Goods
and Services Tax in Malaysia: Sociohistorical Background, Implementation and
Impact
Yeng Yuen Pang & Fung Lan Yong
Lecturers, Jesselton College Sabah
Abstract
The main aim of this paper is to discuss
the historical background and implications of the Goods and Services Tax (GST)
in Malaysia. The paper
includes
how income tax and GST were implemented in the 19th century and the
differences between the Sales and Services Tax (SST) and GST. The GST is difficult for many Malaysians to conceptualize because of the
lack of proper training and education. The GST was implemented by
the Malaysian Government to correct imbalances and to streamline the country’s
tax system so that it would be more efficient, transparent and
business-friendly. The GST was implemented at every level of business operations,
from suppliers all the way to consumers, offering more benefits compared to the
SST. Therefore, the GST is considered as a new tax system for Malaysia that has
a significant impact on every stage of a company’s production and distribution chain.
Keywords: Goods and
Services Tax, Malaysia, historical, implications
I. Introduction
Income
tax was first implemented in Malaysia by British colonists in 1910 (Loo, 2006),
despite facing serious disagreement from the local opposition. In Malaya, income
tax was introduced in 1947, the state of Sabah in 1956, and the state of
Sarawak in 1960. It was legislated under the Income Tax Act (1967) (Act 53).
Before
the introduction of income tax in Malaya, the Sultanate was the largest
political unit in every state of the peninsula (Loo, 2006). The Sultan had the
power of implementing rules and regulations in terms of revenue. After the British introduction of income tax
in Malaya, several of the functions concerning income tax previously performed
by the Sultan were eliminated. According to Loo (2006), the revenue of Sarawak was
mostly derived from opium, mineral and poll taxes. On the other hand, Sabah, under the management
of British North Borneo Company, depended mostly on minerals, forest products
and plantation crops, such as tobacco and rubber. In 1885, tariffs were charged on imported
rice, but they were eliminated in 1903.
In
1914, which was World War I, the British colonial government successfully
introduced income tax in the Straits Settlements, but not in the Federated
Malay States (Loo, 2006). Three years later, Ordinance No. 8 imposed a tax
based on income level, effective from 1 January 1917. From 1918 to 1919, taxes on income were levied
under the War Tax Ordinance. From 1920
to 1922, the War Tax Ordinance was replaced by an income tax. Due to public protest, the income tax was
eliminated, but it reappeared in 1940.
Further,
the Bills imposed income tax, effective from 1 January 1941 to 31 December
1941. During World War II, the Japanese took over the Malay States, but they
did not implement any income tax laws (Loo, 2006). In 1945, the Japanese
surrendered and the British colonial governments in Malaya and Singapore set up
a special committee to consider the possibility of reintroducing an income tax,
which became effective on 1 January 1948 under the Colonial Territories Model
Income Tax Ordinances (1922).
II.
Secondary Findings
On
16 September 1963, the Federation of Malaya, Singapore, Sabah and Sarawak
merged to become a single nation state known as the Federation of Malaysia. From the mid-1950s until the formation of
Malaysia, the tax policies and amendments to the tax ordinances in the
Federation of Malaysia changed a few times. Under the Malaysian Federal
Constitution, attempts were made to streamline the taxation systems in the
Federation of Malaya, Singapore, Sabah and Sarawak under the Modification of
Laws for Income Tax Order (1964) (Wong, 2008). Although Singapore was separated
from Malaysia on 9 August 1965, the policy on the taxation systems continued in
the remaining Federation of Malaya, Sabah and Sarawak.
2.1 History of the
Goods and Services Tax (GST)
According to the Ministry of
Finance Malaysia and Royal Malaysian Customs Department (2012), the GST was
first implemented in France in the 1950s. Today, there are more than 160
countries that have implemented the GST. Myanmar and Brunei are the only
remaining countries in the ASEAN region that have not implemented the GST.
In Malaysia, the GST was first announced
in the 2005 budget in order to replace the existing Sales and Services Tax
(SST). According to Nor Hafizah Abdul
Mansor and Azleen Ilias (2013), the GST was to be implemented in Malaysia in
January 2007. In December 2009, the GST
Bill was tabled for the first reading in the Dewan Rakyat; however, in 2010,
the implementation of GST was postponed so that the government could engage
more inclusively all segments of the Malaysian society and to ensure that the
implementation would be well received.
The Malaysian government recognizes
the importance of the GST in promoting a strong and sustainable fiscal position
to support long-term socioeconomic growth.
During the 2010 budget meeting, the government revealed that it had
reached the final stage of the study on the implementation of the GST,
particularly to identify its social impact.
Before the implementation of the GST,
many arguments had been raised. The positive
and negative impact of the GST on the country and society were widely discussed. The Nor Hafizah Abdul Mansor and Azleen Ilias
(2013) study implied that the implementation of GST would not only affect the
manufacturing and service sector, but would also affect other areas, including
education, health, transport, financial services, agriculture, mining,
petroleum, land, construction and telecommunications.
Besides, the GST would have tremendous impact on export services, international
services, charities, associations and unions.
Before the implementation of the
GST, there were two Acts that independently controlled Malaysian goods and
services, known as the 1972 Sales Tax (Act 64) and 1975 Service Tax (Act 151) (Nor Hafizah Abdul Mansor and Azleen
Ilias, 2013). Both taxes were under the Royal Malaysian Customs and Excise
under Customs. Additionally, both sales
and services tax was a single stage tax levied on consumers at the consumption
stage. It was known as a single stage tax due to the fact that the tax was
charged only once, either at the input or output stage. The sales tax was imposed on consumers who
used taxable goods, which was then collected by the business enterprises and
accountable to the Customs. On the other
hand, the service tax was imposed on consumers who purchased food or services,
for example, in hotels, health centres, or professional services, such as
auditing. Such services were listed
under the 1975 Second Schedule Service Tax Regulations.
Before implementing the GST, the
Malaysian government established a Tax Review Panel comprising representatives
from the public and private sectors (Nor Hafizah Abdul Mansor and Azleen Ilias,
2013). The Tax Review Panel dealt with the concept, legislation, process and
procedures of the GST. As a benchmark,
the Panel reviewed the tax legislations of several countries, including the 1985
Goods and Services Tax Act of New Zealand, 1994 Value Added Tax Act of the United
Kingdom, 1991 Value Added Tax Act of the Republic of South Africa, 1991 Goods
and Services Tax of Canada, 1993 Goods and Services Tax Act of Singapore, 1999
New Tax System (Goods and Services Tax) Act of Australia, 1992 Value Added Tax
Act of Thailand, 2000 Value Added Tax on Goods and Services and Sales Tax on
Luxury Goods of Indonesia and 1990 Sales Tax Act of Pakistan.
2.2 Definition
of the Goods and Services Tax (GST)
The GST is also known as the Value
Added Tax (VAT); it is a multi-stage tax (Nor Hafizah Abdul Mansor and Azleen
Ilias, 2013). It is charged on all taxable supplies of goods and services in
Malaysia except those specifically exempted (Royal Malaysian Customs, 2014a).
According to the Royal Malaysian Customs (2014a), the GST is also imposed on
goods and services that are imported into Malaysia. This is because payment of
tax is made in every stage by the intermediaries during the production and
distribution process (Nor Hafizah Abdul Mansor & Azleen Ilias, 2013; Royal
Malaysian Customs, 2014a). In other
words, the GST is imposed on every level of the production and distribution
chain, including the consumers.
The Ministry of Finance Malaysia
and Royal Malaysian Customs Department (2012) defined the GST as a consumption
tax levied on goods and services at all levels of business. Consumers are taxed only when they spend. The GST would replace the Sales and Services
Tax (SST) effective from 1 April 2015 and the standard rate would be six
percent of the total amount spent. Differences
between the SST and GST are shown in Table 1.0. Finally, the GST aims to streamline the
country’s tax system so that it will become more effective, efficient,
transparent and business-friendly.
Table 1.0: Differences between the Sales and
Services Tax (SST) and the Goods and Services Tax (GST)
|
Attribute
|
Sales and Services Tax
(SST)
|
Goods and Services Tax
(GST)
|
|
Scope
|
·
Manufactured in Malaysia, or acquired under the provisions in Sales
Tax Act 1972
·
Imported into Malaysia by any person for home consumption
·
Categories of taxable person in certain groups (e.g. hotels,
restaurants, private hospitals etc.)
|
·
Any supply of goods and services made in Malaysia, including anything
treated as supply under the GST Act 2014; and
·
Any importation of goods into Malaysia.
|
|
Stage
|
·
Single stage
|
·
Multistage
|
|
Threshold
|
·
Sales Tax - annual sales turnover exceeding RM100,000
·
Service Tax – various annual sales turnover thresholds (RM100,000,
RM300,000, RM3 million)
|
·
RM500,000 of annual taxable turnover
|
|
Rates
|
·
Sales Tax (5%, 10% and at a specific rate)
·
Service Tax is at 6%
|
·
Proposed GST rate is at 6%
|
Source: Block Development Officers (BDO)
2.3 How the GST functions
Any
individual, sole proprietor, partnership, corporation, Federal Government,
State Government, statutory body, local or public authority, society, club,
trade union, co-operative, joint venture, trustee and any other body,
organization, association or group of persons can be GST payers (Ministry of
Finance Malaysia and Royal Malaysian Customs Department, 2014).
Individuals
and organizations are required to be registered under the GST Act that makes
taxable supplies in Malaysia and of which annual turnover exceeds the proposed
threshold of RM500,000 (Ministry of Finance Malaysia and Royal Malaysian
Customs Department, 2014). However,
voluntary registration is encouraged. After voluntary registration, they also
become taxable persons to pay the GST (Ministry of Finance Malaysia and Royal
Malaysian Customs Department, 2014). However, many people are trying to avoid any
tax being charged on them.
According
to the Royal Malaysia Customs Department (2012), some people would be reluctant
to pay any tax that would not benefit them. They would perceive it as troublesome
and a burden if they registered voluntarily for the GST; actually they are not
required to pay any GST if their annual turnover threshold is under RM500,000. Many people found it difficult to accept the GST
due to the lack of knowledge concerning its benefits. They were also unaware that the GST would
replace the Sales and Services Tax charged on each stage of the business
distribution channel.
The
GST is imposed on every level of business operations, from suppliers all the
way to the consumers. Production and sale of goods would go through several
levels of GST collection and payment. Every merchant in the supply chain will have
pay GST to the respective supplier for goods purchased and services received.
Payers include suppliers, manufacturers, wholesalers, retailers and consumers.
Finally, the GST can be computed using Table 2.0 below.
Table 2.0: Computation of the GST
|
Imposed GST
|
Collected GST
|
|||||
|
Supplier
|
||||||
|
Selling Price
|
RM
|
20.00
|
GST imposed on manufacturer
|
RM
|
1.20
|
|
|
Add 6%
GST
|
RM
|
1.20
|
Less GST paid
|
RM
|
0.00
|
|
|
Total
|
RM
|
21.20
|
GST payable
|
RM
|
1.20
|
|
|
Manufacturer
|
||||||
|
Selling Price
|
RM
|
30.00
|
GST imposed on wholesaler
|
RM
|
1.80
|
|
|
Add 6%
GST
|
RM
|
1.80
|
Less GST paid
|
RM
|
1.20
|
|
|
Total
|
RM
|
31.80
|
GST payable
|
RM
|
0.60
|
|
|
Wholesaler
|
||||||
|
Selling Price
|
RM
|
40.00
|
GST imposed on retailer
|
RM
|
2.40
|
|
|
Add 6%
GST
|
RM
|
2.40
|
Less GST paid
|
RM
|
1.80
|
|
|
Total
|
RM
|
42.40
|
GST payable
|
RM
|
0.60
|
|
|
Retailer
|
||||||
|
Selling Price
|
RM
|
50.00
|
GST imposed on consumer
|
RM
|
3.00
|
|
|
Add 6%
GST
|
RM
|
3.00
|
Less GST paid
|
RM
|
2.40
|
|
|
Total
|
RM
|
53.00
|
GST payable
|
RM
|
0.60
|
|
|
Consumer
|
||||||
|
Price as purchased by consumer
|
RM
|
53.00
|
Total GST to be imposed
|
RM
|
3.00
|
|
Source: Ministry
of Finance Malaysia and Royal Malaysian Customs Department (2014)
The
GST will not be imposed on basic food items, piped water supply, transport services,
the first 200 units of electricity, and health and services provided by the government.
According to the Ministry of Finance Malaysia and Royal Malaysian Customs
Department (2014), certain goods and services are exempted from the GST for
socioeconomic benefits.
III.
Implications
Government
revenue includes tax revenue, non-tax revenue and non-revenue receipts. Tax
revenues consisted of both direct and indirect taxes. Direct taxes are
collected by the Inland Revenue Board (IRB) that acts mainly as an agent of the
Malaysian government and its services include administering, assessing, and collecting
income tax and other revenues approved by the government and the IRB.
Direct
taxes consist of income tax from individuals, companies, petroleum, stamp duty,
estate duty and real property gains tax (Nanthakumar & Roshaiza,
2007). Indirect taxes is collected and
taken by the Royal Malaysian Customs Department, which include import duties,
export duties, excise duties, sales tax and service tax (Nanthakumar &
Roshaiza, 2007).
The
Malaysian government’s non-tax revenues include fees from licenses and permits,
fees for specific services, sales revenue from government assets, government
property rental, bank interest, and returns from government investments fines
and forfeitures (Nanthakumar & Roshaiza, 2007). On the other hand, non-revenue
receipts are collected by the Federal Territories derived from non-profit
receipts and revenue (Veerinderjeet, 2003).
In
the early 1990’s, there was equal contribution between direct and indirect tax,
for example, in 1990, direct tax contributed 35.2 percent while indirect tax
contributed 36.7 percent of the total revenue.
In the early 1960’s, Malaysia relied heavily on indirect taxes, which
constituted 76.7 per cent of the total revenue (Kasipillai, 2009). However, as
the economy became better developed, from 1999 onwards, there was less
dependence on indirect tax. The major
contribution to government revenue then came from direct tax, which contributed
approximately 69 per cent of the total revenue.
In 2005, the Malaysiam Economy Report (2007)
indicated that direct tax contributed 51.0 per cent of the government’s total
revenue. The encouraging growth in Gross
Domestic Product (GDP) in 2006 accounted for 22.0 percent of the national
revenue collection for the Ninth Malaysia Plan from 2006 to 2010. In 2012,
contribution from direct tax was 56.4 percent while indirect tax contributed
only 17.2 percent (Royal Malaysian Customs, 2014b). Studies showed that over-reliance
on a particular tax would have an adverse effect on a nation’s financial
position (Royal Malaysian Customs, 2014b).
Currently,
Malaysia relies heavily on direct tax and petroleum revenue; it is an
appropriate time for the government to undertake an overall tax reform to
correct the imbalances. One of the measures was to introduce the GST which is
more efficient compared to the current tax system (Royal Malaysian Customs,
2014b).
According
to the Ministry of Finance Malaysia and the Royal Malaysian Customs Department
(2014), the GST is a fairer tax system compared to the Sales and Services Tax
(SST). Its five benefits are stated by the
Ministry of Finance Malaysia and the Royal Malaysian Customs Department (2014).
First,
the GST helps reduce business costs. Under the SST, merchants were not able to
claim the input tax fully; however, with the GST, they will enjoy the benefit
as they will be able to claim the input tax over raw materials or goods and
services paid at every level of the business. As a result, the operating cost
can be reduced. Second, the GST helps
improve compliance. The SST had a
complicated tax administration system whilst the GST has a self-policing
mechanism.
Third,
the GST helps reduce bureaucracy. The manufacturing process becomes easier with
GST since the approval for exemption on raw materials is no longer required. Fourth, the GST promotes fairness as the same
rate is applied to all businesses involved, be they manufacturing, wholesaling,
retailing or servicing. Finally, the GST
makes products and services more affordable to consumers. It eliminates the cascading effect of tax
under the SST system. As a result,
consumers get to enjoy more affordable prices for most of the goods and
services.
IV. Discussion
4.1 Tangible effects
of the GST
Generally, implementation of the GST will have
an effect on the organization’s tangible assets and business performance. The
tangible assets in an organization are human capital, information technology,
finance and administration, and sales and procurement.
Training
is one of the essential elements of an organization's overall strategy. Organizational training is defined as the
acquisition and application of knowledge, skills, values, beliefs and attitudes
to improve the maintenance and development of an organization (Miria, 2013). The GST system is difficult to understand unless
a complete module of proper training and education is provided (Nor Hafizah Abdul
Mansor and Azleen Ilias, 2013).
Human
resources are one of the most important assets in an organization. An adequate
and competent workforce is the main criterion of a successful organization. Human resources are needed in both companies
and the tax authority department. With the implementation of a new tax system,
the overall operation of manufacturing or services will change. The
organization needs to take immediate action to train the employees to equip
them with the knowledge to handle the new GST system, especially those who work
in the accounting department.
Prior
to the GST implementation, the Malaysian government had encouraged citizens to
attend and participate in a seminar on the Malaysian taxation system. Trainers were supplied by the Royal Malaysian
Customs (RMC), who served as certified GST tax consultants with a wide
experience in the GST. The seminar enabled participants to understand clearly
the rationale of the GST implementation, tax charges, input tax credit,
business impact, risk management, accounting and new tax rules and regulations.
In an organization, the top management, such as the business unit managers,
directors, general managers, procurement and product pricing managers must
attend the seminar. Staff involved in bookkeeping, accounting, marketing,
finance, legal and taxation department must also attend it. GST implementation required the enhancement of
an organization’s human resources knowledge in the new tax system.
4.1.1 Information technology required to implement the GST
In preparation for the GST, a new accounting
software system is essential for all registered GST companies in Malaysia. The
new accounting system for GST is different from the previous tax system in
terms of tax incurred for each path of the manufacturing or services provided.
Most of the previous accounting systems were not suitable for the GST and would
require significant changes.
According to the Royal Malaysia Customs, all
organizations are advised to ensure that their software developers are GST
compliant and they must be able to generate auditing files and do proper record
keeping for accurate tax declaration. A proper accounting system should be in place to
accurately capture and produce the accounting information required for tax
reporting purposes. A business is less
likely to make errors in their tax declarations with such software. Compliance costs for businesses will be
reduced if tax reporting errors are avoided.
Generally, the Royal Malaysia Custom conducts auditing
on businesses from time to time to ensure that they are making correct tax
declarations. It is a common practice
that the authority would request certain accounting information as part of the
auditing process. Despite the age of
information technology, some small companies are still using the manual
accounting system; however, this system is discouraged with GST implementation.
It is time consuming to produce tax records manually. By using the new
accounting software, compliance will become more effective, requiring less time
and effort.
Some general principles of the GST accounting
software include the following:
·
Provides
the issuance of tax invoice as well as credit debit note in compliance with the
GST legislation, providing a reporting facility for the generation of information
necessary to prepare tax returns
·
Provides
comprehensive documentation to assist auditors and users to understand how the
system operates
·
Incorporates
adequate internal controls to ensure reliability of the data being processed
·
Creates
adequate audit trails to assist auditors to understand the flow of events and
reconstruct the events if necessary
·
Provides
archival and restoration of archived data mechanisms to ensure the integrity
and readability of electronic records after an extended period
·
Contains
key data elements necessary for business
·
Allows
the production of GST Audit File (GAF) by non-specialists, especially staff who
do not have an IT background.
4.1.2 Finance and administration
GST
implementation will affect a company’s cash flow because it needs to pay more
to each of the suppliers for the taxable charges and price mark up. As a
result, a majority of the companies will ensure a good level of cash flow in their
daily operations. Beside more efficient cash flow, GST implementation will have
a positive impact on an organization in terms of annual tax. The Malaysian
government provides monetary assistance to local companies by reducing the
corporate income tax from 25 percent to 24 percent. For small medium enterprises (SMEs), it will
be reduced from 20 percent to 19 percent. The tax reduction measurements started
in April 2015 and would be effective in the 2016 assessment year.
Besides
corporate tax reduction, the Malaysian government offers several positive
incentives; tax deduction was allowed for company expenses on GST training and
information communication technology equipment.
Financial assistance was given to small medium enterprises (SMEs) to
purchase GST accounting software.
The
GST is designed to be neutral; therefore, it should not be create any cost
burden to a company. One of the benefits
that an organization can claim is input tax. Input tax applies to any goods or
services used for business purposes. When
good or services are used partly for business and partly for non-business
purposes, the GST incurred is normally apportioned. In order to claim input tax, proper documents
such as invoices must be furnished.
A Malaysian
case study revealed that a building contractor with a business turnover of less
than RM500,000 had voluntarily registered
to the customs department for input tax
credit benefit. The contractor had to invest money on the training and GST
software and also had to pay tax for construction materials. At the same time, the
GST was imposed on clients for the services provided. Business cash flow became
problematic when the clients did not settle the bills on time. In the end, the contractor failed to collect
the output tax needed to claim the refund from the Customs Department.
4.1.3 Sales
The GST affects the sales and marketing in an
organization. The sales tax will be
abolished, and the GST of 6.0 percent will take place. In its simplest form, the
GST is a value-added tax, that is, a tax paid on the value added to a product
or service. It is applied at each stage of the business transaction, from
distribution, retail and finally to the consumer. Moreover, the GST is a tax on
distribution margins; the higher the distribution margins, the higher the GST
and ultimately, the more expensive certain products will become.
In addition, the GST leads to cash flow
problems for traders as they have to pay the tax up front, and smaller dealers
may feel the pinch, which in turn could affect the demand for certain products
or services. According to Pikom chairman Cheah Kok Hoong, there would be a
general dip in the purchase of hardware and gadgets, such as smart phones,
personal computers, laptops, printers and other peripherals by households and
consumers. Price hikes across hardware,
software and service offerings would occur with the implementation of the GST. A survey done by Pikom showed that more than
60 percent of local ICT organizations believed that the GST would significantly
affect their revenue, especially the small and medium enterprises.
To offset the impact of the GST, many organizations
will restructure their pricing strategies and reprice their products or
services; at the same time, they will re-examine their margins and price
mark-ups. Property transactions are expected to decline by 10 percent with house
prices rising slightly from 3 percent to 5 percent upon the implementation of
the GST on building materials. An
organization will have to restructure its pricing strategy in order to make a
profit. The current price increase for
goods is partly attributed to traders who are eligible, but choose not to make
the claims for the Special Sales Tax Refund on stock in hand.
While preparing for the GST, the management
of a company should know how to set up the prices for its goods or services because
each item from the supplier is taxable. The management needs to know the
taxable amount and the margin for each item to ensure a profit at the end of the
manufacturing of goods or supplying of services. This is because the GST would
inevitably lead businesses to raise the prices of their goods or services.
Furthermore, businesses that are eligible for GST claims would be reluctant to mark
their prices down. The onus would then fall on the consumers who tend to
compare prices, which in turn allows the market forces to keep businesses
price-competitive.
4.1.4 Procurement
The GST is a multi-stage tax; payment of the tax
is made in every stage by intermediaries in the production and distribution
process. In other words, the GST is imposed on every level of the production
and distribution chain until the consumer.
In terms of purchasing raw material for
business purposes, the supplier, manufacturer, wholesaler or retailer would
have to pay the GST during business purchases, which are rated before product
sales. This means that the management would have to carefully plan the cash
flow and turnaround time in order to carry out business activities. Improper
planning could lead to a huge cash flow deficit; it might take a few months
before a product or service can be sold.
The management must therefore select the
vendor wisely and adopt an efficient procurement strategy to minimize
irrecoverable input tax; at the same time it should maximize the input tax
claim. Small businesses with a turnover of less than RM500,000 annually should register
under the GST in order to create wider business opportunities; bigger companies
tend to register for recoverable input tax benefits. Hence, small businesses need to carefully plan
and prepare themselves for the GST in order to avoid possible cash flow
deficits and to maintain liquidity despite claiming credit at each level of the
supply chain.
Due to the high cost of raw materials, many businesses
tend to decrease their supply in order to meet the conditions of lower demand. Once demand decreases, the businesses would
not be producing efficiently and would not be maximizing the usage of machinery
and rental. The consequences would lead to the downsizing of businesses.
4.2 Intangible effects
of the GST
The
introduction of the GST in Malaysia has caused many arguments from academics,
professionals and consumers, mainly focusing on its impact on the prices of
goods and services (Mohd Rizal Palil, Rosiati Ramli, Ahmad Fariq Mustapha &
Norul Syuhada Abu Hassan, 2013). On 1st
April 2015, the GST replaced the Sales and Service Tax (SST) according to the
AFTA policy. The Accounting Standards
(2014) define an intangible asset as a perceivable non-monetary asset without
physical substance and is used in production and the supply of goods or services.
Intangible assets are difficult to
identify and are subject to a structured identification process (Castedello,
2010).
4.2.1
Organizational performance
The
GST encourages employers to work harder and increases entrepreneurship in society
(Pheng & Loi, 1994). This is because it is a tax that is imposed on consumers
during the purchase of goods or services.
Pheng and Loi (1994) found that problems occurred at a construction
company where the contractor was not well prepared for the GST. Problems encountered after the implementation
of GST are mainly due to the lack of preparation, which could affect a
company’s performance and productivity.
4.2.2 Compliance
costs
Mohd
Rizal Palil et al. (2013) stated that
the GST would provide an opportunity for organizations to reduce their
corporate rates and individual income tax. However, small and medium companies usually
incur compliance costs, such as software development, human resource training
and accounting systems for the GST. Compliance costs can be explained using the
definition given by Sandford, Godwin, Hardwick and Butterworth (1981); they are
the costs incurred by taxpayers or by third parties in meeting the requirements
of the tax system, over and above the tax liabilities itself and over and above
any harmful distortions of consumption or production to which the tax may give
rise.
There
are three elements in compliance costs, which are monetary, time and
psychological (Sandford, 1981 in Mohd Rizal Palil et al., 2013). Monetary cost
is the cost incurred between the intangible and tangible effects of the GST. It is also known as fiscal cost, which is the
start-up cost for an organization to run its daily business, such as the costs
incurred for changing the organization’s policies and rates, for submitting the
GST to the government and for consulting external accountants.
The
second element is the time spent on recording for the purpose of the GST
(Sandford, 1981 in Mohd Rizal Palil et
al., 2013). Time is spent on the
recording of every transaction and the organization needs to bear the cost of
hiring tax professionals and dealing with tax authorities.
The
third element is psychological cost which is incurred by the complexities of the
GST. According to Sandford et al.
(1981) in Mohd Rizal Palil et al. (2013),
regulations of the GST are very complicated; an organization needs adequate
information in order to carry out the GST policies and sufficient time to
record every business transaction. The
GST will have an impact on an organization’s performance; an organization must
be able to accurately apply the GST in its daily business. Nevertheless, the components of compliance
costs are difficult for organizations to quantify (Sandford et al., 1981 in Mohd Rizal Palil et al., 2013).
4.2.3 Accountability
Accountability
is a concept that is very hard to define. According to Stapenhurst O’Brien (n.d.), accountability exists when
there is a relationship between an organization and the performance of tasks by
that organization. The structures of
accountability are political, bureaucratic, legal, professional, financial, and
societal (Lindberg, 2009).
Any
business with a turnover of RM500,000 is required to register for the GST; the Malaysian
government encourages other businesses with a turnover of less than RM500,000
to voluntarily register for the GST (Royal Malaysian Customs, 2014c). Besides considering business turnover, a
company should engage in taxable supply to be eligible to register for the GST.
The main benefit of a GST registered company is that it will be able to claim
input tax. The company is required to pay the tax difference between its input
and output tax to the Royal Malaysian Customs Department (Royal Malaysian
Customs, 2014c). The output tax is the
GST imposed on the customer for the supply of taxable goods. The input tax is
the GST paid when purchasing goods or services for the company’s business. If the input tax is higher than the output
tax, the Royal Malaysian Customs Department will refund the surplus to the
company.
The
liability for a company registered for the GST will cease when one or more of
the conditions below exist (Goods and Services Tax Act, 2014):
·
Ceases to make a taxable supply
·
Ceases to have the intention of making a
taxable supply
·
Ceases to making a supply outside Malaysia
·
The value of taxable supplies for a period of
twelve months succeeding will not exceed the prescribed threshold, i.e. taxable
turnover for the next twelve months will not exceed the registration threshold.
In order to determine whether the taxable
turnover for the next twelve months will exceed the registration threshold or
otherwise, the registered company should ascertain the total taxable turnover
for the preceding twelve months. A taxable company is still liable to be
registered even though its annual taxable turnover for the next twelve months
is expected not to exceed the prescribed threshold given that during the twelve
months period taxable supplies are ceasing for a period of thirty days or more
(Royal
Malaysian Customs, 2014c). A registered person may apply to cancel his or
her registration if his or her liability to be registered has ceased. The
registration of any person may also be cancelled by the Customs if it is found
that the person is not liable or eligible to be registered (Goods and
Services Tax Act, 2014).
4.2.4 Corporate strategy
The GST is complex because it is a
multi-stage tax, collected at every stage of the production and distribution
chain and when the purchase or sales of goods and services are involved (Nor
Hafizah Abdul Mansor & Azleen Ilias, 2013). It is imperative
for business owners to determine what GST processes best suit their business in
order to maximize their input tax credit and avoid penalties. Implementation of
the GST requires a company to install a new or upgraded computer system,
accounting system and book keeping system. Apart from that, the management has
to provide training to staff so that they will become more knowledgeable on the
GST (Nor Hafizah Abdul Mansor & Azleen Ilias, 2013).
Overall, implementation of the GST will have an impact on corporate
plans as the management has to restructure while attempting to minimize compliance
costs.
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