I REFER to the comment by Jalbir Singh Riar on Aug 16, 2021, in StarBiz, “OECD recommends that Malaysia reintroduce the GST”. I agree with Jalbir Singh that the Goods and Services Tax is a more efficient tax system than the Sales and Services Tax (SST). From the perspective of the revenue authorities, GST is the most effective mode of tax collection in the history of taxation. This is because the entire burden of collecting the tax is borne by GST-registered traders and the tax authorities merely conduct audits to ensure that these businesses account the tax correctly.
I was a pioneer in the implementation of GST in Singapore on April 1, 1994, and also conducted many seminars in Malaysia prior to its implemention of GST as a director of a GST academy in Malaysia. I would like to share my experience of more than 27 years in Singapore’s GST implementation and my training stint when GST was introduced in Malaysia.
In my opinion, GST is not an ideal model both from the perspective of consumers and from GST collectors, ie GST-registered traders. In summary, this is a regressive tax for consumers since the lower income group bears a bigger burden unless there are extensive exemptions, which complicates compliance with the tax. For GST-registered businesses, they bear the huge responsibility of collecting and accounting the tax, in addition to identifying if suppliers are involved in any fraudulent schemes, and being penalised for any lapses.
The initial compliance costs for a business to comply with a new GST tax regime is a one-time cost and is not significant. However, the long-term compliance cost can be a huge burden on businesses, especially for small and medium-sized enterprises (SMEs). Let’s look at Singapore’s experience with respect to businesses, specifically those who submit input tax credits.
Under normal business circumstances, input tax credits are refunded by the Inland Authority of Singapore to businesses who export goods. However, if a trader in a particular industry, eg handphone suppliers, is audited, ALL traders in the handphone industry will have their input tax claims “frozen”. This is irrespective of whether the business is a genuine trader or directly involved in the fraud, ie a “missing trader”. This has caused massive cash flow issues for many SMEs in this industry who have incurred losses and had to take up bank loans just to sustain their business.
Generally, traders in the handphone industry make, on average, a profit margin of 3% to 5% and denial of the input tax claims effectively wipes out their profit margin resulting in losses. Many of these SMEs are facing the prospect of either challenging the tax authorities in the courts, which the majority are unwilling to do for obvious reasons, or shifting their business operations overseas to Dubai or Hong Kong.
Channel News Asia reported on Nov 3, 2020, that Singapore had more than 300 GST-registered businesses suspected of being involved in missing trader fraud as at end 2019, with a total GST revenue loss of S$450mil (RM1.39bil). This clearly illustrates the fact that the GST system has inherent flaws that give fraudsters the opportunity to defraud the government of tax revenues.
The Singapore tax authorities have not been able to resolve this issue for the past five years and SMEs are facing the brunt of this extended audit delaying their input tax refunds.
In an attempt to address this issue, the Singapore’s Finance Ministry introduced the GST (Amendment) Act 2020 effective from Jan 1, 2021. This was a drastic move since it effectively shifts the burden of auditing GST-registered suppliers to GST-registered businesses. These changes are summarised below:
> This amendment requires a GST-registered business to take “reasonable steps” – which are not defined in the Act – to ensure that goods purchased from a supplier are not part of a “missing trader” arrangement. Effectively, businesses have to conduct a risk assessment on behalf of the Tax Authority. SMEs would face a huge burden to carry out compliance checks and risk analysis on behalf of the Tax Authority resulting in additional manpower and business costs.
> Input tax will be denied if “you knew or should have known to be part of an arrangement to cause loss of public revenue”.
> Businesses have to check the source and authenticity of goods they purchase, eg brand, manufacturer, country of origin, etc.
> Businesses have to check suppliers’ relevant experience in the trade and knowledge of the product/market.
> Businesses have to obtain credit checks on suppliers and perform background checks through independent third parties.
> Businesses have to visit their suppliers/customers premises to ensure that they are conducting a genuine business.
> Businesses have to check if supplier/customer has the relevant experience in the trade and product/market knowledge.
The above are just some of the extensive and onerous procedures with which GST-registered businesses in Singapore have to comply. Failing to do so means the Tax Authority can deny input tax claims.
Jasbir Singh’s article highlighted the positive aspects from the government’s perspective of reintroducing the GST in Malaysia. I hope my summary of Singapore’s experience, whereby SMEs are facing the brunt in terms of compliance cost and delays in input tax claims, provides a balanced perspective on whether Malaysia should reintroduce the GST.
From my 27 years of experience and assisting many SMEs with cash-flow issues due to the withholding of GST input tax refunds, my suggestion is that there are other tax revenue channels, and that the GST is not an ideal model.
Accredited tax advisor