Wednesday, May 22, 2013

GST And Inflation

My rant for the day.

Here are the facts:

  1. Malaysia is one of the last countries in the world to implement a full fledged value-added tax. The only countries of note that have yet to implement a VAT are the United States, Hong Kong, Brunei, and the countries under the Gulf Cooperation Council (GCC). Everybody else either has it, or are implementing it.
  2. Malaysia currently levies two forms of consumption tax – sales tax and service tax (henceforth SST).
  3. Sales tax is levied on all goods sold or produced in Malaysia, with the exception of petroleum and exports. The current standard rate is 10%, but a lower rate of 5% is applicable to fruits, certain foodstuffs, timber, building materials, cigarettes and tobacco, and liquor and alcohol.
  4. Service tax is applicable to restaurants, hotels, parking lots, golf courses, clubs, discoes, insurance agents, phone companies, professional services like accountants, lawyers and consultants, and many more at a rate of 6%. Some of these services require a minimum corporate income threshold before the tax is levied. Credit cards are also subject to a service tax, but in this case it’s a flat fee levied on principal and supplementary cards.
  5. GST is going to replace both these two taxes (with the possible exception of credit cards), and from which certain essential goods will continue to be excluded i.e. zero-rated (exports, petrol and basic foods for instance).

So, let’s assume that a 7% rate will be implemented:

  1. For food, the tax on basic staples will go from 5% to 0%.
  2. For other foods, the tax rate will go from 10% to 7%.
  3. For the “sin” goods, the tax rate will increase marginally from 5% to 7%.
  4. For everything else, the tax rate falls from 10% to 7%.
  5. Certain other goods, like books and petrol, will continue to attract no tax.
  6. For services, the rate will increase from 6% to 7%.

When the basic tax rates on most goods at point of sale are set to fall, how on earth can this be inflationary?

Both in theory and in practice, the implementation of a VAT or an increase in the VAT rate is almost always accompanied by a one time increase in the price level (cost of living), but not the rate of price increases (inflation). There are umpteenth examples of this over the last couple of decades.

In Malaysia’s case however, GST will be replacing a pre-existing tax and at a rate that is lower than the prevailing rate. Under those circumstances, the impact should be a one-time decrease in the price level, not an increase.

The regressive nature of GST is completely irrelevant in this discussion, because we’re replacing one regressive tax with another, and moreover one that is proven to be more efficient in raising tax revenues.

Almost all the gains in revenue collection from the switch to GST from SST will come from enforcing tax collection across the chain of production and distribution of goods and services, and not an increase in the overall tax burden to consumers.

Again, how can replacing SST with GST be inflationary?


  1. I understand the point about GST not inflationary given that it's replacing a higher SST.

    But if it's not inflationary, shouldn't it also imply that it isn't revenue-positive for the government, or at the very least, it should be revenue-neutral?

    Yet, Idris Jala said the other day, GST would generate additional revenue for the government. I find that statement problematic, and never mind that previously, the proposed rate was 4% and now it's 7%. And given the same rate, GST generates more tax revenue than SST due to the efficiency of the former tax regime.

    I've argued before that Malaysian GST isn't inflationary and I got whammed for it (but heh, what's new?). But my inability to square off the statement about government revenue and inflation/deflation is preventing me from continuing to say Malaysian GST isn't inflationary.

    1. Hafiz,

      I think there's a lot of confusion over this issue because SST is a single stage tax, but GST will be multi-stage. The extra revenue isn't going to come from consumers (i.e. higher prices), but from intermediate stages of production and distribution (greater tax base).

      Under the current SST system, everybody theoretically pays sales tax, but doesn't always do so, especially if they're small enough to fall below the required income thresholds or escaped notice. But under GST, the incentive of tax rebates on purchases of intermediate and finished goods means that there will be greater voluntary participation in the formal tax system, which is what really raises the extra revenue.

      It's not free of course - greater taxation is greater taxation, irrespective of the mode. Most of it will fall on businesses that had previously not bothered to collect the sales tax at all. But this impact will be largely irrelevant for final consumer prices.

    2. Think of it like this, GST is like Zakat, in Zakat you paid for your wealth (i.e what you have left of your spendings).

      So in similar manner, GST is tax on our consumption. So the more we consume the more we pay the tax.

      But like VAT, companies or tourist can get a refund from the government.

  2. Just wondering, are cars currently being subject to Sales Tax

    Second question, when GST comes in, will cars be subject to GST?

  3. I have been waiting to read about gst in your blog, and your opinion.
    from my understanding, it is true that burden from consumers will be eased due to gst will also levied to manufacturer and retailer (and transport).
    However my concern is due to product will go multiple process (manufacturing, transporting and retailing), will the price of the product itself rise, thus effecting buying power of consumers?
    We can see that present method used by companies to control their record book in black is by minimizing the product size. Wonder how will the goods be after GST is implemented?

    Anak Bentong

    1. @Anak Bentong

      There shouldn't be any price increases, because through tax rebates, companies only pay net tax on their value added, and not 7% on their gross sales.

    2. BTW, the key problem here isn't price increases but tax fraud and evasion, for example deliberately inflating invoices to claim greater tax rebates.

  4. Exactly, you cannot implement GET without the control and audit mechanisms in place, and we do not have them !!!! Imagine the amount of cheating and the amount of kopi oh duit that government auditors can stand to make!!! Hey, most retailers do not even have registers to record transactions in the first place. How do you implement GST except in supermarkets on the retail side. Most Malaysian business are cash no invoice no data system. Only those with proper records will have nightmares, and those with very good records will be able to tweak their data well because the level of audit expertise is not there. So WHY GST? Please explain, so I can be enlightened. Thanks for an extremely good blog!!!

    1. @anon,

      I don't see why supermarkets alone are candidates for GST. What about hotels, restaurants, car companies, furniture shops, electrical goods chains, etc etc? Most of the cash-based economy wouldn't meet the income threshold required to be captured under a GST anyway, so I don't see that as a particular obstacle.

      Also, the prospect of tax rebates is a good incentive for companies to make the necessary investments and comply with the regulatory requirements. That's the real advantage of a GST. Anybody in business who has to pay GST on inputs has an incentive to register in the system, and thus charge GST on the his/her outputs. You have to be part of the system first to defraud it. In the meantime, the government benefits from the increased tax yield while consumers benefit from a mostly lower tax rate.

    2. anything that related to commercial such as office, shop lot, hotel, motel, apparels, textile and furniture will be subjected to the GST

  5. " I think there's a lot of confusion over this issue because SST is a single stage tax, but GST will be multi-stage. "

    Dear ADMIN, GST is not A MUTI-STAGE TAX !!
    Manufactures & retailers & such can claim from gov for tax they pay, in the end, consumers will take up the current suggested GST rate 4%. DO homework before make urself looks silly

    1. This comment has been removed by a blog administrator.

    2. Sorry, Abel, but while I personally don't mind my identity bruited about, my boss is allergic to any references to the company.

      In any case, it is not necessary. Free conversation is the purpose of this blog, as long as it doesn't descend into useless name calling or insults.

      I'm not infallible, and people are free to challenge anything I say. That keeps me on my toes, and makes sure I actually do do my "homework". That's partly where the fun of blogging comes from anyway.

    3. @anon

      I think I know where you're coming from - the strict definition of a multi-stage tax is a tax levied on the same set of goods at all stages of a production and sales process. To be more precise, this is a cumulative multi-stage tax.

      Nevertheless, I am correct in my usage of the term to describe VAT/GST, as it is commonly referred to as a multi-stage tax, even by many tax authorities. Perhaps it would be more precise if I had used the term non-cumulative multi-stage tax, but that's a trifle cumbersome.

      1. European Union history - "On 11 April 1967 the first two VAT Directives were adopted, establishing a general, multi-stage but non-cumulative turnover tax to replace all other turnover taxes in the Member States."

      2. US Treasury - "A value-added tax is a multistage sales tax that is collected at each stage or point in the production and distribution process."

      3. India - "It is a multi-stage tax with the provision to allow 'Input tax credit (ITC)' on tax at an earlier stage, which can be appropriated against the VAT liability on subsequent sale."

      4. Singapore - "Goods and services tax (GST) is a tax on domestic consumption. The tax is paid when money is spent on goods or services, including imports. It is a multi-stage tax which is collected at every stage of the production and distribution chain."

      5. Hong Kong - "GST is a multi-stage indirect tax levied on local consumption"

      And closer to home:

      Business Times article by PwC - "Hence, in reality, GST is a multi-stage tax on the increase in the sales price of the goods or services as they pass through the chain."

  6. Hey admin Can you tell me about the tax rebates? I m curious how these will benefit the businesses? To my understanding I add value to the products and I have to pay tax for it right? what if I have produced a product and the consumers do not buy it? do I have to pay tax for the items then?

    1. You don't pay GST on "your" value added - the customers do. What you pay GST for is actually in the raw materials that you put into your product, and that's where the rebate comes in. And yes, you're still entitled to the rebate even if you don't sell a sen of goods (in fact, that's one popular avenue for VAT fraud).

  7. HishamH,

    I've sometimes wondered why a VAT or GST type tax is necessary at all. If I'm not mis-reading a particular Bloomberg chart, sales tax makes up only 7% of Malaysia government revenues. Instead of having this whole system of government tax, sales tax, or GST, considering the overheads and additional accounting and enforcement needed, wouldn't it be MUCH more efficient to raise an extra 7% revenue through higher company tax or income tax? This argument could also be bolstered from an equality standpoint (regressive nature, etc).

    But I'm more inclined to think there's just something here that I've overlooked, since as you point out the overwhelming majority of countries seem to think it's a good idea. Do you have any ideas?

    1. @aetherfox

      As one of my colleagues put it - GST will start taxing all those people who've never been taxed before.

      In a lot of ways, VAT/GST is very attractive:

      1. Income taxes are incurred, irrespective of whether that income is spent, which means savers are penalised.

      2. Also income taxes don't account for inherited/accumulated wealth, which a consumption tax does.

      3. A consumption tax also hits those in the shadow economy, who wouldn't normally be captured under an income tax, or never bothered to report their income. While this will include small traders and hawkers, some of these make really good money (my mother's relative for one - sells nasi lemak, drives a Mercedes).

      4. The regressive nature of a consumption tax has to be offset with the fact that higher income households will invariably spend more, and thus be taxed more, even if the rate is flat for all households. The other way this issue can be handled is by zero-rating basic essentials, like staple foods.

      5. GST is more "efficient" than the current sales tax because it only taxes value added, and not gross sales value. This is hugely important for businesses, as it should reduce their input costs (even if the sales tax is purportedly single stage).

      6. For the government, the burden and cost of collection is shifted to companies, which have an incentive to make the system work.

      7. And that in turn means a greater tax yield for any given tax base.

      It should also be remembered that Malaysia has a very narrow tax base - less than 20% of the population have income levels sufficiently high for them to be taxed, and only about 10% actually have to (after deducting allowances, rebates and deductions).

      The income tax rate would have to be lifted fairly high to match what a GST would yield. Moreover, personal income tax is just 10% of the government revenue base, corporate tax is about 23%. Based on Pemandu's estimates, it looks like GST will yield 2x more than the current SST, but at a 3% lower tax rate.

      Seriously, what's not to like?

  8. Thanks Hishamh. you've done a good job here. Now for this lesson to be drummed into the heads of all the opposition leaders who keep saying that the poor are going to have to pay for GST and whatever not rubbish completely ignoring exempt and zero rated supplies and other mechanisms that can be introduced to alleviate any undue cost increases that the poor might find themselves facing. Sure there are distortions in the application of GST where one finds imported orangers being subject to GST whereas lobsters are not. But I cannot see how this cannot be remedied. And over time it is possible to square off any of these distortions. I have been supportive of GST as I believe it is a fairer tax and I can now see a lot of people who do not pay taxes and yet enjoy the benefits of their wealth and undeclared or untaxable incomes now paying at least something when they consume.

    1. @Old Fart (seriously?)

      Thanks. Your sentiments have been echoed by many people I know, especially at the end of every April!

  9. Hi Admin

    I have a question regarding point 6. For services, the rate will increase from 6% to 7%.

    Does it mean that now a customer of a restaurant will be paying 7% instead of 6%? If so doesn't this mean as a burden to the customer?

    Thanks in advanced for your help.

    1. Rashidi,

      How much of a burden will that turn out to be?

      Based on the household expenditure survey, Malaysians spend approximately 3.2% of their annual expenditure on restaurants and hotels (room charges will also go from 6% to 7%). A 1% tax increase for a RM200 hotel room will be just RM2, a RM10 meal is an extra 10 sen. In the meantime, the sales tax on food (30% of expenditure) will go from 10% to 7%.

      You win some and you lose some, but on the whole, you should be gaining.

    2. I'm sorry. I'm a little lost on 10% to 7%. Are you referring to 10% imposed by restaurants as service charge?

    3. Rashidi, 10% is the current tax on sales of goods i.e. what you are paying right now. This rate applies to all but certain foodstuffs, building materials, cigarettes and alcohol, which are taxed at 5%. More details here.

      The service charge is not a tax, but a surcharge collected by hotels and restaurants. It has nothing to do with the government. Refer here for an explanation of the difference by Customs Malaysia.

    4. Thank you for the explanation.

      However I as a consumer can't truly understand how does GST benefits us or the economy.

      By reducing from 10% to 7% I believe the price will be cheaper for restaurant owners but not they consumer.

      Am I correct?

      Thanks again.

    5. Rashidi,

      For businesses registered with the government, it will be much cheaper, because they can now claim a rebate on any GST they have paid for any of their supplies.

  10. The big question is will the manurefacturers pass back the sales tax to consumer or keep for themselves? Should they keep it thanthe inflation sill definelty b there.

    1. @anon 4.57

      I'm sorry but you're confusing the price level with inflation. Also, the evidence suggests that changes in tax will be transferred to consumers.

  11. Given that Pakatan has basically created this perception that the GST will in fact increase the rakyat's expenditure, do you think it's likely that producers/retailers will cash in and be motivated to increase prices, just because they're essentially given a free pass to do so?

    1. Ladybug,

      One way to get around this is to ensure that all prices are quoted to consumers without GST with the tax only calculated at point of sale. While this may be confusing at first, it means companies cannot "hide" any price changes they make. This is common practice in most countries using a VAT/GST system.

  12. Interesting post.

    However, I disagree with your following assertions:

    1. "In Malaysia’s case however, GST will be replacing a pre-existing tax and at a rate that is lower than the prevailing rate. Under those circumstances, the impact should be a one-time decrease in the price level, not an increase."

    You are assuming that consumers of goods which will be subject to GST are currently paying the full rate of SST, which is untrue thanks to endemic tax evasion. More accurately, you should say that industries which are currently paying the current rate of SST will experience a decrease in prices, whereas industries which are not will experience a price increase. (NB: This is not a bad thing really)

    2. "The regressive nature of GST is completely irrelevant in this discussion, because we’re replacing one regressive tax with another, and moreover one that is proven to be more efficient in raising tax revenues."

    Again, not true unless you assume that everybody is currently paying SST.

    3. "Almost all the gains in revenue collection from the switch to GST from SST will come from enforcing tax collection across the chain of production and distribution of goods and services, and not an increase in the overall tax burden to consumers."

    This cannot be true. The initial burden of GST is always completely borne by the consumer, because consumer prices tend to be sticky downwards. Your assertion will only be correct if we assume that the suppliers absorb the tax by reducing prices. The end result is that products and services which currently evade GST will become more expensive, no?

    PS: Totally agree though that GST is not inflationary.

    1. @anon 12.22

      All valid criticisms, thank you.

      On point 1, the evidence is that the 2012 tax yield from SST is just 2% of GDP, i.e only about 1/5 of business revenue is being covered. GST ought to raise the base closer to 40%.

      On point 2, zero-rating of basic goods should ensure that GST is less regressive than SST, regardless of the change in base.

      On point 3, your last point is correct - goods and services not currently subject to GST will certainly go up in price, but this will be a one time change in prices, not an increase in inflation.

  13. Hisham

    you have made some good points here re GST, however there are still a few questions in my mind.

    1. 27b additional revenue has to come from someone, you mentioned those that have not been paying taxes currently or not declaring if I read correctly. Do you think if they are running businesses they will increase prices? if they are part of the GST chain they will want to make sure taxes are covered or recovered from one way or another ie increasing prices? imagine you me and the readers here are suppliers, each is increase by 4-7% of our costs, all other suppliers who need not pay taxes too how would it hurt the poor? and the public.

    2. GST process and procedures are still alot of questions, if we bring a comparison to home, tax authorities in SG are alot more efficient. Refunds, accuracy and efficiency you name it are alot faster. if GST refund is delayed would it meant a cost to the companies? and do you think they want to pass this costs to consumers. since now GST procedures have also been passed on from IRB to suppliers or companies wouldn't they need to hire more people to take care of the admin GST claims and compliance? costs again to companies and chances are costs pass on to consumers.

    what's your thought?

  14. Sales tax is only for manufacturing, NOT all sales!
    You are WRONG that it is NOT inflationary|

    1. @anon 12.16

      Actually, it's imposed at the manufacturing level for all goods and for imports. The definition of manufacturing used though is highly generic, and covers a wide range of activities.

      But whether or not the change to GST will result in an increase in the effective tax rate on consumers, the what I wrote above still applies:

      "Both in theory and in practice, the implementation of a VAT or an increase in the VAT rate is almost always accompanied by a one time increase in the price level (cost of living), but not the rate of price increases (inflation). There are umpteenth examples of this over the last couple of decades."

  15. Syabas for 'daring' to blog on this topic, which seems to be toxic for most politicians (on both sides of the divide). Perception (or misperception?) seems to be a major stumbling block to understanding the true implications of the imposition of GST.
    Perhaps to add to the prevalent confusion on the topic, please allow me to throw my hat into the ring:
    1. None of your commentators has seriously considered the impact (on consumers) of zero-rating essential &/or basic items like staple food.
    2. No one has discussed the turnover thresholds, below which even 'taxable' supplies will not be affected; for e.g., your teh tarik & roti canai at the warong should not attract any GST (unless, of course, you choose to patronise the more 'upmarket' ones!).
    3. The Government has, of course, not made any commitments on reducing personal income tax rates to ameliorate the 'expected' double-whammy impact of GST on income-tax paying consumers.
    Without the benefit or support of any relevant detailed research, I would still like to believe that the impact on the man in the street will be minimal (plus or minus).

    1. @pohLam

      Yes, I figure the more objectivity and actual information being put into this debate, the better. I agree on your assessment - I don't think the imposition of GST will have any major impact.

    2. I reiterate my view that 'misperception' is the major cause for all the confusion and concern.
      It does not help that PEMANDU has come up with the expectation that there'll be a huge jump in revenue (without clarifying how): the typical knee-jerk conclusion would be that that additional revenue must all come from us, the consumer!
      And it all goes back to the fact that GST had been mooted ages ago, with the Government taking great pains to assure us that this would be the best thing since sliced bread. Then (flip-flop?) it was immediately deferred - not the most reassuring move!

    3. @pohLam

      Yes, DS Idris made the statement of RM27 billion with the qualification of "at maturity", i.e. when GST is implemented across the entire production and retail levels, which obviously isn't going to be any time soon.

  16. The fact remains that the Govt projects 27Billion additional tax revenue. If is true that manufacturers will ultimately see a tax reduction, the increase has to come from somewhere, we must assume strict enforcement will be part of the equation. The increase in project tax collection means that the revenue will ultimately come from the consumers, because everyone in the GST chain just passes on the tax for value they add. I fail to see how one can simply deduce that because of refunds, the consumer prices will not increase.

    1. @anon 5.49

      Because it's likely to expand the base of goods taxable under GST, certainly some prices will go up. But I expect to see other prices come down. The net effect shouldn't change the overall price level very much. The big thing is whether food prices will change (30% of the CPI), and I don't see that happening at all.

  17. Hmm how nice.... if everyone in this country understand the economy and and account like you guys... uses jagon of your own world...
    But one thing for sure Supplier (seller/retailer) is the beneficiary of the move (both tax regimes)NEVER the consumer... for sure..
    always the case of the consumer will gets the heat.... like recent case of GST... one pair of half boiled eggs increase of 20 Sen (just one good example)caused by REDUCES of RON97 petrol... can anyone imagine that????
    This is about reality in life BUT not rethoric theory..

  18. Okay Hisham, lets assume that 27Billion comes from expansion of the base of goods taxable. Now how is such base not taxable now? Lets say it is taxable but avoided or escaped the tax, that 27 billion in new taxes have to pass to the consumers, whether it is foods or not. In order words, the consumers at the end will face the 27billion tax bill, is that not correct? Unless that tax does not pass to the consumer, which is an impossibility, is that not true. In the end, it all goes to the consumer; thats what the GST is all about or am I completely lost?

    1. @anon 4.58

      After looking at the whole thing from top to bottom for the last few days - it's been an educational experience - I wouldn't disagree.

      Except that it would be RM27b minus RM15b, which is the current take from SST.

    2. Ah, but which segments of the consumers?

      Obviously, not the consumers of the zero-rated supplies; and not the consumers who patronize only suppliers whose turnover is below the threshold (so let's stick to our favourite warong and/or faithful makcik/pakcik - but we may have to make sure we all don't flock to the same ones, because that would push them over the trheshold!).

      As for those of us who, occasionally or otherwise, can't 'avoid' going to the registered suppliers, let's hope the promised reduction in personal income tax will be more or less commensurate with the anticipated impact of GST.

      And while we are commiserating with each other over our now 'value-added' F&B, let's spare a kind thought for our non-income-tax-paying brethren who would now be 'invited' to join us in bearing the social burden.

      What's not to like about GST?

    3. @pohLam

      I don't think any putative personal income tax cut will likely offset the increased take from GST. As a share of government revenue, personal income tax is just a little over 10%; as a share of GDP, it's averaged just 2.1% since 1970 (max. was 2.78% in 1995).

      A full offset would probably require cutting the top marginal rate by at least a third, which might not sit well with the non-tax paying public. "Tax-cuts for the rich", etc. I suspect a token decrease of 1%-2% is the more likely, with an outside chance of up to 5%.

    4. I was, of course, speaking from the man-in-the-street perspective, not on the overall basis (your views on which I would concur with). After all, the tone of many of your respondents in the present discourse appears to be: what's in it for me?

      Income tax is never equitable (witness the ascending scale rates in respect of individuals), so there won't be any 'equitable' offset for anyone in particular. At best, we could hope for some modicum of set-off.

      On an overall basis, at least theoretically, the benefits will outweigh any adverse impact on the individual: widening of the tax base and better record-keeping, to mention just the obvious.

      Much will depend upon proper enforcement by the Customs (I would have preferred the IRB, which has a better & proven track record at forensic work on accounting records).
      [Acknowledment of bias: I'm ex-IRB.]

    5. @pohLam

      When I left my first job, near two decades ago, it took nearly a month and two trips to IRB to clear my income tax; now I don't even have to go, it's automatic. The annual pilgrimage of sending in the income tax returns used to be a pain; now it's online, and I get my refund in under a month.

      Kudos to IRB.

      I agree; it'd be more ideal to have IRB in charge of GST than Customs.

    6. Well, if you had come to my branch, you'd have settled the matter on the spot!

      Besides the dedication & diligence of the staff, technological advances also played a major role in propelling IRB to its present status. Having participated actively in the computerization program, right from the beginning until I retired a decade ago, yeah, it was great ride.

      As to the choice of Customs to handle the GST, it must be presumed that the Government made the decision solely on the grounds of direct progression since Customs has been handling the direct taxes all the while.

      In the UK, they went one step further, they merged the 2 authorities into 1. I dread that that would happen over here, because it won't work due to 'irreconcilable differences' (world of difference in work ethics!).

    7. More tax revenue = someone paying for it. At present the lower income are not paying income tax. So they are hit the hardest. Product & services will still need to charge additional cost for GST implementation for extra resources & training. It is the indirect of rounding up the extra cost which is raising the prices up + marginal taking advantage of profit for each level which add up the pain to the consumer pocket!

    8. @anon

      1. Before or after GST,.lower income households will not pay income tax.

      2. Before or after GST, everybody is paying tax on goods and services whether they know it or not, since the 1970s. Last year's revenue from sales and services taxes were RM9.5b and RM5,6 billion respectively. Every purchase of a car, an iPhone, a computer, of Coke or Maggi, a box of cigarettes was subject to sales tax. Every order of Big Mac or KFC, or stay in a hotel room is subject to 6% service tax.

      3. The government is putting in a lot of subsidies, tax incentives, and training into implementing GST. Companies will also save an big bundle, because they can now claim tax credits from LHDN. There is no justification for raising prices at all - any such instance should be reported to Customs, LHDN and the Ministry of Domestic Trade.

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  20. Abdussalam ShokhawiAugust 28, 2013 at 11:18 AM

    GST levied on consumers. Manufacturer and retailer can claim back the GST paid for their purchases after deducting the GST collected from their their sales. It is called Input Tax and Output Tax. If output tax collected is more than input tax paid, then the manufacturer and retailer must refund the excess tax to the government or vice versa ("rebates" is incorrect term). At the end, manufacturer and retailer ware not paying any GST to the government. It is good since SST had so many loophole such as tax avoidance activity by the tax payer. In the current SST system, consumer is actually pay higher taxes (Sales Tax 10% + Service 6%) as manufacturer and retailer has included SST element in their profit margins. it is called "embedded tax". So, as a consumer I think GST is good coz we will pay less tax (10% + 6% (SST) - GST4% or 7%). GST is transparent enough and we should support GST to replace SST. Actually, there are so many good things about GST. No reason to reject it.

  21. Great explanation, we will look forward even the GST affect our inflation rate in Malaysia or not.

  22. Thanks, a very informative indeed... (^___^)d

  23. In my opinion, GST tax is more effective rather than SST in collecting tax and the government should proceed it. It is cause the inflation? For me, it depend how the government manage the economy. More you buy, more tax you should pay.Hmmm..? Of course, it will effected the price as changes in tax rate. Reduce or increase in inflation rate will determine with the ratio price of goods in variety sector.

  24. Indeed, this is very informative. However, you guys really have to work better on your imagination. Practically speaking, the Company is only allowed to claim their tax on input. Upon the added value and pricing by the Company, the tax on output will be higher than the tax on input. For example, I purchase metals with cost at RM 100, tax on input 6% = RM 6, then I process the metals into finished goods, and mark up the price to RM 200, tax on output 6% = RM 12. Based on GST policy, the Company gets to claim only tax on input which is RM 6. In other words, the Company has to absorb the remaining tax on output of RM 6. In your opinion, do you think that the Company will absorb the RM 6 or charge them into selling price for the consumer?

    Imagine this remaining tax to be charged into selling after all the different stages; from manufacturer to wholesale, to retailer, to shop and end user. Every business will be charging the tax they are suppose to pay into the selling price.

    1. @anon 10.00

      I don't think you're quite getting how GST works. Companies do bear the tax burden of input taxes, which they can reclaim as input tax credit.

      However, the output tax is NOT borne by companies. They are borne by whoever buys their products. Companies only act as the government's collection agents.

      There is no question of companies having to "absorb" taxes on their output EXCEPT in the case of goods and services under the exempt list (residential housing, public transport, toll roads, financial services for example), where companies are NOT allowed to charge GST on their output and NOT eligible for input tax credit.

      Even in this case, the tax burden companies have to absorb is based on the GST they pay on inputs, not on their output.