Datuk Seri Najib Abdul Razak has said in Budget 2014 that GST will be introduced from April

1, 2015. Discuss the pros and cons of GST and its implication to a professional engineer.

In recent times, the Goods and Services Tax (GST) has been subject of heated debates by Malaysians from all walks of life. This due to the announcement from our Prime Minister, Datuk Seri Najib Abdul Razak in Budget 2014 to introduce and implement the GST in 2015 to replace the current tax. While the experts and supporters lauded the positive wealth effect GST is expected to have on the country, others questioned the potential impacts GST could have on the common folks. When most people hear about the introduction of GST, most of them will understand that their cost of living will increase by 6%. One thing is clear, GST is bound for implementation in Malaysia and its arrival could be in the very near future. Few questions remain to be asking as what are the pros and cons of GST on common Malaysians? Will we better or worse off with this implementation with the addition of price hike in some sectors such as petrol, electrical tariff, houses and so on during 2013? It pays to begin familiarising ourselves with the basics of GST and to understand some of the potential impacts GST may have on the customers. First off, what exactly is GST? Officially, GST is a consumption tax that is imposed on goods and services at every stage of the supply chain, which typically begins at the manufacturing stage and ends at the retail stage. GST is a broad based consumption tax which will generally applicable on all goods and services. GST is based on the valued-added concept to avoid duplication in tax collected. Here is an example of how GST with a rate of 6% can be imposed on a can of juice: 1) We start off with a juice manufacturer, who buys the required raw material from a supplier, say at RM1, to produce a can of juice. Under the GST system, the manufacturer ends up paying RM1.06 to the supplier (RM1 + 6% in GST). The supplier then pays the GST of RM0.06 it has collected to the government. 2) The manufacturer, upon producing the juice, charges the retailer RM2 for each can of juice. Under the GST system, the retailer ends up paying RM2.12 to the manufacturer (RM2 + 6% in GST). GST payment by the manufacturer to the government is RM0.06, after deducting the RM0.06 in GST it had paid earlier to the supplier.

3) The retailer, upon receiving the manufactured juice, now sells it to the consumer at RM3. Under the GST system, the consumer ends up paying RM3.24 to the retailer (RM3 + 6% in GST). GST payment by the retailer to the government is RM0.06, after deducting the RM0.12 in GST it had paid earlier to the manufacturer. Eventually, after the numerous stages of GST collections and payments by different stakeholders, the government ends up receiving a total GST of 6% for the can of juice. The above example illustrates how the GST is ultimately borne by the consumer. In Malaysia, one of the common misconceptions about the GST is that it is a new tax that will make you pay more for everything you buy. However, according to the Authorities, GST is not a new tax but a replacement tax for Malaysias existing Sales Tax and Service Tax (SST). Naturally, to understand how GST could change the consumption tax environment in Malaysia, one would first have to understand how SST works. At present, there are two key components of SST. The first component is the Sales Tax, which is imposed on most goods at the import or manufacturing stages. Sales Tax is generally 10%, though it can be higher or lower depending on the nature of the goods. In Malaysia, many consumers are unaware of the Sales Tax because it isnt shown on the price tags or receipts of the goods we buy, instead, it is embedded within the pricing and passed on to the consumers. The second component of SST is the Service Tax, which is imposed on a long list of taxable services that range from hotels, restaurants to legal and insurance companies. Service Tax is 6%, and is indicated in receipts when it is imposed. As one could imagine, due to the way SST works, we as consumers often find ourselves unwittingly paying double taxes first at the manufacturing stage, and later at the service stage. The GST, which is set to replace the SST, is a far more comprehensive and transparent tax system that will ultimately benefit the consumers. One of its greatest benefits is the elimination of the possibility of paying double taxes, because the two-pronged tax rates and policies in the SST system would have been replaced by one single GST. Most taxes can distort the choices made by households, business and foreign sector in some way: Taxes can affect the incentives for households to work, and affect choices about the level and pattern of consumption. Taxes can affect choices made by firms about their levels of production or their use of different types of labour, capital, land and natural resources.

Taxes can affect choices about whether to use imported or domestically produced goods and services. Taxes can affect the demand by foreigners for Malaysias exports. Using the earlier juice analogy, youll know youre paying RM0.24 in GST for every

RM3 can of juice you buy, and nothing else. Ultimately, it is important to take note that GST is here to replace an older, arguably less efficient consumption tax system in the SST. GST is not a new tax, nor is it an additional tax that is imposed on top of existing taxes. So, technically, you will not pay more for everything you buy which is the common impression of GST right now. GST are used to fund important services such as education, health and welfare. However, this tax can also affect the way that the economy operates, and can lead to less productive use of the resources available in Malaysian economy and lower living standard. GST may not make you pay more for everything you buy, but it still bears implications on the pricing of goods, some more so than others. Using the widely speculated GST of 6% as assumption, these are some potential scenarios you could face as a consumer should GST be implemented: Scenario A: You could end up paying 6% more for a product/service that previously wasnt taxable under the SST. As GST is believed to cover a wider range of products/services than SST, this may apply to quite a number of items. Scenario B: You could end up paying slightly less for a product/service that previously was taxable under the 6% Service Tax but not under the Sales Tax, or one that was taxable under the Sales Tax but not under the 6% Service Tax. Scenario C: You could end up paying significantly less for a product/service that previously was taxable under the 6% Service Tax AND the Sales Tax. Scenario D: You could be paying the same price for a product/service that is tax-exempted under both the GST and the SST. However, the obvious concern here is to make sure that businesses do not take advantage of just the fact that GST has been introduced as a reason to raise prices of goods and services indiscriminately. To this end, the Anti-Profiteering Act has been tabled to enable enforcement against such practices. In theory though, the multi-stage tax nature of the GST

should allow the Customs department to aggregate pricing information far more accurately than they do currently, the implied monitoring of this should serve as a deterrent to unscrupulous businesses .In a nutshell, GST has the potential of causing prices to go up, go down or stay the same depending on the eventual rate as stated by the Government, as well as, tax policies for specific categories of goods and services. However, GST will not cause prices to go up in a universal manner. The variations in taxes that are abolished and in the design of the GST also lead to different impacts on industry activities. Impacts at the industry level tend to be non-uniform. While most sectors experience higher activity levels because of the tax reforms, sectors with larger exposures to the GST and/or smaller exposures to the abolished taxes are expected to have reduced levels of output. For government, GST helps to generate stable and predictable tax income in both good and weak economic environment. It is also an efficient tax due to the comparatively lower cost of administration and collection and allows the government to lower corporate and personal income taxes which is going to propose when GST implemented that will leads to overall economic growth. Besides for businesses and individuals, GST is a fairer tax system and it taxes the self-employed and wage earners only when they spend their money. Cost of doing business is reduced and thereby contributing to lower prices. Businesses do not suffer a tax cost due to multi-stage credit mechanism since the real taxpayer is the end-user. However, the drawbacks is that the disadvantage of GST can be a burden to lower income groups especially during times of high inflation when the 6% tax is paid on the increasing price of daily essentials. To a certain extent, it will somehow affect pockets of middle and lower income group Malaysians. There been some arguments about the implementation of GST which are: 1) Recent price hike in petrol, prices of commodities have increased drastically and now another one called GST can really burden the lower income groups 2) Income tax brackets for high earners are not as expensive as middle to low income groups 3) GST is tax on spending means that basically everything form parking fees to purchasing mattress and even with GST exempted items, this would still hit lower income groups in Malaysia

4) Private sectors are not paying much to Malaysians as the wages and salaries are not higher 5) Inflation may happen as the introduction of GST, the chain of passing the cost will end up usually at the hands of consumers. The GST also gives impact on the engineering business such as in Victoria. There has been inquiry regarding this matter with the Institution of Engineers, Australia (IEAust) to make a written submission. The inquiry is focussing on the impact of GST toward the competitiveness of small and medium business. IEAust is supportive of maintaining a strong, self-employed consulting engineers sector as part of the professional services balance for the overall industry. However, the members of IEAust have expressed concerns about what constitutes a contractor for taxation purposes under the new tax system. The Alienation of Personal Services Income legislation is of significant concern to self-employed engineers and may result in these engineers leaving self-employed status. It is understood that the legislation is designed to prevent individuals from reducing their tax by diverting income generated by their personal services to a company, partnership or trust. It is also designed to limit work related deductions available in those cases. IEAust supports measures that ensure a fair tax system, but is concerned those engineering practitioners who genuinely act as contractors will not be treated as such because of the introduction of this legislation. IEAust has about 60,000 members of which about 8,800 are self-employed consulting engineers. Most of these engineers do not employ persons, but rather, will sub-contract aspects of work to other practitioners. Reasons given for considering leaving self-employment included concerns about GST compliance costs, the impact of the 80 per cent tax ruling relating to income from one source, and that there would be decreased tax advantage in trading as a micro business. for engineering services, the net dollar margin rule has minimal relevance. This is because engineering services are often not directly determined on the basis of cost inputs. The prices set for engineering services are often determined on the basis of a market-based hourly rate or on the basis of a fixed tender cost, which again is related to an hourly rate. Other factors that affect the prices set for engineering services are changes in the supply and demand conditions, and exchange rate fluctuations. These changes may be considered acceptable reasons for raising prices providing the ACCC price exploitation guidelines are observed.

The major impact of the GST will be on small engineering businesses, particularly with the application of the Alienation of Personal Services Income legislation. This may result in small, but significant number of self-employed engineers leaving the market or returning to employee status.

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