How Sales and service tax (SST) affects Malaysian?
On the National Tax Conference held on 17th July 2018, Malaysia’s Finance Minster Lim Guan Eng stated that the government will incur a 10% tax on sales of goods and 6% tax on service provision. This will be the SST rate that will be implemented from 1st September 2018. But how exactly does SST works? How does it impact Malaysian in our daily life (compared to GST)?
We’ve created a blog focusing on the comparison between SST (using previous framework) and GST. This blog post will discuss SST by looking into these questions.
How SST works?
The Sales and service tax (SST) in Malaysia is made up of 2 separate tax law – the Sales Tax Act 1972 and Service Tax Act 1975.
Sales Tax
Sales tax is single stage tax incurred either on imported or manufactured goods. Goods refers to all movable properties only.
The Sales Tax Act 1972 defines “manufacture” as the conversion by manual or mechanical means of organic or inorganic materials into a new product by changing the size, shape or nature of such materials. This includes the assembly of parts into a piece of machinery or other products, but does not include the installation of machinery or equipment for the purpose of construction. These apply to goods other than petroleum.
Every personjnel who manufactures taxable goods are required to apply for a sales tax license. Only those manufacturer with an annual sales turnover of taxable goods not exceeding RM100,000 and companies with Licensed Manufacturing Warehouse (LMW) status can apply for a certificate of exemption to be exempted from licensing. However, he is required to pay sales tax on taxable raw materials and components used in the manufacture.
Service tax
Service tax is an indirect single stage tax incurred on certain prescribed goods and services in Malaysia. Taxable goods under the service tax includes food, drinks, tobaccos. Professional and advisory service providers like lawyers, architect, insurance companies, accountants and etc are also taxable services.
All taxable person who provides taxable services are required to apply for a license under the Service Tax Act 1975. There are different threshold for different taxable service sector to be required to apply.
How does it impact Malaysian (compared to GST)?
Many will expect prices of goods and services to be reduced since SST is a single stage tax whereas GST is a multi stage tax. Our Finance Minister Lim Guan Eng also suggested that SST collection will reduce government tax collection by RM23bil, which in turn reducing burdens of Malaysian.
The main question that consumers are interested is whether the prices of goods and services will be reduced after the implementation of SST? This has also been the aim of the government to replace GST by introducing SST in September.
Important note
Before answering the question, one important difference between SST and GST that we have to take note is that, under the SST, only selected goods and services will be taxed at a particular stage of supply chain. Meanwhile, the broad-based GST was imposed at every stage of business transactions. GST is a blanket tax system which is implemented on every stage of a supply chain from the start until when it reach the consumers, whereas, SST is a single staged tax system but with a risk of cascading effect whereby the supplier who is needs to pay tax may pass the increased cost to wholesalers and retailers.
Furthermore, our Finance Minister Mr. Lim also stated that “whether the target to reduce prices of goods and services can be achieved relies on whether the government is able to instill confidence among the public that the implemented tax regime by Inland Revenue Board (LHDN) is fair”. He continued saying that “Generally, it has been proven that if people believe that the government is using the obtained tax money for the right purposes, they are willing to pay more and we hope that we can instill this confidence among the taxpayers,”
Targeted price reduction effect
Looking into the very first step that our government made on moving towards the implementation of SST, is the Zerorization of GST rate. Many people will expect prices of goods and services to be reduced since zerorization of GST take effect. Nevertheless, a survey covering 417 items shown that only 70% (about 280 items) of the surveyed items experienced 0.04% to 13% price reduction. This means that the price reduction effect does not apply to all products while many only experience minimal reduction in price. Besides, as most of the consumers products are already either zero-rated or exempted under the GST regulation, hence, only big-ticket items like electrical goods, vehicles and luxury goods were those experiencing price reduction after the zerorization of GST. Therefore, most consumers may not be feeling the effects of price drops as much as they wanted especially if they are not looking at those big-ticket items. And in fact, prices are not reducing as much as expected.
In the national tax conference, Mr. Lim also mentioned that “Unlike the GST, which burdens the poor proportionately more, the new SST will be tweaked and designed to ensure that the impact on the lower-income groups would be proportionately less”. Nevertheless. “the details of the improvements would be announced when the new SST Bill is tabled in Parliament during the current sitting” said Mr. Lim.
From Mr. Lim’s statement, we can deduce that, compared to GST period, the implementation of SST should lead to price reduction or minimal to no increment on items that are targeted for individuals under the B40 income group. However, other big-ticket items may most probably experience an increment in item price as the suggested sales of goods tax rate (10%) is higher compared to GST (6%).
Hence, one will still expect the implementation of SST leads to higher prices in the market overall even though the tax regime covers fewer products compared to GST. Nevertheless, this expectation will still need to be confirmed by the list of goods and services that will be covered under the new SST system.
Conclusion
In short, the re-introduction of SST will most probably impact people depending on their expenditure habits. For instance, people who dine out at high-end restaurant habitually will be spending more after the re-introduction of SST compared to those who eat at a hawker centre habitually. Re-introduction of SST will reduce people's day-to-day groceries expenses theoretically, but increase expenses on things like phones and vehicles.
Such a result, in my opinion, will benefit Malaysia in long run in terms of reducing the difference in spending power between individuals of higher and lower income group, reducing the disparity between the groups.
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