore cannot recover the GST. In addition, GST is charged when a sale is made and not when payment is received and is payable to the Government monthly. GST is a major difference from the present sales and service tax in Malaysia. Some very small businesses will be exempt from registration.
TYPES OF GST IN MALAYSIA
GST to be introduced at four different rates:
- Standard Rated is charged on any taxable supply of goods and services by businesses Malaysia. GST is also charged on importation of goods and services. GST is applied at the standard rate unless there is a provision that states that it can be treated differently. There are some reliefs and exemptions for certain specific goods and services, and for very small businesses
- Zero rated: This is a taxable supply, meaning when you sell you do not change VAT because the rate is 0%. But GST incurred by the business can be recovered. If you make wholly zero-rated supplies, then it is likely that you will be in a refund position with Customs. Examples include for example certain agricultural products, foodstuff, water to domestic consumers, electricity supply (with limits) to domestic users, export of goods and international services.
- Exempt: This supply means no GST is charged on the supply. This does not mean that you are GST-free. It also means that there is no entitlement to recover GST. If you make wholly exempt supplies, then you will not be able to register for GST. Therefore GST would become an added cost to the business. Examples include private healthcare, private education and certain financial services.
- Out of scope: These supplies are outside the GST system. Therefore no GST is payable or recoverable. Examples include transfer of going concerns and supplies made by the Government, such as issuance of passports and licenses, except some supplies of services prescribed by the Minister of Finance.
WHO IS AFFECTED?
Every individual in Malaysia who consumes any goods or services will be affected by the implementation of GST. Businesses that are registered for GST will need to account for GST on their business activities on a monthly basis and pay GST to the Customs Department.
IMPACT ON OTHER CURRENT TAXES
The Government is abolishing the current sales tax of 5% to 10%, and service tax of 6%. These taxes will come to an end when GST starts on 1 April 2015. In addition, it was stated in the 2014 Budget that some assistance will be given to individuals and businesses following the introduction of GST.
ASSISTANCE FROM THE GOVERNMENT
The following measures will be effective from April 2015:
- One-off cash assistance of RM300 to households that receive Bantuan Rakyat 1Malaysia (BR1M).
- Individual income tax rates to be reduced by 1% to 3%.
- Individual income tax structure to be reviewed to ensure a more progressive tax structure, including increasing the chargeable income subject to the maximum rate from in excess of RM100,000 to in excess of RM400,000.
THE GST RATE AND AN ILLUSTRATION OF HOW IT WILL WORK FOR BUSINESSES AND CONSUMERS
The GST rate announced is 6%. This will replace Sales Tax and Service Tax which has been payable annually, whereas GST is payable monthly. Because of this, SME’s should plan for additional cash and be aware that GST is payable whether they have received payment from their customers or not. There are also penalties and interest payable for any delay in submitting returns or not paying on the due date.
It is worth illustrating how GST works with a very simple example:
Suppose Firm A (a Manufacturer) makes a sale to Firm B for RM100 plus 6% GST —RM106 in total.
Firm A will pay VAT to the tax authorities at the end of the month less the GST they pay on goods they buy.
Firm B (a Distributor), uses what it has bought to make products worth RM150; RM9 VAT is due when these products are sold to Firm C, but Firm B can also reclaim the RM6 GST charged on goods they buy.
Firm C (a Retailer) sells its products to final consumers—households—for RM350 plus 21 VAT. (Illustration table below)
The impact on prices and any price increase will need to be considered by all businesses. This is complicated by different types and rates of GST. Therefore an early GST review and impact is advisable for particularly SME’s.
|Implementation of GST - Malaysia||Sales||Purchases||Net GST|
|Sale||GST on Sales at 6%||Sales Prices||Cost||GST on Costs at 6%||GST to Government|
|Sale from Firm A to Firm B - Manufacturer||100||6||106||75||4.5||1.5|
|Sale from Firm B to Firm C - Distributors||150||9||159||100||6||3|
|Sale from Firm C to consumer - Retailers||350||21||371||150||9||12|
This example is for illustrative purposes only. This is based on the GST Bill (and excludes any changes in the Act. In any event you should seek professional advice)
The following measures will be effective from 2015. There may be changes during the process of the Bill being approved and enacted into law by the Government:
- Corporate income tax will be reduced by 1% from 25% to 24%. Income tax rate for small and medium enterprises (SMEs) will be reduced by 1% from 20% to 19%. Reductions will take effect in the year of assessment 2016.
- Cooperative income tax rate will be reduced by 1% to 2% from the year of assessment 2015.
- Secretarial and tax filing fees (subject to limits) are allowed as tax deductions from the year of assessment 2015.
- Accelerated capital allowances on the cost of information and communications technology (ICT) equipment and software are extended to the year of assessment 2016.
- Expenses incurred for training in accounting and ICT relating to GST are to be given a further tax deduction for the years of assessment 2014 and 2015.
- Grants for GST training of employees in 2013 and 2014 and financial assistance to SMEs for the purchase of accounting software in 2014 and 2015 will be provided.
WHAT BUSINESSES AND PROFESSIONALS NEED TO DO
The following business decisions need to be considered:
- Budget for cost of implementing GST
- Accountants and consultants fees
- configuration of accounting systems and recording
- Stationery changes & Staff policy
- training expenses,
- hiring of additional finance support
- Registration options and tax planning
- Additional time of the owners and the staff in GST imlimentation
- Manage cash flow as GST is paid on accrual basis
- Analyze the capabilities of existing accounting system, and make necessary changes
- Review accounts payable process to ensure tracking and recording of expenses, and any cash flow implications.
- Review employees benefits and the process of approving claims re VAT
- Changes required for existing standard contracts, templates ,documentation and related stationery
- Analyze and understand all the transitional issues on supply of goods and services
- Evaluate the impact on pricing of sales with effect from 1 April 2015
- Train employees on understanding and implementation of GST
- Identify the legal implications of existing long-term contracts which will have an impact with effect from 1 April 2015
- Review your business structure and make changes to benefit from GST implementation