GST Effect on SMEs
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Ahmad Naim bin Zaid Goods and Services Taxes (GST) and its possible impacts on Malaysian Small and Medium-Sized Enterprises (SMEs) Intro The Prime Minister of Malaysia Mohd. Najib Tun Abdul Razak unveiled the Malaysian Budget for the year 2010 on October 23, 2009. The theme of the Budget was “1Malaysia, Together We Prosper”. The three main strategies focused in the Budget are namely, driving the nation towards a high-income economy, ensuring holistic and sustainable development and focusing on wellbeing of the people. The government also announced initiatives for SMEs to more innovative and competitive. However, the highlight of the budget was the proposed implementation of Goods and Services Tax (GST) by mid-2011. The initial rate for GST is expected to be 4 percent and the new tax system is scheduled to be implemented by the middle of 2011. GST will replace the present sales and services tax (SST) which ranges from 5 percent to 10 percent. A sum of RM222 million has been allocated as initial cost to ensure the smooth and effective implementation of the Goods and Services Tax (GST) system in Malaysia. The allocation will cover the cost of developing the GST computerisation system at RM139 million and the additional operations cost of RM83 million for the agency implementing the system, Malaysian Customs Department. The maintenance cost each year is estimated at RM8.5 million The plan to introduce GST has attracted a great deal attention from the economists, NGOs, politicians, businesses and the consumers. The attention it received was overwhelming and the critics spared no leniency in attacking the move by the government. It is understood that, as in other nations applying the GST, that the immediate effect will be a sudden instantaneous inflation with all goods and services going up in prices. The worse affected will be the consumers with the Small and Medium Enterprises (SMEs) likely to be adversely affected as well in their operations and the demand for their products. The government has since moved to quell the negativity surrounding the proposed tax system, will the Second Finance Minister saying that the GST implementation would be a win-win situation for all, as the Government would receive an additional RM1bil in revenue for the first year while the business and export sectors would save RM4.1bil and RM1.4bil, respectively. Besides, the government is proposing GST at a rate lower than the current sales and services tax rates, and to allow certain exemptions from GST, especially on essential goods such as rice, vegetables, basic food (rice, sugar, flour, cooking oil), fish, meat and chicken, to ensure it will not burden the public, especially the lower income group. The government also stated that the main purpose for introducing GST is to make the current taxation system more comprehensive, efficient, effective, transparent and business friendly. It is understood that the move to introduce the GST is to boost government income and reduce the deficit that has long been a problem in public administration. It is also part of measures to reduce Malaysia’s dependence on oil revenues, which currently accounts for almost half of government income. Malaysia’s budget deficit hit a more than 20-year high of 7.4 per cent of gross domestic product in 2009, according to government data.
Malaysian government has operated with deficits for more than a decade and the debts are increasing, prompting suggestions that the country may not be able to meet its liability if this keeps to be the case. Thus, a more comprehensive tax system where the tax is paid during every transaction in the supply chan can help with the cash flow and guarantee a steady source of income for the government for investment, expenditure and paying its debts. The move is undeniably politically unpopular but with current conditions, it is deemed a necessity. However, knowing the impacts on other countries implementing it and the present climate of the Malaysian economy, the timing of the implementation becomes a problem. The impact will be contractionary amidst low key performances in terms of employment and GDP growth while inflation has been increasing due to increases of prices of major inputs like oil prices. As for the SME, they will experience mixed fortunes, depending on the product category, market conditions and consumer behavior subsequent to GST implementation. The paper attempts to discuss on the GST conceptually and forecast in a holistic perspective the potential corollary that the GST may have on SMEs in Malaysia and how can SMEs thrive under the new tax regime with the help of suggested measures for the government that can potentially soften the blow of a new form of ‘burden’ . SME defined Malaysian SMEs can be defined according to size, turnover and activity. Two broad categories of SMEs are as the following: Table 1: Definition of SMEs in Malaysia Category Micro-enterprise Small enterprise 1 Manufacturing, Sales turnover of Sales turnover manufacturing- less than RM250, between related 000 or fewer RM250,000 and services and than five fulltime RM10 million or agrobased employees. between five industries and 50 fulltime employees. 2
Services, primary agriculture and information and communication technology (ICT) . Source: SMIDEC
Sales turnover of less than RM200, 000 or fewer than five fulltime employees.
Sales turnover between RM200, 000 and RM1 million or between five and 19 fulltime employees.
Medium enterprise Sales turnover between RM10 million and RM25 million or between 51 and 150 fulltime employees.
Sales turnover between RM1 million and RM5 million or between 20 and 50 full-time employees
Developing a group of diverse and competitive small and medium enterprises (SMEs) is a central theme towards achieving sustainable economic growth. SMEs are crucial to the economic growth process and play an important role in the country’s overall production network. They are the supporting cast in
some industries controlled by the MNCs1 and GLCs2 and the major player in some other industries where the smaller companies compete. Some advanced economies have succeeded because SMEs form a fundamental part of the economy, as the economy cannot thrive with only a few large companies without the supporting role of the many SMEs which are more agile and adaptive to changes. SMEs have the potential to contribute substantially to the economy and can provide a strong foundation for the growth of new industries as well as strengthening existing ones, for Malaysia’s future development. According to (SMIDEC3) SMEs account for close to 99 percent of all the establishments in the manufacturing, services and agricultural sector, provide around 65 percent of total employment and it is expected that the value added production of SMEs to be around RM120 billion or 50 percent of total production in the manufacturing sector by 2020. The figures show how crucial it is for the government to take into account of how a new tax system like the GST can affect The GST and how it works GST is a consumption tax charged on a wide range of domestic & international products, goods and services. It’s a broad-based tax imposed on every level of a product, from raw materials all the way to finished goods. It affects all layers of business and consumers. Basically, a value-added tax like GST is a tax on consumption, and not on income, hence the tax system inherently encourages savings and investments instead of consumption. A simplified illustration on how GST works;
The Small and Medium Industries Development Corporation
Notes: Scenario A
TV Retailer A will collect 5percent GST of $15 from the consumer. On the other hand, he has already paid GST of $10 to the TV Manufacturer.
SME Retailer B, with turnover less than $1 million, does not need to register for GST (although it can do so voluntarily).
TV Retailer A can deduct this $10 GST from the $15 GST which he collects. So he only pays a net amount of $15 - $10 = $5 of GST to LHDN. Similarly, the TV Manufacturer collects GST of $10, deducts input GST of $5, and pays to LHDN $5. The TV Parts Supplier pays the entire $5 GST collected from the TV Manufacturer to LHDN as he incurs no GST on his inputs.
Like TV Retailer A, SME Retailer B has to pay GST to the TV Manufacturer. Because SME Retailer B is not registered, it cannot claim back the input GST of $10 from LHDN. But it can pass on this $10 to its consumer, in the price of the TV set. SME Retailer B charges its customer $310 to recover his GST costs. This is $5 less than Retailer A’s price of $315. SME Retailer B earns a gross margin of $100, the same as TV Retailer A.
The total GST collected by LHDN from the sale of this TV is thus $15, which is exactly the GST borne by the final consumer.
Another simplified illustration for clearer understanding;
The above illustrations are simplification of the actual market which is much more complicated in nature. The number of times which a product changes hand is normally more than in the illustrations and both illustrations are within the ceteris paribus assumption where all other factors except GST will be held constant. In a real market the prices are not determined by tax alone and the changes in prices may not be proportionate to the changes in the tax rate. A recent example would be how a slight increase in oil prices resulted in multiplefold escalation in prices in almost all products. In a market involving imported items, the illustration will be as follows; Case • • •
1: A small exempted SME imports an item for RM100 + RM4 GST= RM104. It then sells it to a big company A for RM107. The big company A would in turn sells it to the end user for RM120 + RM4.8 GST =RM124.80. • Total GST collected by the government for the imported item is RM4 (from small SME) + RM4.8 (from A) =RM8.4 which is 7percent of RM120. • The gross margin enjoyed by this SME is RM3 (RM107-RM104) and A is RM13(RM120-RM107) Case 2: • Now if another big time importer with GST licence, also imports the RM100 item and sells it to A for RM107+ RM4.28 GST=RM111.28. • A then sells it to the end user for RM120 + RM4.80 GST=RM124.80. • Net GST to be paid by the importer to custom is RM4 upon importation + (RM4.28-RM4 upon sale transaction) =RM4.28. • Net GST to be paid to custom by A is RM4.80-RM4.28=RM0.52. • Total GST collected by custom is now only RM4.28 + RM0.52=RM4.80 which is 4percent of RM120. • The gross margin of big importer in this case is RM7 (RM111.28-RM100RM4.2 and A is still RM13 (RM124.80-RM111.28-RM0.52)
This means big importer has a much bigger gross margin (RM7 compared to RM3) and therefore can be more competitive than small SME due to taxation system. The net effect is, having more SME companies exempted from GST that are not directly selling to final end-users, may actually mean more GST revenue to the government, assuming these exempted companies can survive against the non exempted ones. There can be many more permutations of instances in which the outcome can be different each time. The SME can be at various levels within the supply chain and the impact of GST can be very different for each. GST: A more detailed economic conceptual explanation The GST is an equivalent to value added tax (VAT) employed in many countries like Britain, Canada and Singapore. The underlying principles are the same but there can be many variations in its implementation in different countries. It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. Personal end-consumers of products and services cannot recover GST on purchases, but businesses are able to recover GST (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Basis for GST By the method of collection, GST can be accounts-based or invoice-based. Under the invoice method of collection, each seller charges GST rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to GST on their own sales (output tax), consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. The difference between output tax and input tax is paid to the government (or a refund is claimed, in the case of negative liability). Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method. By the timing of collection, GST (as well as accounting in general) can be either accrual or cash based. Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds — no matter when the sale had been made. Checks are written when funds are available to pay bills, and the expense is recorded as of the check date — regardless of when the expense had been incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred. Accrual basis accounting matches revenues to the time period in which
they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports. Limitations of GST conceptual explanation against the market in reality The fundamentals of supply and demand suggest that any tax raises the cost of transaction for someone, whether it is the seller or purchaser. In raising the cost, either the demand curve shifts leftward, or the supply curve shifts upward. The two are functionally equivalent. Consequently, the quantity of a good purchased decrease, and/or the price for which it is sold increases. This shift in supply and demand is not incorporated into the above example, for simplicity and because these effects are different for every type of good. The above example assumes the tax is non-distortionary. A GST, like most taxes, distorts what would have happened without it. Because the price for someone rises, the quantity of goods traded decreases. Correspondingly, some people are worse off by more than the government is made better off by tax income. That is, more is lost due to supply and demand shifts than is gained in tax. This is known as a deadweight loss. The income lost by the economy is greater than the government's income; the tax is inefficient. The entire amount of the government's income (the tax revenue) may not be a deadweight drag, if the tax revenue is used for productive spending or has positive externalities - in other words, governments may do more than simply consume the tax income. While distortions occur, consumption taxes like GST are often considered superior because they distort incentives to invest, save and work less than most other types of taxation - in other words, a GST discourages consumption rather than production.
A Supply-Demand Analysis of a Taxed Market In the above diagram,
• • • •
Deadweight loss: the area of the triangle formed by the tax income box, the original supply curve, and the demand curve Governments tax income: the grey rectangle that says "tax revenue" Total consumer surplus after the shift: the green area Total producer surplus after the shift: the yellow area
Criticisms on GST The "value-added tax" has been criticized as the burden of it relies on personal end-consumers of products. Some critics consider it to be a regressive tax, meaning the poor pay more, as a percentage of their income, than the rich. Defenders argue that excising taxation through income is an arbitrary standard, and that the value-added tax is in fact a proportional tax in that people with higher income pay more at the same rate that they consume more. The effective progressiveness or regressiveness of a GST system can also be affected when different classes of goods are taxed at different rates. To maintain the progressive nature of total taxes on individuals, countries implementing GST have reduced income tax on lower income-earners, as well as instituted direct transfer payments to lower-income groups, resulting in lower tax burdens on the poor. Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate profit taxes has been historically weak, GST collection has been more successful than other types of taxes. GST has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as GST has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient. Certain industries (small-scale services, for example) tend to have more GST avoidance, particularly where cash transactions predominate, and GST may be criticized for encouraging this. From the perspective of government, however, GST may be preferable because it captures at least some of the value-added. For example, a carpenter may offer to provide services for cash (i.e. without a receipt, and without GST) to a homeowner, who usually cannot claim input GST back. The homeowner will hence bear lower costs and the carpenter may be able to avoid other taxes (profit or payroll taxes). The government, however, may still receive GST for various other inputs (lumber, paint, gasoline, tools, etc.) sold to the carpenter, who would be unable to reclaim the GST on these inputs (unless of course the carpenter also has at least some jobs done with receipt, and claims all purchased inputs to go to those jobs). While the total tax receipts may be lower compared to full compliance, it may not be lower than under other feasible taxation systems. Because exports are generally zero-rated (and GST refunded or offset against other taxes), this is often where GST fraud occurs. In Europe, the main source of problems is called carousel fraud. Large quantities of valuable goods (often microchips or mobile phones) are transported from one member state to another. During these transactions, some companies owe GST, others acquire a right to reclaim GST. The first companies, called 'missing traders' go bankrupt
without paying. The second group of companies can 'pump' money straight out of the national treasuries. This kind of fraud originated in the 1970s in the Benelux-countries. Today, the British treasury is a large victim. There are also similar fraud possibilities inside a country. To avoid this, in some countries like Sweden, the major owner of a limited company is personally responsible for taxes. This is circumvented by having an unemployed person without assets as the formal owner. The impact GST may have on SMEs Credit offset mechanism: In simple terms, businesses supplying taxable goods and services have to charge GST on supplies made (referred to as output tax). The GST paid on purchases (input tax), including capital equipment, supplies and materials can be offset against the output GST. This is referred to as the credit offset mechanism. The net amount would have to be remitted to the Royal Malaysian Customs. Businesses that are largely export-oriented are likely to be in a refund position. To claim the credit offset, businesses are required to obtain and keep tax invoices from suppliers. While this may sound simple, the tracking, record keeping and reporting can be a challenge to many businesses. Awareness of responsibilities: Notwithstanding the size of the business, the law imposes the same compliance obligations once the registration threshold is reached. Once the registration threshold is announced, affected businesses will need to follow closely the developments and to understand their responsibilities under the GST regime. While the business is essentially just collecting and remitting GST for the Government, non-compliance will result in penalties on the business itself. It is hoped that the Government would leverage off the experience from other countries that have successfully implemented GST and roll out comprehensive awareness programs to help, in particular SMEs, prepare for the GST. These could include organizing briefings at various locations, setting up small offices, kiosks, helpdesks and hotlines throughout the country. Compliance cost: GST imposes additional compliance costs for businesses. These come in the form of additional work to account for the tax, tracking of the input taxes paid, undertaking reconciliations and filings of GST returns. In addition, where a business pays cash or has short credit periods from its suppliers, this may result in the business needing extra finances to purchase supplies when GST is first introduced. This is a timing issue which should iron itself out over time as credits are claimed. In this respect, there have been requests that the tax return cycles for SMEs be extended to ease the cashflow burden under the GST regime. Altered consumer behaviour:
GST is a multistage tax that works through the whole manufacturing and supply chain of everyday goods and services. GST will have immediate effect on the inflation rate. Indirect taxes like GST are more regressive than direct taxes like corporate and individual income taxes, as the higher one’s income, the smaller portion of that income goes to pay the tax, and vice versa – resulting in greater tax burden on the poorer strata of society as a share of income. The liability for the tax is imposed on the entity that makes a taxable supply .However generally the liability of the supplier for GST will be built into the price charged to the customer. In this way, the GST liability ultimately falls on the end consumer of goods and services because they, generally speaking are the only entity that does not get a credit for GST on its purchases. At present, only slightly above 10 percent of Malaysian pay income tax. Those who are not in taxed category are the low and middle income. For SMEs whose customer base are from those presently not having to pay income taxes, but once the GST is implemented, they will have start paying taxes for their daily consumption of goods and services, and that could possibly dampen their spending mood. Besides, if GST results in higher bank charges for credit card transactions, and hence, significantly higher prices in certain products, many SMEs will be adversely affected. As often happens, customers react to news of discounts or price increases. It is generally anticipated that GST will result in a price hike on certain goods. The level of increase depends partly on the rate of tax announced. Experiences in other countries have shown that customers generally go on a shopping spree shortly before the introduction of the tax, followed by a period of relative inactivity after the tax is introduced. Anticipating this, it may be necessary to do some stock planning to cater for a pre-GST rush. This, however, has to be balanced by the fact that stock in hand when GST is introduced, may not be entitled to any input tax credit. Purchase of business assets: Like customers, businesses should also plan their purchases during the GST transition period. This is because currently many goods (particularly capital goods) have an embedded sales tax in them which is not deductible or creditable. On the other hand, buying the same goods by the business after GST would allow the business to claim a credit for the GST (which will replace sales tax). This is an advantage for the business and the effective cost of the goods would then be lower (other things remaining equal). As a rule of thumb, while household consumers are likely to shop before GST is introduced, businesses which are GST registration candidates should perhaps delay purchases to a time when GST is effective. This does, however, require some assumption that prices will otherwise remain static. To register or not to register: Some businesses will inevitably fall below the registration threshold. While it may appear a good thing that the business is not subject to the compliance burden of the tax, other factors need to be taken into consideration whether or not to register.
For one, unless the business is licensed, it would not be entitled to claim the input tax credits on purchases. This leads to input tax paid being a cost to the business (this may be a good thing from the customers’ perspective; GST is not imposed when they purchase the goods). However, in a situation where the customers of the business are other GST registered businesses, the supplier may be obligated to license itself as it is likely that the customer would insist on buying from another registered person to enable him to claim the input tax credit. Noting the additional burden that GST puts on SMEs, the Government could consider making concerted efforts in conducting education campaigns as well as addressing and deciding on compliance issues before the introduction of GST. Treatment of specific transitional issues needs to be announced upfront to facilitate a smooth transition to the GST regime. Price competitiveness: GST registered SMEs will have an advantage in terms of cost due to the fact that they only pay GST. The fact is explained in the illustrations. However, they will have to charge higher prices to the customers, eroding their price competitiveness. Cash Flow issues: GST will hit the cash flow of SMEs, leaving many with the challenge of finding additional finance or having to make the difficult decision to get tougher on customers in order to meet GST liabilities. Businesses with significant funds tied up in unpaid invoices will be the worst affected. Businesses rely heavily on these deposits for the cash flow needed to meet their immediate liabilities to suppliers, staff and the IRA4, particularly around tax time. Businesses with already tight cash flow will either have to source the additional finance from within the business e.g. from savings or increase borrowings just to meet GST liabilities. For many, the cost will have to be passed on through higher deposits or stiffer terms of trade - steps which could make small businesses less competitive. Therefore, businesses need to be proactive in their approach to cash flow management and develop and implement a strategy to ensure cash flow is consistent. GST will have a serious negative impact on the cash flow of the SMEs if there isn’t an efficient tax refund mechanism in place. Other issues in relation to GST that businesses should consider include: -The likely GST treatment for products / services and the impact on pricing strategies. -The impact of GST on long term contracts. -The GST cost of outsourcing versus internal supply. -Timing of purchases pre and post the implementation of GST. -Impact of GST on benefits-in-kind to staff and provision of samples and gifts. How government can help SMEs to adapt to the new tax system and cushion the impact of GST. 1. Give the SMEs more time to adjust their present accounting system 4
Internal Revenue Agency or Lembaga Hasil Dalam Negeri in Malay
The Associated Chinese Chambers of Commerce & Industry of Malaysia (ACCCIM) says 2012 will be the appropriate time for the government to introduce the Goods and Services Tax (GST). A majority of businesses felt that they should be given at least 24 months to prepare for the new tax system. Businesses would require changes to processes and procedures, IT and accounting systems, customer and vendor communication, in accordance with the new law. Most SMEs in the country are not ready for the GST implementation because they are still not very clear about the mechanisms surrounding the new tax. 80 per cent of SMEs’ computer systems are not ready to cater to the administration of GST. The government should consider giving free GST software in order to kick start the implementation. Training by the government as well as business incentives were also needed for better administration of the GST. If GST compliance costs are high, whether in terms of dollars and cents or time, SMEs will be unnecessarily burdened. The government needs draw up a clear timetable and provide more details so that the public have sufficient time to understand and prepare accordingly. By having sufficient preparation, the public, especially the businesses will not be caught by surprise or have any resistance and misunderstanding of the GST. While burden of GST is on consumers, businesses will still have to pay GST upfront on inputs and then claim for their refund. 2. Start at a low rate of GST to avoid backlash of significant reduction in spending and business transactions GST implementation will definitely result in a once-off increased in inflation thus the indicated 18 months target date seems to be too fast. At a time when the economy is just in its initial stage of recovery, a hasty implemented GST would severely impact the economy, burden the consumers, cause confusion and affect cash flow of business. A GST rate of 4 percent has been indicated as a probable GST rate. The rate of 4 per cent is lower than the existing sales tax but pending the list of exemptions, potential tax cuts and also grants that will be given to the lower income group to enable to sustain their living it would be difficult to assess the reasonableness of the rate. Thus it is recommended that when determining the rate of GST the government should not target for a substantial positive GST return compared to rebate and offset provided. This is crucial to avoid inflationary pressure that are already diminishing the purchasing power capacity of lower income families and also affecting most middle income families. By adopting a lower rate and subsequently adjusting it when the economic situation is better it would not add unnecessary pressure to the consumers. This is because the subsidies distribution method is still in the midst of revamping and would be crucial to mitigate the impact of the GST. We may feel that we are ready for GST as Malaysia’s poverty rate is low. However, the reason for low poverty rate in Malaysia is because the income level per month used to determine the poverty is only RM720 in peninsular Malaysia. As such, after the GST implementation the income level used to assess poverty needs to be reassessed due to the inflationary impact.
In addition in Malaysia 38 per cent of the 5.6 million household in Malaysia has an income level of less than RM2000 a month. This shows that while GST can still be implemented the impact on 2.12million household needs to be weighed carefully as food and transport represent a high portion of their expenditure from their monthly income. 3. Rigorous price monitoring implementation It is likely that even though a rate of 4 per cent increase in GST is introduced food prices or goods of basic necessities might increase higher than 4 per cent. Look at the instances when the subsidized price of sugar or flour prices increase, the corresponding food prices is substantially higher. As such prior to the implementation the government would need to ensure the existing committee or ministry involved in the monitoring of the price of goods and service needs to be beefed up with necessary manpower and authority to avoid heavy profiteering by unscrupulous traders. If not, any implementation of GST would likely result in increase of prices of goods and services more than expected. 4. Setting a steering committee with the necessary political commitment Implementation of GST is a massive tax initiative that warrants a steering committee for the following reasons: •
To study the impact of GST to the people to identify and resolve operational problems to highlight the Ministry of Finance’s major concerns regarding the business community to prepare the business community for compliance to oversee the public education programme.
The job of implementation of the GST should not be limited to the Ministry of Finance. The Steering Committee should also be represented by the Ministry of Trade and Industry, SME Department, the Department of Customs and Excise and etc.
Strong political commitment is required to ensure that departments cooperate and to ensure a buy-in to make the GST successful. Without strong political backing it would difficult to get the necessary resources to assemble a steering committee with the necessary authority to carried out and monitor the implementation. Feedback from tax experts and business leader is also important to enable better preparation before the roll out of the GST.
5. Revamp the distribution of subsidy system and providing offset There are various subsidies, allowances, and also benefits given to the lower income group to help alleviate the burden of the consumers. However most of these subsidies do not reach the target group for e.g. RM720million is spent yearly on rice subsidy but sadly the poor still could not get the hands on the required quantity of rice. The government’s current initiative to use the list of
names from e-kasih5 to distribute the rice subsidy had to be postponed as majority of those verified as requiring assistance by the Welfare department was not included. A massive exercise is needed to revamp the e-kasih system which is plagued by red tape. e.g. the form is 24 pages and the approval process is long. It is vital to have just one database that can be used by all departments to determine the people requiring assistance. A proper system to reach out directly to those in need of assistance would enable the government to help mitigate the impact of GST. Several offsetting measures should also be introduced to assist the consumers to adjust to the new tax regime for example a) a cut in corporate and personal income tax b) probable cut in excise duty or import duty c) increase in public assistance by increasing the threshold of income for those to be eligible to receive the direct subsidy assistance d) increase in pensioners pay e) lower excise duty for cars 6. A Simple Tax System to reduce compliance cost GST systems with multiple rates and multiple exemptions would result in confusion by both the authorities and the public. This will likely result in countless and unnecessary disputes with the businesses on the scope of tax. Multiple rates and exemptions also pose higher compliance burden on the businesses. A complex system with multiple rates could potentially lead to more abuses. Thus a single flat rate should be considered. Meanwhile to assist SME, the government in implementing GST should ensure only SME generating a certain level of income is subject to GST. This is because not all SME have the necessary accounting or record keeping system and staff force to ensure compliance with GST. Requiring all business to register for GST would complicate the implementation. Thus, it would be more business friendly and efficient if a high threshold is determined (e.g. businesses with turnover of RM2million and above) or low target base (e.g approximately 30 per cent of the business in Malaysia) to compulsorily register for GST. This ensures that only large businesses which should already have the necessary resources are only required to be subjected to GST. By implementing this, small retailers, neighborhood shops and hawkers are probably exempted from registration which indirectly helps mitigate the impact of GST on the lower income groups. 7. Business Education and Public Communication The implementation of the tax must be supported by a massive communication exercise to engage the business community and the general public. The authorities must be ready to organise numerous dialogue sessions, seminar, and classes on the GST. For example dialogue sessions with trade organisation or business should be focused particular to the line of business. These dialogue sessions would enable the government to get input from the businesses regarding how the GST 5
A portal containing databases and information regarding poverty alleviation.
would fit into the actual operations of particular lines of business. This is crucial to help to fine-tune the GST in order to prevent the GST system from becoming unnecessarily complicated and affecting business adversely. Brochures and pamphlets should be available for distribution while media and even direct mail to potential tax payers could be used to enable the public to be aware of the GST and it details. Before implementation, field visits to selected companies are also important to assess the readiness of the business. Likewise toll free help line should also be setup to provide advise people throughout the implementation of the GST. In addition, it important that talk programs are held at the community level through the elected representatives, community leaders and even at the grassroots level. This is to dispel any misunderstanding of the reasons why GST was being introduced. The focus should be on communicating the rationale for GST, tax offsets for GST and the exemptions if applicable. In summary, as the details of the GST is still currently sketchy , I believe that what is essential is that the government needs to ensure that the GST is business friendly and that the necessary subsidy distribution framework is ready before the GST is implemented. The initial rate should also be acceptable and would not create a huge hike in inflation on top of the yearly CPI during the period of uncertainty. Likewise appropriate support structures to facilitate SME are also important to avoid any confusion resulting in non-compliance as SME represent 99 percent of the businesses in Malaysia and employs 50 per cent of the workforce. 8. Reduce income tax and corporate tax A comprehensive tax like GST will definitely increase prices instantly and real disposable income of consumers will fall and their demand for goods and services will categorically plummet, affecting businesses of all sizes. However, the worst affected will be the SMEs who do not have the ability to compete in pricing and cost minimization. Given the need for funds to reduce deficits, the GST is deemed as a very effective measure. Nevertheless, the government must realize the fact that tax is only maximized at a certain level until it reduces the incentives to spend, work and do business after which it will not bring anything to the economy and state but losses. 9. Adjust income rates and social security payments Experts have mentioned that a government will have to adjust income rates and social security payments before introducing GST to cushion the effects of price increase on the poor. But the Malaysian government still turns a blind eye on the calls to implement a minimum wage for workers. The drastic increase in inflation rate will hit hard on manufacturing and service sector workers. If the GST is introduced in the year 2011, in the absence of a minimum wage for workers, it will push back thousands of working class families into poverty. The people are currently still struggling to overcome the onslaught of the job and pay cuts during the global economic crisis since 2008. The governments’ economic stimulus package has not trickled down to the common man. Will the GST rate stay at 4percent
The Government, represented by its Second Finance Minister Ahmad Husni Hanadziah reportedly said that the GST rate proposed will be only 4percent, which is the lowest in the region. The questions remain whether the rate will stay at 4 percent in the coming years. Experiences at other countries implementing the GST indicated that it will not be the case. Currently Singapore’s GST is 7 percent, but it started off introducing GST at 3 percent. Thus, GST for Malaysia may not remain forever at 4 percent, it will increase as the government sees the need to do so. VAT rate in Britain is 17.5 percent currently and it was much lower when it was first introduced and it was the same in Canada. Conclusion and recommendations A survey by the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) which polled 1,250 SMEs indicated that 38 per cent of them were not prepared at all for the implementation of GST, while 33 per cent said their readiness was between 1 to 25 per cent. Only 4 per cent of respondents believed they were at least 75 per cent ready for the new tax regime. According to the survey, property developers were the least ready — up to half said they had not prepared at all for GST — followed closely by wholesalers and retail dealers. Importers and exporters were the most ready, with 27 per cent indicating that they were more than 50 per cent ready, followed by 19 per cent of manufacturers. 32 per cent hoped that the government will postpone the implementation of GST to 2012 and two-thirds wanted at least 24 months grace period to get ready for the new tax rather than the proposed 12 to 18 months. At present there is not much details in the information released on the proposed GST by the government. The threshold is still unclear and the product exemptions are yet to be released in detail. The SMEs need time to fully understand the proposal and how they will be affected. They will also need further time to prepare for and adjust to the new tax system. The plan to fully implement GST by mid-2011 will not be consistent with the policy to assist SMEs as the time for preparation is not sufficient. Furthermore, the government has not given any assertion of how the this fiscal measure will benefit in an acceptable manner as being studied by the panel investigating into implementing the GST in Malaysia. The detailed mechanisms of how ST will work must be explained to the business community and the consumers to avoid a backlash which cancel out whatever the positives the GST may have for the economy at large. This paper has only been able to analyze the impacts of GST based on the experiences of other countries due to the lack of details in the explanation by the government. So much information is still unavailable for the discussion to forecast the full extent of consequence of GST on SMEs and the Malaysian economy at large. Furthermore, there are no identical economies in the world. A positive result in other countries may not signify a potential positive outcome in Malaysia. There so much more than fiscal policy in determining the conditions of the economy. Politics, culture, and the global economy are among many variables than contributes to the ever volatile economy. An isolated analysis of GST as the independent variable will not produce a reliable net impact projection on SMEs’ performance subsequent to the implementation of GST. The GST alone can affect
many other variables like spending patterns, business preferences etc. which will in turn affect the performances of SMEs. Hence, the paper concludes that there is so much to be researched before the GST can be implemented and the government will have come out with measures to make the GST a new tax system benefitting the SMEs. The new fiscal measure must not be introduced just for the sake of reducing budget deficit or employed in a rush using the perceived success in other countries a basis to paint a beautiful picture of life after GST. There must be continuous exchanges of views, prior to and after the implementation, between the government, businesses and consumers as well as academics so that a proper formulation of GST suited to the Malaysian economy can be produced and GST revenue will not be crowded out by losses on the side of SMEs which form the backbone of the economy of Malaysia. References SMIDEC (2002). “SMI Development Plan (2001–2005)”, Percetakan Nasional Malaysia Berhad, KualaLumpur. Kamaruzaman Hj. Ampon, Syed Azizi Wafa (2004) Malaysian Small and Medium Enterprises (SMEs) And Innovation, SMIDEC, SME Performance 2003 Report, Kula Lumpur, Malaysia. Ram Consultancy Services Sdn Bhd (2005), SME Access to Financing: Addressing The Supply Side Of SME Financing GST for the layperson in Malaysia, online available, http://sinismalaya.blogspot.com/2010/03/14th-march-2010-gst-for-ordinaryfolk.html Abood Mohammad Salmeen, Goods And Services Tax, Problems And Effects Of Implementation Australian Trade And Taxation Department Singaporean Trade And Internal Revenue Services Cecilia Kok Making Sense Of GST, Star Online Chew Theam Hock (2009), How GST affects small, medium businesses The Star, November 23, 2009 Sivarajan 2009 GST WILL MAKE WORKING CLASS POORER http://www.kotadamansara.net/ 2012 Will Be Right to Introduce GST, Says ACCCIM, Malaysia SME Online publication 26 July 2010, online available http://www.malaysiasme.com.my/index2.php? option=com_rss&feed=RSS1.0&no_html=1 Sivarajan (2009), GST WILL MAKE WORKING CLASS POORER! Online available http://www.kotadamansara.net/node/favicon.ico
SME Corp Malaysia Official Website (2009), 4 percent GST expected to come into effect in middle of 2011 Online available http://www.smecorp.gov.my/taxonomy/term/10 SME Corp Malaysia Official Website (2009)Businesses can start preparing for GST http://www.smecorp.gov.my/taxonomy/term/10 Boo Cheng Hau 2010GST: Is the govt playing fair? http://freemalaysiatoday.com/fmt-english/opinion/comment/3205gst-is-the-govt-playing-fair 2010 About GST – Goods And Services Tax Malaysia http://www.ivaluenews.com/category/ramblings/ Chua T.K. (2009), Keep info flowing on how the GST works, the star (opinion section) publication December 31, 2009, online available http://thestar.com.my/news/opinion 2009 GST – Malaysia Goods and Services Tax in Year 2011 http://www.money4invest.com/gst-malaysia-goods-and-services-tax-in-year2011/feed/ BERNAMA 2010 RM222m for smooth running of GST http://www.btimes.com.my/Current_News/BTIMES/rss/rss_html? section=frontpage Yow Hong Chieh (2010, SMEs not ready for GST, online available http://www.themalaysianinsider.com/rss/feed Cecilia Kok (2010), Hoping for a good deal out of a taxing issue, The Star publication January 16, 2010, online available http://biz.thestar.com.my/news/story.asp? file=/2010/1/16/business/5449113&sec=business Chua Tee Yong (2010), GST yes, but steps must follow http://www.themalaysianinsider.com/mobile/opinion/columnist/chua-tee-yong