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By Lien Hoang
Malaysia’s consumption tax will officially drop to zero next month, quickly fulfilling the new government’s campaign pledge but pushing businesses into a last-minute scramble to swap out shop displays and tax software.
Repeal of the 6 percent goods and services tax June 1 is expected to lower prices across sectors, especially retail, a market in which customers most clearly see tax bills passed on to them.
However, this move will pave the way for a comeback for the sales and service tax (SST) from three years ago. If the reincarnated SST is 10 percent, as in its past life, costs could rise for the manufactured products that are covered, like vehicles, and for services like consulting and engineering.
The Finance Ministry’s May 16 decision to remove GST has given companies about two weeks to transition. Kularaj Kulathungam, managing director of KR Tax Consultants Sdn Bhd, fears that some taxpayers will exploit the transition period for profiteering.
“My bigger concern is that there could be recipients of goods and services who may pressure suppliers to not issue tax invoices until after June 1 so as not to incur GST at six percent,” Kularaj told Bloomberg Tax. “Or, there could be suppliers who do not lower the price of goods as a result of the removal of GST at six percent.”
The government probably “will be closely monitoring businesses and retail outlets to ensure that the prices of goods and services are revised accordingly, in view of the reduction of the GST rate,” Baker McKenzie affiliate Wong & Partners said in a client alert.
Officials from the newly-installed Pakatan Harapan, the first opposition party ever to win a Malaysian election, didn’t fully snuff out the GST system. Within days of taking office this month, party leaders announced a stopgap measure to reduce the levy to zero, as promised on the campaign trail.
Yet few believe that a sales and service tax alone, with its more limited scope, will suffice in the face of Malaysia’s persistent fiscal deficits.
“Ideally, a hybrid tax system of SST and GST which addresses the cascading effect of the old SST regime would be the best tax avenue to replace GST,” Ivy Ling Yieng Ping, associate at law firm Lee Hishammuddin Allen & Gledhill, told Bloomberg Tax.
The finance ministry offered assurances it would trim spending and raise funds through oil revenues.
“Expenditure reduction will begin with rationalization, efficiency measures, and reduction in wastages,” it said in a press release on abolishing GST. “Of significance, oil prices have been higher than the $52 per barrel estimated for budget 2018. This provides fiscal buffers for the immediate future.”
The ministry didn’t specify where it might cut costs. Robert Teo Keng Tuan, managing partner of RSM Malaysia, said the government could prevent “widespread leakage” by deferring some large procurement contracts and making their tenders more transparent. It also could save money by shrinking the bureaucracy, he said. During the campaign, then-Prime Minister Najib Razak offered higher pay for civil servants if re-elected.
Once the sales and service tax returns, Ping predicts it will mostly affect service industries, from restaurants and night-clubs, to legal and accounting firms. However, she said in the meantime, the most visible impact will be on retail stores.
“The retailers are the ones who need to make the biggest changes, as all their displayed prices need to be reduced to reflect the reduction of the GST rate,” she said.
Kularaj reminded taxpayers they still need to keep tax files, even with GST at zero.
“We foresee that there may be some practical accounting or transaction-related issues for many GST registrants,” he said. “There could also be administrative issues, as some GST accounting software may not be flexible with changes to tax rates and tax coding for transaction recording.”
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