ASSIGNMENT 2 JAMILAH BINTI MOHD RAFI (AM100193) SME4901 PROFESSIONAL ENGINEERING PRACTICE

FACULTY OF MECHANICAL ENGINEERING UNIVERSITI TEKNOLOGI MALAYSIA MARCH 2014

PROF WAN KHAIRUDDIN

Pro and Cons of Good and Service Tax

Good and Service Tax is a consumption tax based on the value-added tax (VAT) concept. GST is imposed on goods and services at every production and distribution stage in the supply chain including importation of goods and services. Goods and Services Tax (GST) will be implemented with effective from 1 April 2015 and GST rate is fixed at 6 (%) per cent. GST can be classified under the cluster of indirect taxes and if it is to be implemented in Malaysia, the jurisdiction to collect this tax will be under the Royal Customs Department. Globally, around 146 nations are noted for implementing GST as one of the tax regimes. The percentage of GST varies amongst countries, from as little as 5% to as high as 50%. Currently there are 160 countries that are implementing the GST according to regions are as follows[1]: No. 1 2 3 4 5 6 7 Region ASEAN Asia Europe Oceania Africa South America Caribbean, Central & North America No. of Country 7 19 53 7 44 11 19

Sales tax and service tax will be abolished. Currently, Sales tax and service tax rates are 10% and 6% respectively. GST will not be imposed on piped water and first 200 units of electricity per month for domestic consumers and Transportation services such as bus, train, LRT, taxi, ferry, boat, highway tolls as well as education and health services are exempted from GST.

GST is charged and collected on all taxable goods and services produced in the country including imports. Only businesses registered under GST can charge and collect GST. GST collected on output must be remitted to the government. However, businesses are allowed to claim the input tax credit through the following mechanism and method: 1) GST collected on output (output tax) is deducted against the GST paid on input (input tax). 2) If there is excess, the amount shall be remitted to the government within the stipulated period. 3) If there is deficit, businesses can claim for refund from the government GST can only be charged if the business is registered under GST. A business is not liable to be registered if its annual turnover of taxable supplies does not reach the prescribed threshold. Therefore, such businesses cannot charge and collect GST on the supply of goods and services made to their customers. Nevertheless, businesses can apply to be registered voluntarily.

The pie chart above shows that out of the total votes (1,213), 924 votes or 76% were disagreed with the implementation of GST, while 262 votes or 22% agreed with it.[2] As mentioned in Royal Malaysian Custom Department (RMCD), GST is going to replace current consumption tax such as sales tax and also service tax. The purpose is to provide a more efficient way to enhance the government existing taxing system. It is more

efficient tax system besides generates a more stable source of revenue to the nation as its more susceptible to economic fluctuations. Various benefits that GST can provide to Malaysia are noted as follows. 1) Improved Standard of Living The revenue from GST could be used for development purposes for social infrastructure like health facilities and institutions, educational infrastructures and public facilities to further improve the standard of living. 2) Lower Cost of Doing Business Under the current system, some businesses pay multiple taxes and higher levels of tax-on-tax (cascading tax). With GST, businesses can benefit from recovering input tax, thus reducing cost of doing business. 3) Nation-Building GST is a better and more efficient method of revenue collection for the government. More funds can be channeled into nation-building projects for progress towards achieving a high income nation. 4) Fairness and Equality With the GST, taxes are levied fairly among all the businesses involved, whether they are in the manufacturing, wholesaling, retailing or service sectors. 5) Enhanced Delivery System GST will be administrated in a fully computerized environment, therefore speeding up the delivery, especially for refund claims. This makes it faster, more efficient and reliable.

6) Increase Global Competitiveness

Prices of Malaysian exports will become more competitive on the global stage as no GST is imposed on exported goods and services, while GST incurred on inputs can be recovered along the supplies chain. This will strengthen our export industry, helping the country progress even further. 7) Enhanced Compliance The current SST has many inherent weaknesses making administration difficult. GST system has in-built mechanism to make the tax administration self-policing and therefore will enhance compliance. 8) Reduces Red Tape Under the present SST, businesses must apply for approval to get tax-free materials and also for special exemption for capital goods. Under GST, this system is abolished as businesses can offset the GST on inputs in their returns. 9) Fair Pricing to Consumers GST eliminates double taxation under SST. Consumers will pay fairer prices for most goods and services compared to SST. 10) Greater Transparency Unlike the present sales tax, consumers would benefit under GST as they will know exactly whether the goods they consume are subject to tax and the amount they pay for. Moreover, according to president of the Federation of Sabah Manufacturers (FSM) Datuk Wong Khen Thau said the tax will also not burden the people, but lead to a partnership concept in respect of the economic development. Meanwhile, the president of the Malay Chamber of Commerce Malaysia Labuan (DPMML) Datuk Yussof Mohammad said implementation of the GST or also known as a consumption tax, would see a regulatory system that is efficient and effective in respect of tax collection. It can be said as GST can be an advantage to economy to Malaysia from the above statement. All these statement above are expectation and assumption by the higher authorities and here some pro and cons views from the public according to NBC on 2010 are as follows [2]:

The reasons for the public to support GST are : 1. Increase national/government revenue and mitigate the heavy reliance on income tax and petroleum tax, in which income taxes contributed 44.4% of government revenue in 2010. 2. Tax burden will not increase when income level increased. 3. Everyone will pay tax and tax burden is spread over, instead of just relying on income taxes derived from 15% of the working population. 4. Overcome the loopholes of current sales and services tax systems. 5. Eliminate over-lapping tax at different stages, as GST is generally charged on the consumption of goods and services at every stage of the supply chain, with the tax burden ultimately borne by the end consumer. 6. More stable for government revenue with GST as a consumption tax based, compared to direct income taxes and minimise the impact of economic cycles, particularly during recessions. 7. Corporate tax and individual tax rates could be reduced. 8. Minimise the occurrences of tax evasions. The reasons for public to disagree with GST: 1. May result in inflation as general products prices may go up. 2. Increase the tax burden on low income working group (the other 85% as described item 3 above) 3. The government may possibly increase the GST rate from 4% to 15% to increase revenue. 4. Worry that the GST tax may even higher than current sales tax 10% and service tax 5%. 5. Worry that the effect of tax revenue re-distribution may not be achieved. From above statements, we can conclude that GST can be worth in managing our country taxing system in more systematic and professional way. Besides that GST is a broad based consumption tax and generally most goods and services will be subject to GST. It would appear that it could lead to inflationary pressures for taxpayers if it is not implemented properly. At present, there are uncertainties over this new tax to be imposed and proper rules and regulations needs to be wisely formulated. In addition, proper guidance and early planning shall be required to prepare the taxpayers for the smooth implementation.