GOODS and services tax (GST) is the tax that everyone is talking about but is probably the most misunderstood tax in this current economic climate. The deferment of GST caused ripples in the current climate. Where does GST go from here? Has the tax been shelved or will GST be implemented in the next two years? Will the consumer ever get to see “inclusive of GST” on a price tag in Malaysia? Is this another setback for GST?

Statements that begin as questions and are replied with more questions – are the taxpayers ready for a replacement consumption tax? Is the rakyat aware of the GST mechanism and its implications? Is it a fairer and more transparent tax system compared with the existing sales and service tax regime?

Going back to the basics, GST is a broad based consumption tax that will replace the existing sales and service taxes (see chart).

The concept of GST allows a self-policing mechanism for collection of taxes, which should result in lower leakages and a lowering of other direct taxes in the future. It is a transaction-based tax, which requires regular submission of both tax returns and remittances of the taxes collected. Such a mechanism allows for refunds to be issued in a more efficient manner, as the monies due to taxpayers (when the output taxes paid are lower than the input taxes paid) are already in the coffers of the Royal Malaysian Customs, due to the regular remittances made by GST registered entities.

Goods and services are either subject to GST (taxable) or not (non taxable). For taxable goods and services, there are two rates of GST that can be imposed, i.e. standard rate (current prescribed rate to be imposed is 4%) and zero rate. For non-taxable goods and services, there are two categories to be considered, i.e. exempt and ‘out of scope’. In both categories of non-taxable goods and services, no GST (i.e. output tax) is imposed and no GST (i.e. input tax) can be claimed.

GST in action

In order to illustrate the different GST implications based on the various categories, we have used arbitrary figures in the example below.

Company A manufactures, develops and sells finished products to consumers. GST considerations have to be made with regards to the supplies/raw materials acquired to manufacture/develop (value-added activity), together with the GST (if any) to be imposed on the selling price to the customer.

Jane acquires a finished product of RM100,000 and Company A acquires supplies/raw materials (taxable supplies) for RM40,000 and pays its suppliers, RM41,600 (GST component – input tax of RM1,600).

We have outlined the GST implications based on the different categories in Table 1.

Is the rakyat aware of the GST mechanism and its implications? Are they ready?

Further to the Second Finance Minister’s statement (March 13, 2010) in respect of the deferment of the reading of the draft GST bill, a point to note is the concern of the “readiness” of the rakyat of this new tax. How many people actually understand the mechanism and impact of GST?

GST is a transparent tax, where there is no cascading effect akin to what is currently experienced with the existing sales and service tax (‘hidden taxes’ borne by the consumer). However, due to lack of awareness and understanding of the GST mechanism, implementation of such a tax could present some challenges.

Does it really take 12 to 18 months for a business entity to get ready to be able to cope in a GST environment? Generally, the time required for a GST implementation exercise varies from business entity to entity, with regards to the existing infrastructure, volume of business transactions, peculiarities of the business itself as well as how efficient the GST knowledge transfer is executed.

A bird eye’s view of considerations to be made with regards to how ready you are for GST is outlined in Table 2. Even though GST is a tax, it impacts all operations of a business.

The list of considerations outlined in Table 2 is not exhaustive. Please note that the “GST readiness” for each entity would vary based on type of business, GST awareness, infrastructure, etc. We hope that the above checklist can provide some assistance to businesses, in terms of determining how ready they may or may not be for a GST environment.

The extension of time or rather deferment of GST can be viewed as being practical, in terms of enabling more taxpayers to educate and better prepare themselves for the impending GST environment. A smooth transition into a new climate is possible, provided steps are taken based on the requirements of an entity (i.e. depending on how “GST ready” they are). Therefore, taking measures to take stock of your position in relation to GST, should be taken now to enable planning for the implementation exercise.

“To think too long about doing a thing often becomes its undoing”. The introduction of GST as a replacement tax and its deferred reading at parliament, really allows more time for the rakyat to get ready. However, the clock starts ticking now and the additional time only becomes useful, if actions are taken now to determine the timelines and implementation exercise to be executed.