Monday, February 24, 2014

The Meaning Of Zero Rated

I’m still snowed under with work commitments, so the blog will be on temporary hiatus until I can get a handle on my new job responsibilities.

Nevertheless, I can’t resist commenting on this (excerpt, emphasis added):

Putrajaya confusing Malaysians about GST, says NGO

Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah’s recent explanation of the goods and services tax (GST) is illogical and only confuses the Malaysians, a civil society group said.

The Oppressed People's Network (Jerit) refuted Husni’s remarks that those earning RM2,000 a month would only pay RM15.06 of tax because of the GST.

“The finance minister appears to try to confuse the people with his statement,” Jerit Coordinator E. Parames said in a statement yesterday....

...The GST will come into effect on April 1, 2015. Essential items such as flour, rice and sugar and public transportation services such as bus and train fares are exempted from the tax.

Citing Malaysia’s high household debt of 83% to the gross domestic product (GDP), Jerit said that there is no assurance that zero-rated items would exempted from tax, despite Putrajaya saying otherwise.

“As an example, rice is zero-rated item but the things used to produce rice and process it such as fertiliser, plastics and transport for distribution will all be charged with the GST,” said Parames.

“The GST applied on other items used to process rice and transport services will cause an increase in the price of rice,” he added....

The article title should by rights be “People are still confused over GST”.

What does “zero-rated” mean? It has a totally different meaning from “exempt”. From the point of view of the consumer, you want to see zero-rated much more often than exempt.

When a good or service is GST-exempt, the good or service provider has to absorb all GST charged on any input. While the consumer does not in principle pay GST on the final good or service, there will be an element of GST involved from the cost of the inputs, which could raise the final price. GST-exempt goods or services thus may actually have GST embedded in the price consumers pay.

When a good or service is instead zero-rated, the good or service provider has the right to reclaim from Customs any GST paid on inputs. In other words, not only does the consumer not have to pay any explicit GST on those goods or services, there is no embedded GST from inputs in the final price either, because the government refunds the tax.

I’m afraid Jerit is the one who’s actually confusing the people.


  1. I read in juxtaposition with the recently announced Singapore Budget 2014.

    Contrary to some expectations, the Singapore Finance Minister maintained the GST there at 7%.

    With no increases in corporate tax (currently 17%) and the top personal income tax rate (currently 20%).

    Yet the Singapore government managed to chalk up a budget surplus for FY2013, and is projecting only a slight budget deficit (0.3% of GDP) in FY2014.

    That is praiseworthy, but what should be noted is how much GST contribute to the Singapore government's revenue.

    I just wish that the Malaysian government had the political will to have implemented GST much earlier, while slashing subsidies, reducing tax rate and widening the tax net.

    That could have provided some much-needed backbone to the Ringgit and allowed it to better withstand the capital flight consequences of the US QE tapering.

  2. “As an example, rice is zero-rated item but the things used to produce rice and process it such as fertiliser, plastics and transport for distribution will all be charged with the GST,” said Parames.

    Do you mean they can claim back the GST that imposed on those transport / packaging of the zero rated goods which indirectly increase the cost of the goods?

    1. Yes, they can claim back the input tax..

      As far as I am informed on the GST implementation. Maybe Hisham has a more knowledge on the implementation part.


    2. Yep businesses can claim back tax for all inputs used to provide the zero-rated item.

    3. Hi Hishamh and anonymous,

      Yes, you guys are correct that businesses can claim back the input tax. However, I would like to add an insight into this.

      There will be an increase in working capital of business to finance the cashflow impact due to GST. This is because, the input tax paid, can only be claim back a month later.

      Therefore, companies might pass the finance costs or opportunity cost related to consumers.

      Just my 2 cents.



    4. Kenny,

      Can it be claimed back from the gst that was collected a month earlier? or the claim need to come from Custom department?

      Zuo De

    5. Dear Kenny

      1) I have been to the GST workshop for my company

      2) There are two ways to claim back GST paid
      a) I 'rebate' input tax by deducting from output tax collected. Example, if I pay RM10 input tax, when I collect RM20 output tax, I deduct RM10 to cover my input tax cost and forward the balance RM10 to Customs
      b) The second method is, upon issuance of invoice to my customer, I fill an online form where then Customs will 'rebate' the input tax paid within 14 days.

      for my company, both methods is quick enough turnaround (14 days) that I wont need to pass the temporary jump in cost to my customers. in my industry, we usually have a working capital to withstand permanent cost increase of 10-50%. only the poor performing companies will have problems absorbing permanent cost increase, let alone a temporary one.

      for companies dealing exclusively in zero rated items, I recall, they can claim back tax immediately after purchase. so their turnaround is almost instantaneous.

  3. Hope to see more economic insights soon.

  4. hey hisham ,

    I agree with you that the input tax can be reclaimed causing an item to be fully zero-rated. However, does this apply to fixed capital as well?

  5. i wonder how the government going to impose gst on individuals trading on the internet. i hope there is no leakages there as experienced by other countries.

  6. for farmer not earn yearly rm500k, they are not to register GST, even they may not apply Flat Rate Scheme (Palm Oil got FRS2%) for 2%, how they claim CHARGABLE GST 6% ? unless government increase SUBSIDI to them