What lies ahead for Malaysia and its businesses after scrapping of contentious tax

What lies ahead for Malaysia and its businesses after scrapping of contentious tax

Malaysia’s newly elected government made good on their pre-election promise by scrapping the controversial goods and services tax introduced by former Prime Minister Najib Razak. But uncertainty remains over what impact the abolition of the tax will have on Malaysian businesses – and how the country will fill the multibillion-dollar hole it leaves

What happened

On 16 May, Malaysia’s Ministry of Finance announced it would be scrapping the country’s goods and services tax (GST) as part of a larger effort to streamline the business environment. Adopted in 2015, GST applied a 6% tax at the point of sale on a wide variety of goods and services throughout the country.

Malaysia’s new leader Mahathir Mohamad settled comfortably back into his role as Prime Minister and wasted no time in making the change to the tax system. But as the euphoria of tax-free purchases wares off over the coming weeks, businesses will need to understand how the GST rollback will be implemented and what will be in store for them in the future.

The Ministry of Finance’s decision has been followed by a series of clarifying announcements that spell out exactly how the rollback and replacement of GST will be carried out. The first move was to announce that GST was to be zero-rated from 1 June. In theory, this reverts prices back to levels without GST – with a few notable exceptions, such as cigarettes, which will retain their current price levels.

Companies and regulators were quick to note that contracts and product labels would still reflect GST pricing during the zero-rate period. To prevent abuses, the Ministry of Domestic Trade, Co-operatives and Consumerism (KPDNKK) has given businesses until 30 June to update their pricing and threatened to find noncompliant those businesses in violation of Malaysia’s Price Control and Anti-Profiteering Act 2011 and the Profiteering Under Price Control and Anti Profiteering (Mechanism to Determine Unreasonably High Profit for Goods) Regulations 2016 law should they fail to comply.

GST’s replacement?

Companies and consumers may no longer be liable for GST, but the tax is still on the books in Malaysia. The Parliament of Malaysia will need to formally repeal the law to remove it from the books and make way for any replacement. Parliament’s next session, slated for 16 July and lasting for 20 days, is widely expected to result in the repeal of GST and the introduction of a replacement.

The real question is what will replace GST and when it will be implemented. At the moment, Malaysia’s old sales and service tax (SST), or some form of special sales tax, is expected to be reintroduced as an alternative to GST. Malaysian officials have offered little clarification to date on the nature of an SST replacement, but have promised to introduce such a tax by September 2018.

GST vs SST

As companies and consumers wait for more details on SST to surface, it is important to note a few of the key differences between GST and SST. These differences will have a large impact on the nature of taxation in Malaysia and the operating environment for many companies doing business there.

Point of taxation

Under the GST system, taxation is applied at the point of sale for items and services at varying points of the supply chain. SST, on the other hand, limits the application of tax to the manufacturing stage. In practice, this will reduce compliance for all companies but those involved in the manufacturing stage of a supply chain. The method of incorporating taxes into pricing will also change. Instead of being charged tax on purchases under SST, the effective cost of new SST taxes levied on manufacturers will be incorporated into the price of their goods.

Ability to see the tax

One of the biggest differences between GST and SST for the average consumer is the ability to see the amount of tax being charged. When GST was first implemented, it came as a shock to many consumers unaccustomed to this practice, and it was a source of contention. Interestingly, following the implementation of SST, consumers may see that some of the goods that they wish to purchase may actually rise in price from their zero-rated levels as SST is incorporated into the end cost of goods.

Targets of taxation

Businesses are likely to see the biggest long-term impact from the narrowing scope of taxation applied under an SST tax system. Unlike GST, which is applied to a wide range of goods and services, SST has traditionally focused on a smaller range of goods.

Tax Rates

GST was applied at a rate of 6%. SST, on the other hand, has not been formally announced. Businesses operating in the country widely expect Malaysia to revert back to its previous SST rate of 10%, but many companies are lobbying for a lower rate to avoid raising the cost of their goods for consumers.

Tax Base and Government Revenues

GST is widely accepted to have a larger tax base than the previous SST model because it taxes a wider range of businesses. Some economists speculate that SST will bring in fewer tax revenues than GST, but government officials do not seem concerned at this time; they point to the rise in oil prices seen since the introduction of GST as a significant mitigating factor.

Impact on business

In the immediate term, retailers and companies face compliance challenges. All those with pricing incorporating GST will be required to make updates by 30 June. This is easier said than done since GST implementation took nearly a year to complete and, in many cases, companies have taken an even longer amount of time to fully build out effective pricing structures and point-of-sale systems.

Malaysia’s penalties for noncompliance, though, are far from lenient. Companies that fail to comply may face fines equivalent to $25,000, while individuals risk paying up to $12,500 .

More important than short-term compliance is the uncertainty that remains over the companies and industries that will be liable under an SST structure and the level of tax that will be applied to these companies. This is likely to prevent some companies from investing and scaling operations until they are equipped with more information on the market.

Impact on national competitiveness

Malaysia is one of Southeast Asia’s most dynamic economies and looks set to remain so for the foreseeable future. The country’s strong financial system, deep industrial talent pools and vibrant culture make it a clear choice for many companies seeking to do business within the country.

While GST reform can be construed as a means of improving the country’s businesses environment, successive changes to taxation or other areas of regulation make it difficult for Malaysia to improve its position and to attract increasingly complex forms of investment.

GST reform’s short-term compliance and medium-term uncertainty over what will replace it are just one example of this. To continue to be viewed as a destination for increasingly sophisticated investments, Malaysia will have to pick a course and stick with it.

Source: http://sea-globe.com/what-lies-ahead-for-malaysia-and-its-businesses-after-scrapping-of-contentious-tax/

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