GST in perspective
by David Lee
The GST (Goods and Services Tax) Bill was first introduced in the Malaysian Parliament for its first reading in December 2009. The intention then was to implement the new tax scheme as soon as the GST system was in place and the proposed rate was 4%.
Its implementation has since been delayed as the government studies its impact on society. Suffice to say, it will be introduced at some stage and it is thus important to have a good understanding of the GST. This article will discuss the pertinent aspects of the GST.
GST is a form of indirect taxation. It can be defined as a domestic input credit consumption tax, meaning that the GST will be levied on taxable supplies and, ultimately, consumers will bear the effects of the tax.
In order to minimise the GST’s impact on society, there will be exemptions and zero rating for certain types of transactions and these will also be examined in this article.
Malaysia has been recording fiscal deficits (government total expenditures exceeding the revenue it generates, excluding money from borrowings) for more than a decade. For the year 2011, the budget deficit was 5.4% of the country’s gross domestic product (GDP). The government intends to reduce the deficit and the target is to bring it down to 4% of GDP by 2015.
In light of this, there is a need to introduce measures that can strengthen and stabilise the revenue base for the future, hence the proposal to implement the GST. Other reasons for implementing this new tax regime include the following:
- Malaysia has a narrow revenue base, being dependent mostly on direct taxes. The contribution from oil and gas to the government’s revenue has been growing over the years and presently account for about 40% of the total. This is considered risky as oil and gas are not reliable sources of revenue over the medium to longer term because they are depleting natural resources and prices for such commodities tend to be volatile.
- The government’s financial position can be addressed through the implementation of an indirect tax such as the GST. Many countries, including Singapore, have successfully adopted GST as a part of their fiscal strategy.
- Studies by tax experts show the government can expect to collect on additional RM1 billion in revenue annually after the first year of implementation.
Not all businesses will be affected by the implementation of the GST. Small businesses can expect to be exempted in order to save them the cost and effort of keeping records required if they are registered for GST. Such businesses need not add GST to the amounts at which they sell their products or supply their services, nor will they get refunds of the GST they pay on goods and services bought.
The amounts they enter in their accounting records relating to expenditure would be the total amount paid to suppliers, including any GST. For example, if they purchase goods for RM130 that includes RM5 for GST, they would enter RM130 in their purchases accounts and make no separate entries for the RM5 GST. They will not charge GST on their sales and there will therefore be no impact on their customers.
Zero-rated businesses are businesses that will not add GST onto the selling prices of their products as their rates of GST would be zero. Such businesses can however obtain refunds of all GST paid on the purchase of goods or services from the relevant authorities. Examples of zero-rated businesses include those selling children’s clothing and shoes.
Partly-exempt businesses include businesses that sell a variety of goods which are exempted, zero-rated and standard-rated. These traders will have to apportion their turnover accordingly and follow the rules already described for each part of their turnover.
Meanwhile, taxable businesses will add GST to their sales invoices and they will be able to get a refund of the GST they pay on their purchases. Therefore, they will need to know how to charge and prepare appropriate GST sales invoices on a taxable supply. The following is an example for a typical taxable supply:
Senadin Wholesaler sells 10 rolls of black tape at RM6 per roll and 70 marker pens at RM2 each. The goods are subjected to GST at the rate of 4%. The customer is given a trade discount of 25% by Senadin Wholesale.
|10 rolls of black tape at RM6 per roll
70 marker pens at RM2 each
|Less trade discount of 25%
Price after discount
|Add 4% GST||RM 6|
|Final price||RM 156|
Businesses which can get refunds of GST paid will not include GST as part of the cost recorded in their ledger accounts of expenses or fixed assets. On the other hand, businesses which cannot get refunds of GST paid will include the GST.
At the end of each GST tax period, a GST return has to be filled in and sent to the Royal Malaysian Customs. A typical GST return is shown below:
|GST due on sales in this period||(1)||
|Total GST due||(2)||
|GST reclaimed on purchases in this period||(3)||
|GST reclaimed on other inputs in this period||(4)||
|Total GST reclaimed in this period||(5)||
|Net GST to be paid to Royal Malaysian Customs or
reclaimed by the business – difference between (2) and (5)
Note: The figures above are examples only.
GST owed by or to the businesses will be shown as separate items under Current Liabilities or Current Assets in their balance sheets.
David Lee is an associate lecturer in the Foundation Studies Department of the School of Business at Curtin Sarawak. He teaches accountingand has extensive accounting and corporate experience both in Malaysia and overseas. He has done significant research in the area of indirect taxation, including GST. He can be contacted at +6 085-443 939 ext. 3902 or by e-mail to firstname.lastname@example.org.