April 6, 2015    3 minute read

Malaysia: The Unfolding of the Consumption Tax

   April 6, 2015    3 minute read

Malaysia: The Unfolding of the Consumption Tax

1st April marked the date Malaysia joined the other 160 countries in the world in implementing a broad-based consumption tax known as GST (Goods and Services Tax). Numerous consumers were seen flocking supermarkets and grocery stores a few days before the 1st of April to have one last shopping spree before the prices of many goods increased by 6%. GST has had a bittersweet start in Malaysia; some have welcomed it with open arms, some are against it but many are confused about its details and consequences.

The GST mechanism may seem simple but its amount of detail and classification is quite complicated. It is a multi-stage tax system, aimed to trim the widening fiscal deficit to the targeted level of 3.2% of Malaysia’s Gross Domestic Product. Previously, the Malaysian government charged a Sales Tax of 10% and a Service Tax of 6% (SST). Under the SST, all goods were subjected to sales tax unless exempted but service tax was only levied on specifically listed items. Now, with GST, a larger breath of goods and services are subjected to tax unless excluded.

There are three categories of goods under the umbrella of the GST in Malaysia: Standard-Rated GST (6% tax borne by consumers), Zero-Rated GST (nil tax on consumers and businesses can claim the credits on their input tax) and Exempt-Rated GST (nil tax on consumers but business cannot claim the credits on their input tax). Basic food items, housing and healthcare fall under the latter two categories. So, for final consumers, the prices of most other goods and services will rise, with the exception of such essentials.

The supporters of GST claim that it is beneficial for businesses as they can be reimbursed their input tax on raw materials and thus reduce their cost of production. With no GST on exported goods and services, the Malaysian export industry will also enjoy improved competitiveness in terms of price in the global market. The new GST system is also government-friendly as it possesses the mechanism of making tax-administration a self-regulating policy, facilitating compliance.

However, GST has a dark side. Although it is claimed to provide fair pricing and better transparency to consumers, many have yet to experience this benefit. The cloud of confusion surrounding the implementation of GST is immense. Retailers, manufacturers and shoppers are not entirely sure which items are to be charged with GST and which are not. It is not their fault, really. Malaysia currently has the longest list of exempted items and to study the list in detail can be too cumbersome, especially in preparing firms’ accounts. The result is that some consumers end up being overcharged, violating their consumer rights and lowering their standard of living.

Malaysia’s government may have had a noble reasoning of introducing GST. In fact, Mr Najib stated that GST is meant to minimize the burden on the consumers. Unfortunately, many consumers are currently frustrated with the complexity of the system, uncertain if they are being charged reasonably. Will the complications of the system cause further chaos or is it just an adjusting period that will improve eventually? Only time will tell but for now, the outlook is bleak. It is essential that the Malaysian government quickly address the confusion on GST and if necessary, re-evaluate the pros and cons of GST in Malaysia before it is too late.

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