GST net collection may not be as high as thought

IT is highly likely that the government’s revenue position from an indirect tax collection will not improve immediately should the country make a switch to the goods and services tax (GST) from the current sales and service tax (SST) system.

Any GST reimplementation would likely see a dip in terms of net collection and then this will rise perhaps only later on, says Grant Thornton Malaysia’s senior executive director for indirect tax Alan Chung.

“The mindset to reimplement the GST should not be purely to increase the government’s revenue – theocratically it does but it should not be implemented for this reason.

“This is because there would be a need for special refunds on the sales tax (first). This is largely an unknown variable, as we won’t know how much will be refunded,” he says.

“When you buy goods, the sales tax is embedded in them already. If the GST is reimplemented, we would have inventories which a company has paid sales tax on. It is necessary for this sales tax paid to be refunded so that the GST can be applied on the same inventory of goods,” Chung adds.

Chung says this was not executed properly in 2015, pursuant to the first implementation of the GST.

Any GST reimplementation would likely see a dip in terms of net collection and then this will rise perhaps only later on, says Grant Thornton Malaysia’s senior executive director for indirect tax Alan Chung.

“It was called a special refund of the sales tax – it was not done as promised. The business experience was that they got an arbitrarily reduced amount of the sales tax refund and sometimes, just a fraction of what they had actually applied for,” he says.

“We still have outstanding issues that arose from this sales tax refund from 2015 – and this is still being disputed with Customs.

“Can you imagine having paid the sales tax since 2015 and prior and not getting back the money until today,” he adds.

Chung says there would need to be a more in-depth study on the matter, noting that collections may not actually be as high as desired should the GST be reintroduced.

“There are a lot of people who think the GST is a silver bullet that would help solve any need to collect extra taxes. But according to statistics, we may not actually get the higher amount of revenue that people actually think of,” Chung says.

A case in point was in 2017 – the final and full-year the GST was collected – which saw gross GST collections at RM44.35bil compared with the RM27.67bil collected from the SST in the entire 2019 year (prior to the pandemic).

“A lot of people base their assumptions of the huge differential in these figures.

“But here we need to note that the GST collection in 2017 has not yet accounted for the refunds that need to be paid out and was paid out – we don’t know this figure so we do not know the net revenue collected from the GST when it was in place,” Chung says.

It was reported then in 2019 that about RM19.47bil in GST refunds was outstanding to slightly over 120,000 companies and individuals during the entire period of time the GST was in force.

The GST was in force in Malaysia from April 1, 2015 to June 1, 2018.

“Bear in mind these refunds are those that were outstanding then, but is not inclusive of the GST refunds that have already been paid out. It is about an average of RM6.5bil per year of GST collected which was due for refunds,” Chung says.

After taking this into consideration, he notes that the GST collection after netting off about RM6.5bil owed in refunds was RM37.85bil for 2017.

“However, this RM37.85bil figure is still a gross figure as it has still not taken into account the GST refunds that have already been refunded and paid out.

“So, if you look and compare this with the RM27.67bil SST in 2019, there is not much of a significant difference, especially once the GST collection takes into account GST-refunds,” he says.

All being said, Chung says the GST system still offers other advantages when compared to the SST, especially when the country needs to compete for foreign direct investments on the international stage.

“Another major benefit is tax neutrality – a concept where taxes are not a cost to businesses – in domestic and international cross border trades. The GST model is tax-neutral as businesses can claim any the GST input taxes they incur as refunds. But the SST isn’t,” he says.

“Tax neutrality promotes international trade when taxes are not a cost to businesses. When it is a cost to cross-border trade, this will impede the nature of such trades.

“Since the cost of doing business goes up with the SST, it will be an additional challenge for international firms to do business in Malaysia as pricing will go up,” Chung adds.

On another matter, Chung also notes that while the GST is obviously stated, the SST conversely isn’t and this gives rise to the perception that no taxes are being paid on goods and services presently under the SST regime.

“In actual fact, the public still pays taxes but they are hidden and embedded within each layer of the product supply chain. Bear in mind that the sales tax can be as high as 10% for most goods.

“The SST is very opaque while the GST is transparent as people can claim tax credits from GST-refunds,” Chung says.

Meanwhile, he hopes that the government will give ample notice of more than 17 months should there be any decision to reimplement the GST system.

This is as businesses would need to readjust their systems, purchase new equipment and ensure their personnel are properly equipped and trained.

“It is not an easy overnight switch. We also have to bear in mind that there have been many businesses that have come online since 2018 till now.

“These businesses do not have any experience in the GST – this is a large unknown variable,” Chung says.