…and the world hasn’t ended. Car prices have even come down, as predicted (so will furniture, and quite a few imported manufactured goods). There will no doubt be teething troubles along the way, but Malaysia’s most significant tax reform in a generation is now established.
But confusion abounds. Take this article from yesterday:
KUALA LUMPUR, March 31 — University students have complained that they will be charged the goods and services tax (GST) on their fees despite Putrajaya insisting that education is exempted from the tax.
Malay daily Sinar Harian reported students as saying that their costs will rise significantly as they have received notices of increase in school fees, room and board fees and miscellaneous charges, all due to GST.
“The government promised a few items and services are exempted from GST. Among them the health sector, public transportation sector and education,
“Yet, we doubt the effect of GST exemption on such services as service providers still charge GST on administration costs. Even though the user of the service is exempt from GST, the price of the service is still increased and university students are the victims,” Sinar Harian quoted president of the National Association of Muslim Students in Malaysia (PKPIM) Mohammad Fazril Mohd Saleh as saying.
OK, let’s go through this s-l-o-w-l-y. There are four different categories of goods and services under GST:
- Out of scope – where its difficult to determine value-added (e.g. investment or interest on loans). The government is also out-of-scope, for obvious reasons (though there are exceptions, where government services compete with private sector activities e.g. air time sales by RTM);
- Standard rate – where 6% is levied across the entire value chain, and where producers and retailers can claim back input credit on any GST they paid for inputs. The final tax is borne by consumers;
- Zero-rated – exactly the same as the standard rate, except the final 6% on final sale to consumers is waived. These are goods with GST embedded but because of the input credit claims, the government gets nothing, and consumers are not charged either;
- GST exempt – under this category, consumers are not charged GST, BUT producers and retailers CANNOT claim input tax credits.
There’s also a category of mixed supply, where a company has to manage one or more categories of goods and services. Banks for instance are mostly out of scope or exempt, but fee based charges are subject to the standard rate.
Education, public transport and healthcare are mostly exempt, and this is where most of the confusion lies. The word exempt here means that no GST is charged to the final consumer, but the cost of goods and services provided still have an element of GST embedded, as service providers CANNOT claim back the GST cost on their inputs. This is actually the most penal tax category, as it is almost guaranteed to raise final costs.
GST exempt does NOT mean there is no tax burden involved, only that there’s no levy on the final consumption stage. It still exists in previous stages, and because producers have to absorb the cost, prices will have to rise. So returning to the article above, there’s no grounds for complaint – the real confusion is over the terminology.
Some countries have tried to make this clearer – Australia for instance uses the term “input-taxed sales” – and the use of the word exempt in this instance is unfortunate. In that sense, the government could have done a better of job of communicating this. But the fact remains that “exempt” means you’re going to get taxed, just not overtly.