ON Jan 30, Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim announced that the implementation of a goods and services tax (GST) is not being considered at present.
Given that the public and the private sector are still recovering in the aftermath of the pandemic, this decision is considered wise.
This pause presents an opportunity for the sales and service tax (SST) to be improved and streamlined for easier compliance, better enforcement and increased government revenue.
In 2019, the GST collected a total of RM44bil from 480,000 registered companies, with RM9bil in input tax refunds outstanding.
The effective net collection from GST was RM35bil.
Meanwhile, in the first year of SST implementation, RM28bil was collected from 80,000 registered companies.
This change allowed 400,000 mainly small and medium enterprises to be relieved from the burden of paying, recording and remitting input and output taxes under the GST system.
Two key benefits of GST are currently missing in the current SST regime.
Firstly, GST enables companies to claim input taxes on their output taxes, avoiding the so-called “tax on tax” that results in increased costs and prices under the SST.
Secondly, GST applies the same treatment to both goods and services, allowing input tax credits from either sector to offset against output tax.
The SST system can be modified to incorporate these beneficial features, streamlining compliance without negatively affecting government revenue.
It is possible to achieve this goal through carefully planned tweaks in the implementation process.
Step 1 – Eliminate input taxes by creating a “bubble”
The current lack of mechanism for refunding or claiming sales or service tax on everyday business transactions needs to be addressed.
The Customs Department has already acknowledged this shortcoming of SST and provided a solution for one industry: In the advertising industry, multiple companies – such as copywriters, photographers and media consultants – collaborate to create an advertising media campaign and end up charging each other service taxes.
The final bill to the customer includes tax on taxes, driving up the price.
To overcome this cascading of taxes, the Customs Department has created a “bubble” for the advertising industry, where input taxes are not charged between companies within the sector but only when the advertising company charges its customer outside the industry.
This “bubble” model mirrors the GST system, refunding or crediting input taxes from output taxes along the value chain.
However the advertising industry is only a part of a larger ecosystem that includes other service providers such as lawyers, accountants and courier companies.
Currently, the service tax on these inputs are added to the cost and passed on to the final consumer, resulting in a tax on tax.
To address this issue, the “bubble” that defined the advertising industry should be expanded to include all services in the economy.
In this enlarged bubble, service providers with a registered service tax number would not charge each other for services.
A similar “bubble” already exists in the entire manufacturing sector since 1972, where inputs to a sales tax-registered factory – whether imported or from other sub-manufacturers – are purchased free of sales tax (with the exception when the products produced are a mix of exempt and taxable goods but this can be readily resolved by treating the exempt goods as zero-rated like in GST whereupon all the inputs are then sales tax-free and would greatly simplify compliance and enforcement).
Step 2 – Harmonising the SST
The next step is to harmonise the Sales Tax Act and the Service Tax Act, to bring the two “bubbles” into one overall ecosystem similar to the GST system.
With this harmonisation, all services and goods sold to registered sales tax and service tax entities would be sold without sales or service tax.
This means that only the ultimate consumers or enterprises without a registered sales or service tax number would bear the tax, rather than the service providers and manufacturers along the value chain.
This harmonisation can be quickly achieved through subsidiary regulations in the two Acts via a Gazette without the need for new legislation.
With the introduction of these new regulations, factories registered under this harmonised sales and service tax system can purchase components tax-free and receive services from providers like freight forwarders and accountants without service tax being levied.
The cost of inputs, including components and services, are factored into the final factory sale price, with only the final consumer or non-SST registered business being subject to the 10% sales tax.
This eliminates the need for the separate service taxes to be levied on the manufacturer, but it does not mean that the government will lose the 6% service tax on the services rendered – it will be captured when the 10% sales tax is levied on the product which includes the cost of those services built in.
In the same vein, goods and services provided to a service provider will not be subject to SST but only when the service is rendered to the final consumer or a non-SST registered business.
Step 3 – Implement tax invoicing and reporting
To reduce fraud, all SST registrants must issue a tax invoice, similar to the GST system.
If the customer is also a registered entity, the tax rate will be zero; but the final consumer or non-registered business will be taxed at a rate of 6% or 10%.
Each tax invoice will include the SST number of both the company issuing the invoice and the customer, and a monthly list of all invoices – including tax rate and customer SST number – will be transmitted to the Customs Department for computer-automated cross checking.
This tracking system eliminates the need for actual input tax cash transactions and refunds of the GST system, making tax administration and compliance easier for the private sector as well as for Customs Department enforcement.
Gradually increasing the 6% service tax rate to match the sales tax rate of 10% would bring in additional revenue, equivalent to or higher than that collected by the GST, but through a far simpler system.
A recent webinar by the Malaysian Institute of Economic Research on this topic showed a shift in preference from GST to this HSST system after attendees learned more about it.
The recording of the webinar can be accessed on mier.org.my for those interested in this topic.
Tan Sri Yong Poh Kon is the chairman of Royal Selangor International Sdn Bhd. The views expressed here are the writer’s own.