Goods and Services Tax (GST) in Malaysia

1.0 Introduction

Currently, Goods and Services Tax (GST) is being applied in Malaysia since 1^st April 2015. It is a consumption tax imposed on the sale of goods and services. It was introduced in France in 1950s and has been adopted by more than 120 countries, including all member states of the European Union (EU). GST is to replace the current Sales Tax and Service Tax (SST) in line with the government policy of conforming policies of AFTA.

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GST is also known as Value Added Tax (VAT) in some countries. GST being adopted in some countries because they are dissatisfied with their consumption tax structure. Dissatisfaction happens because of the existing consumption sales tax is unsatisfactory, a reduction in the rate other taxes is sought or the existing tax system has not kept pace with the development of the economy.

In the case of Malaysia, the introduction of GST is part of the overall Government tax reform programme towards making the taxation system more effective, efficient, transparent, business friendly and capable of generating a stable source of revenue. Payment of tax is made in stages by intermediaries in the production and distribution process. The tax itself is not a cost to the intermediaries since they are able to claim back GST incurred on their business inputs. GST is imposed on goods and services at every production and distribution stage in the supply chain including importation of goods and services.

2.0 Unemployment

Implementation of GST brings out negative impact to Malaysia. GST being implemented by government since 1^st April 2015 and it caused unemployment increased. According to Sim (2015), there is almost 10% of Malaysian are unemployed after implementation of GST where most of them are in the range of 15 to 29 years old. The labour force participation reduced by 0.7 percent from 67.9 percent to 67.2 percent compare to the previous month. The unemployment rate rise for 0.1 percent from 3.0 percent to 3.1 percent compared to previous month (Goods and Services Tax (GST) Malaysia, 2014).

Goods and Services Tax (GST) Malaysia, (2014) mentioned that Malaysia implementation of GST will lead to stagflation. Malaysia’s export markets have reduces dependency on traditional markets such as China, EEC and US since Russia, Latin America, India and the Middle East have been promoted for Malaysia’s export markets. Malaysia will lessen the consequences of the forecasts economic decline in its traditional markets. These factors will adversely affect Malaysia’s economic growth resulting in higher unemployment, rise in cost of living with same amount of salary.

2.0.1 Decrease of Small Enterprises

Mohammad Najib (2015), Finance Ministry has mentioned that GST has forced some businesses to close down especially those owned by the elderly. Implementation of GST caused all the old small enterprise such as old mini market has closed up. Generally, old small enterprises are owned by those elderly who got no knowledge of technology and not educated. Therefore, the old small business is very important to them. Unfortunately, since GST has implemented in Malaysia, all those enterprise which could not stand for the financial and technology issues have to close down and this caused some of those elderly commit suicide as they could not face the fact.

According to China Press (2015), there is an elderly who named Lim Tai Choon (Lim), the owner of a sundry shop located at Johor Bahru has commit suicide. He locked himself in the shop before hanging himself. China Press (2015) had further reported that Lim had complained that he was worrying that he could not adapt with the GST system and would close down his shop.

Implementation of GST has come out with a GST system. It is hard for elderly to adapt since they are too old to learn this challenging system. For those old small enterprises, the owners have to withdraw some of their own pocket money to hire someone who knows everything about GST to help them operate their business with GST system. A lot of those small enterprises chose to close down their business because they are not able to afford extra expenses for the whole year. The number of unemployment has increases since there a lot of businesses have closing down.

Furthermore, according to Sin Chew (2015), traditional Chinese medicine (TCM) business which sells Chinese medicine, herbs, and alcohol beverages have contributed 30% of their incomes to government. Moreover, the implementation of GST has affected their businesses to drop by 30%. GST has affected their businesses to face financial issue that made them hard to survive and this forced a lot of TCM businesses to close down. When there are a lot of businesses closing down, it means that the unemployment rate will increase as those who works for the organization which have closed down will be unemployed.

Foong (2015), The Star Online, analysed that people spend lesser after implementation of GST. One of the cases is people who used to eat outside had chosen to eat at home since the price of foods & beverages at restaurant had increased with GST. Business of restaurants had dropped since eating habits of people had changed. When the business of restaurants had dropped, it indirectly affected employment level of a country. It is because it shows that when business of restaurant has dropped, there is lesser and lesser people going to restaurant to have a meal. Then, those restaurants will decruit some of the employees as they do not need that amount of employees to maintain the profit.

3.0 Aspects of Consideration

3.0. 1 Increase Global Competitiveness

GST (2015) declared that prices of Malaysia exports will become more competitive on the international level. Goods and Services Tax (GST) Malaysia, 2014 analysed that each party in the supply chain of a business can get refund of the GST paid to the Government. Therefore, it means that the tax element does not become part of the cost of the product.

When the cost of production falls in the domestic market, this will have the effect of making Malaysian goods and services more price-competitive in international market. This, combined with the fact that under GST on all exported goods will be zero-rated will be very beneficial for exporters who compete with manufacturers abroad facing a lower cost structure.

3.0.2 Lower Businesses Cost

The GST is an improved system of taxation. It is more transparent, efficient, effective, self-regulating and involves less red tape. It will also do away with the double taxation that exists under the Sales and Services Tax (SST) regime. The consumer will pay more reasonable prices for goods and services than under SST. GST is replacing all other taxes such as turnover tax, entry tax and license fees. Therefore, the production cost will be reduced since all the other taxes have been replaced by GST.

Previously, SST that had been taxed by government on business inputs is not allowed to reclaim while GST that taxed on business inputs is reclaimable (Goods and Services Tax (GST) Malaysia, 2014). Overall, it means GST is more effective and efficient tax structure compare to others because it replace multiple taxes on a product or service. The tax structure is much simpler, more transparent and less bureaucratic.

Figure 1: Price comparison before and after GST ()

3.0.3 Equity

Reform with a larger GST in isolation is not a viable option. Charging food, water, health and education a GST is causing the cost of living to be higher.

To the extent that the reform package involves replacement of existing indirect taxes, including state stamp duties, with a larger GST, the net effect on the average cost of living is relatively small. For example, higher food prices are offset by lower insurance premiums.

The reform package also involves a tax mix change from income to consumption, the package would result in an increase in the average cost of living. Importantly, the cost increase would be greater at lower income levels. On average those at higher income levels save a higher share of their income than those on lower income levels, and those at lower income levels spend a higher proportion of their outlays on the now GST-exempt items

3.0.4 Economic Growth

Malaysia’s export markets have reduces dependency on traditional markets such as China, EEC and US since Russia, Latin America, India and the Middle East have been promoted for Malaysia’s export markets. Malaysia will lessen the consequences of the forecasts economic decline in its traditional markets.

Government has designated for several financial aids under Budget 2015 such as subsidies, BR1M and incentives for certain groups. The income of the middle and lower income households will be increase of the effect of these financial aids (Government Malaysia Info, 2015).

Liquidity in the economy will be increase since the rate for income tax, corporate tax and cooperatives tax have been cutback (Government Malaysia Info, 2015). The excess funds will finance more domestic investments and public expenditure. It encourages further economic growth.

The government has also allocated RM52.5 billion under Budget 2015 for various infrastructural projects. This development expenditure will be expansionary on the economy with higher multiplier economic impact. The higher allocation for development expenditure will mitigate any slowdown in public consumption (Government Malaysia Info, 2015).

The GST will check the shadow or underground economy. The self-policing nature of GST will enhance compliance. The government will be able to tap revenue from the underground economy which presently is 30% of the country’s GDP. This would also lessen capital outflow, making funds for domestic investments and public consumption.

MacroeconomicsPage 1