This article appeared on The SME paper, Malaysia on November 3 – November 16 Issue 091
Nobody likes paying taxes. I for sure dread paying any form of tax to the Government. So several years ago when the Government in Budget 2005 announced that GST ("Goods & Services Tax") was going to be implemented on 1 January 2007 (and was subsequently deferred, indefinitely), I was not in favour of having to pay tax each time I buy goods or services.
You see this is how GST works; it is a consumption tax that replaces the existing sales and service tax. As it is based on consumption, the more you consume the more tax you pay; and vice versa.
However, despite my personal resentment towards paying taxes, I think that businesses should be more objective when evaluating the GST. Now, in order to be more objective, I have come up with 5 reasons why GST is good for SME businesses:
The Budget 2013 speech has just been delivered by the Prime Minister on 28 September 2012. Whilst many view it as a people friendly budget, one of the key objectives is to reduce the nation's fiscal deficit from 4.5% of GDP in 2012 to 4% in 2013.
Our country's budget has been in the deficit position consecutively for more than 10 years and the Government is under tremendous pressure to reduce the deficit. Prolonged budget deficit is unhealthy for the Malaysian economy and we should really avoid following the steps of countries such as Greece and Spain. In the long run, SME businesses will suffer as a result of economic instability.
Reducing the deficit is not an easy task. With depleting petroleum resources, the Government would need to look into increasing tax revenues in order to balance the books. GST seems to be the way forward.
It is seen as a more efficient, certain and stable source of revenue that 146 other countries worldwide have imposed. Malaysia and Myanmar are the only 2 countries left in South East Asia who have not implemented GST.
In principle, GST is not a cost to business as GST paid on the business inputs can be claimed as tax credit. It is a multi-stage tax where businesses do not bear the economic cost of the tax. The cost of GST is borne by the final consumer who cannot claim GST credits.
Under the existing sales and services tax consumers have already been paying taxes without realizing it. The selling price to end buyers would have already included the cost of sales or service tax. Malaysia is looking to implement GST at 4% which works out to be cheaper than the present 5% to 10% of sales tax.
However, there are additional compliance costs involved in the implementation of GST such as additional administration costs, training costs and the costs of upgrade of systems.
GST should put SME businesses on fairer competition. There are currently many weaknesses in the existing sales and service tax. One of it is that many businesses who are supposed to be registered to pay sales and service tax escapes being registered and do not pay taxes.
On the other hand, businesses who are fully compliant, registered and pay taxes suffer from being less competitive if its competitors are not registered.
Post GST, businesses not registered may end up being less competitive as they would not be able to recover any input taxes paid to buy items such as raw materials, parts and utilities used to produce their goods.
Businesses such as manufacturers, suppliers and wholesalers would prefer their suppliers to be GST-registered so that input credit claims can be made to set off against GST payable to the government. As businesses along the supply chain would prefer to be GST registered, this would surface most companies for tax contribution and putting everyone on level ground.
Exports would be relieved off the burden of GST by zero rating. Zero rating of exports means that when goods are exported no GST will be charged. Whilst at the same time input tax incurred can be fully claimed and refunded.
This would mean that all goods exported are free of tax, thus allowing our exporters to become more competitive in the international markets. Under the existing sales and service tax, taxes may have been embedded in the price of the goods that exporters purchase.
Statistics have shown that out of the 28 million population in Malaysia approximately 12 million are in the workforce, but only 1.7 million are paying taxes. This means that rest of the population does not contribute.
Countries worldwide are lowering corporate taxes over the years in order to remain competitive to attract foreign direct investments. Malaysia's corporate tax cannot be lowered if GST is not introduced.
With most of the countries in the world already implementing GST, it looks as though it's only a matter of time before our Government introduces this tax. However, to ensure smooth implementation of GST the Government needs to put much more effort in building awareness and educating the public.
Many Malaysians have a misperception about the impact of GST and are unaware that there will be zero tax on basic essentials such as rice, meat, fish, prawns, vegetables, sugar, salt and water. There will also be exemption of GST on critical services such as public transport, toll, hospitals and healthcare, schools, residential property, land for agriculture use and financial services.
If GST is to be implemented in 2014, the Government needs to start preparing the public explaining how GST works and its impact on businesses and consumers.